Much is written about succession planning. But what happens when the family CEO dies in the saddle with no identified successor? Here is a case of a $90 million founder-managed business that went through this unfortunate situation, how it ultimately resolved and some lessons learned.
Bruce Walton’s article was featured in the Family Firm Institute (FFI) Practitioner on 10/11/2017. It is a case study of a $100m revenue, third generation company CEO succession. When a family company recruits an outside executive, particularly at the COO or CEO level, candidates pay attention to what they might be getting into. Family businesses have a reputation for being idiosyncratic. Best candidates will look for best practices in use both within company governance and within the search process. It helps to be aware of things they will look for.
When I’m helping family-owned businesses find new executive leadership, I often hear the following: “We want to find someone who is the right fit.” This word—fit—is difficult to define, yet is always key to a successful hire. When assessing candidates for fit, it’s helpful to use the following questions as guiding principles:
1. Does the candidate’s leadership style align with company’s value systems?
Fit really means linking the value systems and leadership style of the executive candidate with those of the hiring company. In fact, “value systems linkage” is the best predictor of happiness, in all its dimensions, for any hire. Therefore, for a family-owned business, where hiring a non-family CEO can often feel like arranging a marriage, fit is particularly important.
Naturally, the starting point for the hiring process is understanding the Core Family Values that drive the business. Businesses that have survived across multiple generations have invested much thought in the development of family values. They are typically recorded somewhere, either in a corporate handbook, website, or other core material. If this is not the case, formalizing and recording corporate values is an important exercise to complete before starting a CEO or COO search. Since the family can never be separated from the business, these core values will drive decisions that otherwise would be hard for an outsider to understand.
2. Does the candidate possess the most important competencies for the position?
When a candidate clearly aligns with the family’s value system, it can be tempting to conclude that the candidate is automatically a great fit. However, it’s important to move the decision beyond “I like them.” This is why a position competency model, designed to measure the candidate’s specific skill set against the company’s business goals, is critical. The key is to build a competency model that helps separate and prioritize the must-haves from the nice-to-haves. Nobody will be a perfect match on every competency, but the best candidate will have successfully demonstrated the top three to five competencies in the recent past.
3. Will the candidate be a steward of the family’s success?
When I try to consolidate all of the aspects of fit for family businesses, the single word that comes to mind is “stewardship.” Good candidates understand and appreciate what the family has already built. The new CEO becomes a steward of that success, even when the mandate is to transform the company. Family members in the business, ownership or governance have their own self-images (both within the family and in the community or industry) so tightly connected to the business that outside leadership needs to account for it and factor it into the leadership process.
To be a successful steward for the company, the candidate must be a confident adult who is prepared to handle sensitive situations that will arise within family businesses. For example, a mature non-family CEO will be able to react appropriately when ownership wants to drill down into the details of the business, as they always do at some point. The mature steward will not be threatened by this, while an insecure autocrat will not react well.
Investor Relations (IR) also deserves some thought. Every CEO spends a significant amount of time caring for the company’s owners. In public or private equity owned companies, this is pretty clear. In a family-owned business IR involves multi-generational dynamics and strong emotions. It may involve dealing with a Family Council or helping educate a new generation to be successful future owners. So IR does not go away; it is just very different.
In summary, the “best fit” candidates will embrace the core family values and have the capacity and patience to deal with family dynamics without becoming embroiled in them. At the same time the non-family leader will have the right core competencies to lead the business to success, however it may be defined.
by Bruce H. Walton, Partner at Battalia Winston
When a family-owned business needs to recruit a non-family CEO or COO, a well-structured Long Term Incentive Program (LTIP) is essential in attracting an outstanding candidate. However, LTIPs can make some family business owners uncomfortable. Few families want to give up true ownership, even when they realize that an agreement is important for the health of the business. Naturally, the non-family CEO will want to share in the value they create through an incentive program that enables them to feel, act and think like an owner.
Fortunately, there are ways to structure an LTIP that preserve ownership and make the program a win-win situation for both owners and newly hired executives. The dominant LTIP vehicle among private firms is a cash-based performance incentive which contributes the earned award to a deferred pay account with vesting conditions.
Here are a few guidelines that we have found useful in recruiting.
