Why Small Business CEO Successions Often Fail

 

We often receive calls from companies that are in various stages of business decline and are asked to help them deal with their issues.

Our approach is to understand why the company is in decline and to identify the events or issues that contributed to their downturn.

Invariably we find, particularly in family businesses, that a founding CEO has decided to leave for whatever reason and hired a replacement that ultimately mismanaged the company and caused its decline.

 

NO MATTER WHAT YOU BELIEVE …

The stories we hear are very similar:

A CEO, who is long past retirement age, decides to hire a replacement. The company was doing fine prior to the retirement however the company is now losing money.

A husband/wife management team decides to hire a more experienced manager to run the business and hires someone from a “big company”. The new manager does not have the experience to manage the smaller business and makes decisions as though the company is the large corporation he came from and the company is now on the brink of bankruptcy.

A founder/entrepreneur decides the business needs a more experienced CEO and hires someone from the outside to grow the company. Without an agreed upon plan to grow the company, within a year the business is in decline and losing money.

A family business with several generations of family members has a first-generation family CEO who decides to retire. A younger, unproven family member is promoted to CEO. Several years later the business is in a severe decline.

 

ALWAYS SIMILAR RESULTS …

We could go on and on with many stories, however the end results are very similar.

Making the wrong decision to transition to a new CEO can be very costly and in fact could destroy a business.

We have reflected on this issue numerous times and have asked the question:

 

WHY DOES THIS HAPPEN SO OFTEN?

To start to answer this question we should look at the trends.

According to a Financial Planning Association/CNBC study released in 2015, 78% of small business owners plan to sell their business to fund their retirement, but less than 30% have a written succession plan.

The survey also found more than half of small business owners sell their businesses to employees or family members.

Family-owned businesses represent more than 90% of all enterprises in the United States. Of those, 30% are second-generation businesses, 12% are third-generation businesses and 3% are fourth-generation businesses.

Of the 70% of family-owned businesses that fail to transition, 60% fail due to communication problems and lack of trust, while another 25% fail to transition due to lack of preparation of the next generation.

 

THE TREND IS DISTURBING …

This trend is disturbing, particularly since a departing CEO is usually dependent on their successor to generate income that will support their family after they leave the company.

We find in many cases the successor CEO does not have the skills or experience to comprehensively manage the business.

They are not equipped to handle the many challenges of operating in a changing market place; not able to clearly define and communicate the goals required to achieve an acceptable level of profitability and manage and motivate their team to achieve the stated objectives.

The consequence of not having a well thought through succession plan will not only put the departing CEO’s personal wealth at significant risk.

It could also lead to the demise of the company and create substantial personal liability for their family, given that in most small companies, the family personally guarantees the debt of their business.

 

MAJOR MISSING ELEMENT …

The major element that we see missing in most companies is a plan for management succession.

Invariably a small business founder/family CEO will step down for a variety of reasons.

Accepting this as a reality is the first step in planning for a successful transition. Defining the skills, experience and management style required of the successor CEO candidate along with a timeline to implement it are some of the important elements of a carefully considered plan.

While we often see the consequences of poor succession planning, we have successfully helped companies deal with the resultant problems.

Our advice, however, is to be proactive in planning for succession and hopefully avoid the problems that might occur before they happen.

 

 

Revitalization Partners is a Northwest business advisory and restructuring management firm with a demonstrated track record of achieving the best possible outcomes for our clients. And now, we’ve written a book to help our readers understand the issues facing their businesses. You can find this compilation of our business thoughts at:
https://revitalizationpartners.com/we-could-write-a-book/ or on Amazon.

We specialize in improving the operational and financial results of companies and providing hands-on expertise in virtually every circumstance, with a focus on small and mid-market organizations.

Whether your requirement is Interim Management, a Business Assessment, Revitalization and Reengineering or Receivership/Bankruptcy Support, we focus on giving you the best resolution in the fastest time with the highest possible return.