How to Put the Success in Succession

Business Succession Planning and the Alignment Principle

As a lawyer practicing in the area of business succession, nothing drove me crazier than witnessing the inept handover of a successful business to successors who were clearly destined to drive the company into the ground. Typically, but not always, these successors were (in order of risk) the children of the founder, employee successors, or third party purchasers who were high on promise but low on skin in the game. Common to all cases was a big failure of the Alignment of the buyer’s Giftedness with the Need of the client or customer base. (These terms are deliberately capitalized.)

In altogether too many cases, the retirement funding for the founder is tied up in the ongoing success of the business in the hands of the successors. If the succession works, the founder gets paid out, but if not, the real risk is that the cash cow through which the founder expected to live out his golden years will not be there when needed. Having been accustomed to a certain lifestyle, the founder may find himself instead living on a government pension.

When considering business succession, a good deal of time and effort are expended on financial considerations, as should be the case.? Advisors need to take into account the founder’s standard of living and retirement goals and build in mechanisms for the founder to retake control if the success does not unfold as planned. However, insufficient time and effort are expended on a very simple test for predicting the likelihood of ongoing success. Central to that test is the Alignment Principle.

Although the Alignment Principle is primarily concerned with the success of an individual professional or entrepreneur, it adapts easily to a business succession scenario.

The Alignment Principle states that the optimum outcomes for the professional and for the client occur where there is an exact Alignment between Giftedness and Need. Giftedness in turn is said to be that unique bundle of capabilities a professional brings to bear and is composed of innate attributes, shaped by experience, and honed by training.?

Client Need is primarily but not solely the professional issue the client wishes to have addressed. The successful professional knows that there is usually more, and intuits and aligns with the deeper personal or operational needs (often unspoken) of the client.

This principle is particularly apparent in the case of service business and professional enterprises-- architectural firms, project managers, accountants, and the like, where an existing, loyal, and long term client base continues to show up at the door looking to have a specific kind of itch scratched.?

Producers of hard goods, however, should not ignore the application of the Alignment Principle. The Need of an automobile manufacturer for a particular widget may be more than the raw specifications-- the buyer is just as concerned about reliability of product and supply, and likes the fact that he can call the supplier in the evening to discuss a modification, or that the supplier is green certified. All this is part of the Need which requires careful Alignment.

If you think of the entrepreneur or entrepreneurial team operating the business as a professional or as professionals, the application of the Alignment Principle becomes immediately obvious. The business has succeeded because of the Alignment between the entrepreneur’s or the company’s Giftedness and the client Need. Clearly, the more aligned the Giftedness of the successor with the Need of the target market, the better the outcome, all other things being equal.

Without exception, the attractiveness of a business to successors is its ability to generate good income, and to grow. In the hands of the founder, this is almost axiomatic. Why? In simplest terms, if a business has survived long enough to have become an attractive target for takeover, its founder or founders were well aligned with their customers. The better the Alignment, the more successful the business will have been.

Once this is understood, the simple question to be asked is this: “How well is the Giftedness of the successor aligned to the Need of the existing or proposed target customer?” If the answer is “well aligned”, a successful outcome is likely, but if the answer is “poorly aligned”, or even “so-so”, the proposed succession should be given a very jaundiced eye.

Particularly in the case of family succession, and perhaps to a great extent in employee succession, one might think that the Giftedness of the successors would have been inherited or learned from the founder. This assumption is a dangerous one.

Bearing in mind that Giftedness is the unique bundle of innate attributes, shaped by experience, and honed by training, one should not be surprised that the unique Giftedness of the successor will be different than that of the founder. The important question is whether the Giftedness of the successor is nevertheless an appropriate match to the Need of the customer.

Let’s look at the three typical types of successors: children, employees, and third parties, in that order.

There are all kinds of proof cases where children of the founder turned out to be ideal successors, having inherited the key attributes of the founder, and having acquired both experience and training to have shaped and honed the innate attributes. In fact, there are plenty of cases where the successor, standing on the shoulders of the founder, exponentially accelerates the success of the business. But there are, tragically, far more cases where the child or children quickly crash and burn the entire enterprise.

One could be forgiven for thinking that children would be the perfect successors, possessing all or most of the founder’s Giftedness, a “chip off the old block” phenomenon. The reality is always different.

First of all, children do not always inherit their parent’s talents. One need only look at my sad little weed patch compared to the bounty and beauty of my father’s gardens to see how that plays out.

Second, the children will more often than not have enjoyed a more privileged upbringing than did the parent-founder, and may have an entirely different work ethic and entrepreneurial experience. This is a gentle way of saying that they may be spoiled softies, or at least not made of the same stern and resourceful stuff as the parent.?

There are, of course, examples where the founding parent deliberately exposed the children to necessary rigors with a view to preparing them for an eventual succession, and in a few cases of stellar farsightedness, groomed them for taking the business to new heights. But these are not the norm-- “rags to riches to rags in two generations” is at least as common. As a commercial lawyer, I saw it all too often.

Third, the training component has not always been ideal for the success of the business. More often than not the offspring will use their privileged position to “express themselves” in ways which are a universe away from the harsh world of the parent’s business.?

While a master’s degree in early Welsh poetry is unlikely to have much bearing on the production of widgets, it must be admitted that earning any graduate degree does call for some determination, and is good for the discipline of the soul. The effort is clearly not wasted, the point is that it may not be the most appropriate training to enhance the necessary Giftedness.

Now, to be sure, many such child has grown up in the school of hard knocks in the family business, sweeping floors, packaging product, and filing paperwork. Some long term family enterprises, in fact, require the scions of the founders to prove their worth by doing such grunt work, as well as to prove their mettle by working in outside companies where Daddy can’t shelter the child from the cold blast of reality.