Work with Experts
Creating an LTIP is not something that should be handled in-house. It takes a professional compensation consultant to translate the family’s value system and objectives into an appropriate LTIP architecture, and then to fit the program to the requirements of the finalist candidate. There is always a bit of negotiating that goes on, first within the board and family, then with the finalist candidate. The process usually requires several steps/iterations over a couple of months and needs to be memorialized by a lawyer. The whole process might cost $12-15,000.
Because the process can take some time, we strongly encourage clients to start developing the LTIP at the beginning of the CEO or COO search. It is too late to start the process once the final candidate has been identified. If there is an LTIP already in place, it may need to be refreshed to match the current marketplace. Again, this process should be started early, since even minor modifications can take a couple of months.
Start with the Premise that the Program Should Pay Out Only When Value is Created
The architecture of the LTIP should be based on sharing in the value that the CEO helps create. Frequently, the way to measure that value is EBIT or EBITDA, starting with a reference value before the new CEO joins, and allocating a percentage of the value created to a pool that is shared by the top three to five members of the management team. This incents the CEO and provides some tools to attract and retain top talent.
In some programs, a third party assesses the company’s value each year, providing an independent view of the payout, but this method has a yearly expense attached to it. One recent client simply assigned a percentage of the EBITDA growth over time to a pool.
Keep it Simple
Some of my clients have tried to incent behavior with overly complex metrics, to the point that one candidate likened the proposed LTIP to the tax code. He asked, “What are you really trying to get me to do?” The company did not have a good answer. Also, it was very hard for the candidate to assess what was achievable before he moved under the tent with access to all the needed information. Ultimately, the company decided to simply base the incentive on company value growth based on their formal company annual valuation program.
LTIP payouts should be made in a reasonable timeframe, balancing the needs of the candidate with the need to protect the company from a large cash flow demand. Remember, if the CEO makes a lot of money, the family has made even more!
Of course, the value of the LTIP should be subject to a vesting schedule of a reasonable timeframe, perhaps three to five years. I had one client that wanted the monies held within the company until the CEO turned 65. That was unacceptable to the 43-year-old finalist candidate. He proved he was the right candidate by saying, “I want to be able to take some of my (earned) money out on a regular vesting schedule, invest it and then lose it, just like everyone else.” He turned the company profitable within nine months and doubled the value of their minority ESOP within three years.
While a recruiter can provide a sense of whether a program is comparable with others in the market, it takes a compensation consultant who deals with private companies to “turn the dials” and match a program to a specific situation. Recruiters familiar with family-owned businesses are accustomed to collaborating in this way and working with various other consultancies supporting the family-owned business community.
by Terry Gallagher, President, Battalia Winston
Private equity firms consider a number of factors when evaluating a company for acquisition, but many overlook a critical challenge: attracting executive-level talent to the company after acquisition.
If PE firms plan to use their portfolio companies as foundations for building bigger, more complex organizations (as is often the case), they’ll need a high-performing team of executives at the helm. Specifically, they’ll need executives with experience building the infrastructure necessary to scale the company’s growth and position the company for sale once it reaches its optimal value.
In many cases, building this type of A-team will require some replacements. During the “pruning period,” PE firms must evaluate the existing management team and determine whether or not they need to upgrade to a more qualified leadership team to achieve their growth goals.
But identifying and recruiting “upgraded” executives can be difficult, especially for companies that aren’t located in metropolitan areas. Recruiting talent to a small, lesser-known city can be difficult on its own, and an environment of uncertainty or instability after the acquisition exacerbates the issue.
I’ve worked with a number of organizations in this exact predicament: recently acquired companies in small towns like Ferndale, Washington or Palmyra, Pennsylvania that need to attract transformational leaders. It’s not impossible, but it does require a clear strategy.
PE firms planning on acquiring companies in smaller cities need to be prepared to handle recruiting challenges. Each company will, of course, have its own unique challenges, but there are several best practices I’ve developed that will set the stage for success:
- Determine Recruitment Challenges During Due Diligence
Begin by evaluating the company’s existing talent acquisition practices and talent pool. How were the existing executives recruited? Or did they come from within the company? What percentage of leaders and employees already lived in the city before they joined the company? Has the company had success recruiting from outside the town before? What is the average length of tenure – and is there any relationship between length of tenure and the employees’ point of origin (i.e. Can the company retain employees that it’s recruited from other cities?)? Does the company tend to retain executives (i.e. more experienced employees) but fail to retain newer or younger employees, or vice-versa?Exploring these questions will provide PE firms with a thorough understanding of potential recruiting challenges before they acquire the company, so that they can be fully prepared as soon as the deal is closed.
