Most roofing contractors will exit internally by selling to their key managers and family. This is usually a structured buyout over eight to 10 years.
It’s critical that the management team and future CEO are ready to move into their new roles so the present owner can, over time, relinquish the day-to-day management, leadership and strategic role in the business. To achieve this, the company needs a strategic succession plan.
A benchmark company will have a written strategic succession plan.
This plan will eventually allow the owner to identify the future owners and CEO. If you cannot replace yourself, you’ll be stuck in your business without a buyer.
A succession plan provides a customized written map focused on the human side of a business. Succession replaces the owner by moving the chosen performers into a championship team, then into leadership and a process to replace the CEO/owner. This requires time, training and stretching of the team members.
A flexible plan may take several months to write and several years to execute. Depending on the readiness of a company’s management and the type of exit and current payout, a succession plan may last from three to 10 years.
On the other hand, if the business is systematized and has clear financials with mature management in place, and the owner can take a six-week vacation, the company could be “sale ready” in less than two years.
1. Your Mindset Matters
The succession process doesn’t begin until the CEO can begin to see himself or herself outside the business, is able to visualize a clear financial future, and has a conceptual retirement date and written plan in place.
My experience confirms that the owner’s ability to envision his or her financial future is necessary to fully commit to a succession plan. You need a plan to capture the 70 percent or more of your wealth trapped inside your illiquid business.
2. Finish It
A large part of the owner’s exit plan is income replacement, tax reduction, asset protection and legal risk reduction. The owner’s exit plan allows the owner to see himself or herself as financially independent outside the business and liberates the owner to plan for retirement and succession.
Legal agreements should be updated to protect the business and the owner’s estate during this process. A reoccurring problem we see is coordination issues with the buy-sell agreement.
3. Establish Clear Direction and Focus
The beginning of the succession process is a time for the senior management team to revisit the strategic plan, vision and mission. This process will be an exercise for the management team members to establish their roles, work as a team and have a stake in the company’s future.
It will be the management team’s responsibility to take the reins and engage the company in this plan, as well as communicate and ensure implementation. Direction begins at the top, and this exercise will help the team members begin to envision their future. The owner should allow the managers to lead but hold everyone accountable to implement the new goals.
4. The Odds are Against You
A Family Firm Institute study reveals how difficult it is for small businesses to succeed over generations and business cycles:
70 percent of companies fail to transfer into the second generation.
90 percent of companies fail to transfer into the third generation.
You may ask, what’s the main cause of failure?
“At any given time, 40 percent of U.S. businesses are facing the transfer of ownership issue. The primary cause for failure … is the lack of planning,” Small Business Administration, 2015.
The CEO cannot take this lightly. If you fail to plan, you plan to fail.
5. Develop Your Talent
Management succession is more than the replacement of talent; it’s the development of talent. This is a time for the new team to re-examine and enhance the performance of the company’s systems in a process of continuous improvement of productivity and profitability.
The new management team should lead this process and educational effort for the entire company. It’s a time for the owner to coach and stretch managers into champions and for them to start thinking like owners.
The owner will depend on management’s performance to create the profit and cash flow to buy his or her stock over this term. The good news: If structured properly, the management buyout can be very tax efficient. If not, taxes can exceed 55 percent. Remember, in a management buyout the company pays for everything, and the managers drive the company profits.
6. What Got You Here Won’t Get You There
You have strong managers who lead the company to meet deadlines and corporate goals. Now they must rise to a higher level of leadership, set a corporate direction and build consensus. How do you change their behavior, build self-awareness and still maintain their spirit?
The owner evolves into a mentor coach. Management change is accomplished through the light of self-awareness, acceptance of the truth, peer evaluation, experience and personal coaching. There are many processes and proven exercises to help identify managers’ “blind spots” and move them to the next level. This is usually achieved through some type of “360” process led by an outside professional.
7. Understand Emotional Intelligence
Most of us recognize the term IQ from an educational system that heavily weighs this measurement. Now researchers use EQ (emotional quotient) or emotional intelligence as a measurement, as studies have found it’s the key ingredient for leaders and millionaires to be successful.
The book Emotional Intelligence considers non-cognitive skills to be more important than IQ in the workplace. Author Daniel Goleman states that emotional intelligence is reflected in behavior related to self-awareness, how one uses gut feeling, self-control of emotions, empathy and the ability to inspire and influence others.
8. Time is Your Best Friend
Succession and behavioral change take time, and the sooner you start training, the better the results. There are three parts to this training: education, coaching and stretching.
You’ll spend about 30 percent of your time with the first two. The key is to leave 70 percent of your time for the stretching process. This is where managers are field-tested, apply their learning, make mistakes, adapt and mature. Therefore, stretching is considered the most important aspect of the process. Scars and bruises are great teachers, and it takes time to acquire them.
9. Coaching is Essential
Every owner must realize his or her role with the new successor is to make sure he or she is prepared to lead the company. Meet and collectively decide on the process, timeline and curriculum.
Remember, this process is all about the new CEO, not you, the owner. The owner’s role is to teach, coach and ensure the company’s future success. The new CEO’s management and leadership style will likely differ in many ways from your style. Let the new CEO find his or her legs and individual path, and don’t intercede unless you see a disaster in the making.
10. Learn to Let Go
For each CEO, the succession process is different — but the same. You’ll feel like a lame duck, it’ll be more emotional than you thought and you must now focus on life outside the business.
Eventually your phone will stop ringing, managers will bypass you and move directly to the new CEO, and you’ll be out of the loop. When this happens, the good news is that the process is working as designed and you have succeeded where most CEOs fail.
Congratulations, and welcome to the “Lame Duck Club.”
Remember: The exit is a two-step process. First you need an exit plan so you can cash out without being clobbered by taxes, retire and not run out of money. Once you can visualize your financial future, you’ll be liberated to replace yourself with the help of a strategic succession plan.