So, with respect to children taking over the family business, while it is entirely possible that the kids are going to take the enterprise to new heights, it’s at least as likely that they will oversee the death of the company. Perhaps over years, perhaps very quickly. In today’s fast, competitive, unforgiving marketplace, there’s little room for amateurs in the professional space.

Employees are somewhat, although not entirely, different. It’s unlikely that they share the founder’s genetics, and not probable that they grew up privileged under his fond gaze. On the other hand, there are factors which make it less likely that they will have the royal jelly, the Giftedness which would be required to exactly satisfy the Need of the clientele.

Employees are often not entrepreneurial in the sense that their priorities are typically outside the business. Quite properly from their and their family’s perspective, they may not share the same taste for risk, and prefer the steadiness of a paycheque over the thrill of an economic home run.

While they may have been hired, and hired well, for a particular Giftedness in the service of a client Need, they may not have the bigger picture view that the owner would have. Their Giftedness may be a narrow one which speaks specifically to a narrow Need.

It is common for a smart entrepreneur to hire a range of employees, each with specific Giftedness, each to speak to some specific client Need, or even part of a Need. Many employers, however, actually steer away from hiring someone like themselves who can speak to the broad spectrum of client Need, fearing that the newcomer will ultimately bond with clients and steal them away.?

The result is that when the entrepreneur comes to the point he wants to retire and sell off to employees, few or none of his employees understands the whole business and has the capacity to align with the whole spectrum of client Need.

The majority of successful successions involve outside third parties. Let’s consider two scenarios-- the fully funded, and the vendor funded. There is a world of difference.

In the fully funded buyout, the founder gets his bag of gold and walks away. Except for pride and reputation, the founder does not need to care if the successor succeeds, or not.

In fact, in my experience, it was not uncommon for a founder to get his money bag, go home and relax for three or five years until the noncompetition agreement had run out, then go back into the marketplace to pick up the pieces of the imploded business, only to rebuild better, bigger, and stronger.

The vendor funded buyout is a whole different kettle of fish. In this case, the founder provides some or all of the ability to buy. This typically takes the form of a loan from the seller, an earnout, delayed or staged payments, or some combination of these.?

In good hands, and with a modicum of luck, the founder eventually gets paid in full, but in the wrong hands this is like letting an unlicensed teenage boy borrow your Lamborghini for a night out with his buddies. The wise vendor will not turn over the keys to the business without more-than-adequate security for payment, and will not put his head in the noose of an earnout where the success of performance lies in the hands of the buyer.?

But assuming that the founder and his advisors have buttoned down the financial side of the deal, what are the Alignment Principle factors which should be taken into account by both the buyer and the seller?

Remember again that the Alignment Principle speaks of the exact Alignment of Giftedness with Need. For at least a while after the sale of the business, clients will continue to come to the door, expecting the same satisfaction of their Need. What happens after that will depend entirely on the degree of Alignment of the Giftedness of the new owner (and in most cases, the new team) with the Need of those clients.

So in all cases we see that the question of equal importance to the financial question is whether or not the successor possesses the Giftedness which will align exactly, or sufficiently, with the existing and historical Need of the client base.

As we will recall, the term “Need” means much more than the mere professional Need which forms the primary basis of attraction. This is just as true in a products business as it is in a service business-- the customer may say he just wants a car, but in fact he insists that it be flaming red and have the “raging bull” Lamborghini symbol on the hood. The customer may say he needs something to haul groceries, but a Tata Nano would have done that quite nicely. There are submerged needs below the professional Need, and the smart professional or entrepreneur will also align with those.

Thus, in the discussion that the successor be as aligned with client Need (or more so) as was the founder, it is clear that an analysis of the probable Alignment of successor Giftedness and client Need should be done. If the Giftedness of the proposed new owner will not align perfectly with the existing Need of clients, two questions should be asked.

First, is the imperfect Alignment still close enough that clients will continue to be substantially satisfied? Second, can the successor stay true to his own Giftedness but move slightly sideways in the client field so as to appeal to other clients, or other Needs?

Let’s look at the example of a young architect who is considering the purchase of a strong but small architectural firm in a rural town, one which caters largely to high end recreational property and farm projects. The young architect possesses the technical skills to satisfy the professional needs of the clients, but he cut his teeth in a big city firm whose clients were institutional and public housing agencies. Does this young architect have in his heart, soul, and mind the aptitudes to connect with the kind of private clients he will inherit? We mean this not just professionally, but with a holistic understanding of the clients’ emotional and reputational needs. In other words, is he a natural plugin for this client base?

But at the same time, will the Giftedness of this young architect also align with the Need of somewhat different clients? If the firm is going to shift somewhat in the client spectrum, does that shift make economic sense, based on the Alignment of the young architect’s Giftedness with the Need of the proposed new clients?

The young architect could be, of course, the daughter of the founder/vendor, or perhaps an employee who has come over from the big city firm, or perhaps a complete stranger who can make a good economic case to take on the purchase. No matter, it is in the best interest of the young architect and of the founder/vendor to make the succession work.

The money question is normally just the gateway question. The more critical success question is whether or not the Giftedness of the young architect aligns very well with the Need of the existing client base, or at least a reasonably likely kindred client base.

If Alignment is perfect, or nearly so, that augurs well for a succession. If Alignment is not especially good, or is unknown, both vendor and purchaser need to step back and ask why they would want to proceed.

This example demonstrates that while the money and payment questions are critically important to the vendor, the Alignment question is critical to the proposed successor. Only when the founder gets paid in full by a grateful and successful successor, surrounded by happy clients, can we say that the succession was a great one.

Norman Bowley retired from the practice of law in 2016 and now writes, teaches, consults, and coaches. 613-862-3489 or [email protected]