- Identify Talent Needs at the Executive LevelIf the acquisition will result in a merger of two companies, the PE firm will need to quickly evaluate the leadership of the merged companies, retaining the best employees and managing any downsizing in a manner that will minimize the impact on employee morale. More importantly, they’ll need to retain the talent that will not only run the company at the time of the merger, but that will be able to manage the business as it continues on its path of rapid growth. Experience working with mergers/acquisitions within the industry should be a high-priority need. Once gaps are identified, the PE firm will need to evaluate the best way to fill that position, keeping the recruitment challenges they’ve already uncovered in mind. Is an outside hire—potentially one from another city—the right choice, or is an inside hire a better option? Armed with an understanding of the company’s recruiting history, the PE firm should be able to make an educated decision here.
- Target the Right Candidates with the Right Message
Recruiting top talent to smaller cities is all about developing the right candidate profile and fully understanding the needs of the candidates in the pipeline. First, it’s important to understand that some candidates will simply not be interested in leaving a bustling metropolitan area for a small city; don’t waste too much time on those candidates. On the other hand, boomerangs—candidates who attended college or grew up in a small town and may want to return to one—are smart targets, as are candidates from mid-sized cities.It’s also important to fully understand any of the candidates’ personal circumstances and family needs that might affect their willingness to relocate—have their children gone off to college recently? Are they burned out from big city living? Do they want to be closer to family on the opposite coast? All of these factors can turn an unlikely candidate into a good fit.
Once the right candidate profile is identified, the people in communication with the candidates—HR managers, recruiters, headhunters—must be educated on how to sell the value of the city. They should not only tout the value of the city (its attractions, history, high standard of living, etc.) but should also tailor their pitch to each candidate’s needs. For example, an empty-nester looking to leave Manhattan might be particularly interested in the light traffic and walkability of the town while a younger boomerang candidate might be interested in the lively town center or nightlife.
PE firms that are acquiring companies in small cities should be prepared for recruiting challenges. But despite the obstacles that come with attracting big-time execs to small-town life, a thoughtful strategy can lead to success.
Millennials will compose 75% of the workforce by 2025 . As this generation grows up and gains more experience in the workforce, employers are struggling to attract and retain a high-value segment of this generation: mid-level talent. This segment – made up of employees who have 8-10 years of experience and are at manager level – is critical to any company’s success.
Like their younger counterparts, this mid-level group is technology savvy and determined to advance quickly in their careers, but they’ve developed the ability to effectively manage teams and mentor younger members of their generation. As baby boomers retire, mid-level employees – armed with ambition and technical skills – will be the key to propelling companies forward.
This is a particularly pressing issue for businesses in my home state, Michigan, which will see 10,000 baby boomers reach retirement age each month until 2020. After 2020, the numbers only accelerate. Each year, thousands of millenials gradate from Michigan state universities—literally in the backyard of Michigan-based businesses. While some of those millenials, especially those that grew up here, will stay close to their stomping ground, many will leave as they gain more experience.
If companies in Michigan–or any state– want to stop exporting the talent they develop, they should implement the following best practices:
- Branding Your Company (and Corporate Culture) as a Source of Big IdeasMillenials in the mid-level range are not only looking for meaningful work, they’re looking for a company where they can leave their mark. Michigan companies must brand their corporate cultures as forward-thinking and open to new ideas if they want to retain this key demographic. This can be challenging for “non-sexy” industries like manufacturing and automotive, but companies like Troy’s Altair Engineering, one of the winners of the Economic Bright Spots Award, have managed to do it. The company employs over 700 local employees and emphasizes its big-thinking culture in its recruitment efforts: “You’ll find a different culture at Altair in the way we work, how we interact, and the collaborative approach we bring to projects. Your ideas are heard, your efforts are visible, and your work impacts company growth.”
- Prioritize Professional DevelopmentAccording to the Center for Economic Studies, the median length of job tenure for 25-34 year olds was 3.2 years in 2012. Though mid-level millenials change jobs at a slower rate—most likely because they often have families or own homes—they have the same need for constant change and professional growth. Making professional development a critical component of your company culture, allowing for lateral promotions, and encouraging employees to pursue additional skills training will encourage mid-level employees to find the growth they crave within your organization.
