For many businesses, some level of executive turnover is often seen as necessary and healthy, allowing the business to expand and adapt to changing conditions. But CEO transitions aren’t always as smooth as they may seem. Among the 500 companies that comprise the S&P 500, there were a whopping 688 CEO transitions between January 2003 and December 2015, with four of every 10 S&P 500 firms experiencing two or more such transitions.[1]
There’s no question that heavy turnover at the top, especially over a short period of time, can have a big impact on a company’s direction and sustainability. And for businesses that don’t necessarily have the name recognition of the S&P 500 companies, recovering from a stint of short-term executives can be even more challenging. Learn about some of the pitfalls that may await business owners that don’t carefully plan their exits, as well as some steps you can take to ensure you have a viable transition plan.
Why Plan for an Exit?
The same Russell Reynolds survey that revealed the S&P 500’s nearly 700 CEO transitions over 12 years also showed that 13 percent of these new CEOs departed from their positions in less than three years. This quick turnover can leave hiring committees scrambling. It also represents tremendous financial and logistical costs for the business that now must scramble to fill this key leadership role.
Often, new CEOs depart because they simply aren’t a good fit for the position or are seen as ineffectual (and removed) by boards of directors. But these factors can often be mitigated or even eliminated if the departing CEO has a strong exit plan, which might include the identification of a potential successor or two.
Unfortunately, three out of four business owners surveyed “profoundly regretted” their decision to sell their business just 12 months later. And this is for businesses that do sell — a full 70 to 80 percent of businesses put on the market don’t.[2] [3] This means that business owners suddenly forced into retirement may have trouble selling their business to someone with the aptitude to keep it running. Having an exit plan in place may not prevent every unforeseen event, but it can give you the framework you need to make tough decisions quickly.
What an Exit Plan Should Include
With a full 49 percent of business owners lacking any sort of transition plan, there’s never been a better time to begin sketching the broad outlines of your exit strategy.
Identification of potential successors.
Some CEOs tend to see their potential successors as threats and may play their cards close to the vest to avoid becoming “expendable.” However, mentoring candidates for future management positions can be the best way to ensure that one’s management style and priorities are carried forward. Spend time identifying and mentoring those who show promise, and you can help avoid creating a vacuum in corporate leadership with your eventual departure.
Using the board as a sounding board.
Often, new CEOs are constrained (or even fired) by a board of directors who aren’t happy with their leadership. By keeping the board in the loop when you mentor and train prospective future executives and ensuring you know what the board values in a CEO, you can steer your potential successors in the right direction and ensure they’re being trained in accordance with your company’s culture and expectations.
A solid plan for retirement.
Exit planning isn’t just about the future of the business, but the future of the CEO as well. Many business owners who aren’t able to see a future that doesn’t involve being a business owner can have trouble adjusting to retirement. To avoid becoming part of the 75 percent of business owners who report they regret their decision to sell, it’s important to set forth both a financial and a personal plan for retirement. Create a budget that doesn’t depend on getting a certain dollar amount from the sale of the business, but can instead flex with you based on the income coming in that month. Renew old hobbies or find new ones. Reconnect with old friends or distant family members who may have fallen by the wayside amid the hustle and bustle of daily life.
A path for a clean break.
Selling and walking away from a business you started or ran for decades can sometimes feel like giving up a child. It can be tempting to stick around as a consultant or in another role that provides you with continued access to the business during a time of transition.
But while staying involved can be comforting and may be helpful to those left behind, it may also send mixed messages and prevent the company (and you) from moving on. In most cases, a clean break is better. This doesn’t mean you have to walk away and never look back, but you should provide your business (and the board) with the space they need to chart their future path.
Sources:
[2] https://www.bpmcpa.com/News-Events/157801/The-Sad-75-Club-How-to-Easily-Avoid-Business-Regret