- Encourage Work-Life IntegrationMid-level millennials are looking for a different type of work-life balance. While they want time for their families and personal pursuits, they also want to be passionate about the work they do. In other words, they are willing to work long and hard, as long as they love the work and can do it on their own schedule. Work-life integration is about flexibility, not necessarily less hours. In fact, according to research by the Intelligent Group, 74% of millennials want flexible work schedules. Developing a culture that allows, for example, working parents to leave the office at 3pm and finish projects later in the evening after their kids’ bedtime, will be highly attractive to talented mid-level professionals.
|Rich Folts||Bruce Walton|
Succession planning has always been a critical concern for family business owners, but in the past few years we’ve seen a surge in the number of family businesses searching for new leadership. This uptick in succession planning is the result of two converging factors. First, the boomer generation is reaching retirement age. Boomer entrepreneurs who started businesses early in life are thinking about passing the baton. However, the economic recession forced many family-owned businesses to delay succession planning. Now that the economy is showing signs of a rebound, owners are beginning to actively discuss succession strategies.
We’re now seeing the release of this pent-up demand for new leadership, and many businesses are bringing in non-family executives in the absence of a qualified or interested family successor. Family business owners and their advisors feel a sense of urgency and want to act swiftly. But a hurried succession plan is destined to fail. Based on our experience recruiting external executives to family businesses for decades, we recommend following these best practices:
- Start early. The family must begin to formulate a succession strategy well before the chairman is ready to step down. Ideally, the planning would begin when the chairman is in his/her early 60s in order to ensure a smooth transition before s/he reaches 70 or has a health issue. Waiting until the chairman is any older can cause emotional complications (e.g. the owner’s identity is too enmeshed in their professional role, which ultimately hinders the transition and hurts the value of the enterprise) and practical complications (e.g. the chairman develops health problems that force an unplanned transition).
- Seek Expert Help. Every family business is different, and the particularities of organizational structure and family dynamics can lead to complex business challenges, especially when bringing in an outside hire. At the very least, family businesses should build an advisory board to provide outside, unbiased perspective. The business owners should engage a family business advisor who combines expertise in family systems, psychology and business governance.
- Establish Appropriate Incentives. Hiring a leader from outside of the organization can energize a business, but it requires both the right skills and temperament. To attract the right type of candidate, family business owners must provide a way for the CEO to share in the value they create. Doing so will attract candidates who have both the ability and the desire to grow the business.
To demonstrate the effectiveness of implementing these best practices, we’d like to share two case studies. In both cases, bringing in an outside executive resulted in a thriving business and a happier (and wealthier) family business owner.
Case Study: Regional Distribution Company
Several years ago Rich Folts worked with a family-owned regional distribution business. The chairman wasn’t quite ready to step down, but he wanted to prepare for his impending retirement. The executive team who had helped build the business were also interested in retiring. With no obvious successor in line, the chairman worked with Rich to find a new CEO who had the vision and experience to both maintain the culture and build the necessary infrastructure to move the company from a regional to a national distribution business. We hired a seasoned CEO who had prior experience growing two similar regional distribution businesses into national organizations and was looking to continue this pattern by purchasing a regional franchise business. This opportunity fit perfectly into his plan and removed the financing issues associated with an actual purchase. We set up a strategic incentive plan: After ten years, the new CEO could accept a substantial buyout, sell the company, or walk away. In the meantime, the family maintained ownership.
In the six years since being recruited to the company, the new CEO has
- Doubled top line revenues
- More than doubled shareholder value
- Expanded the business from a regional to a national distributor
Because the family business started early and created an enticing, effective long-term incentive plan, the transition has been a success for all parties involved.
Case Study: Global Manufacturer of Engineered Industrial Components
Bruce Walton partnered with a $70 million company that produces engineered industrial components for major companies like HP, Toyota, and Bosch. While the chairperson was family and there were other family branches represented on the board, there was no remaining family in the business, and they had suffered losses for a number of years.
The company had an ESOP, and the family expressed mistrust of the previous CEO. We were looking for a transformative CEO to restore profitability and the family’s trust. We brought in an innovative CEO who had been working in Germany for a mid-cap private manufacturing company where he had been well-trained by a very professional German board chair. With children approaching school age, his family was ready to return to the US.
The new CEO was able to return the business to profitability within nine months. In just under five years, the CEO’s leadership has led to a significant increase in the new business pipeline, resulting in 70% more revenue and an expectation of doubling revenue by the seven year mark. With a focus on “doing things right” and investing in human capital, profitability is healthy and the ESOP share value has already doubled.