How High-Growth Companies Manage Founder Succession Planning
Successful founder succession planning comes from open dialogues. This article offers best practice advice on the pitfalls during the transition to a scalable business.
By: Leadership Dynamics team
Succession planning is key for any high-growth company, wherever they are on their investment journey. However, knowing how to transition a founder-led business to a scalable, corporatised leadership model is a more difficult task.
This article will offer succession planning best practice to help both founders and investors understand how to navigate succession when it’s clear that leadership change needs to be made in order to scale sustainably.
When should companies consider founder succession?
The short answer is: before it’s too late. We argue that succession planning should be a proactive initiative, preparing for all changes that might impact requirements on leadership. But in reality, most founders only start thinking about succession when they are not enjoying the job anymore.
At this point, a founder should ask themselves: “Even though I was the right person to get this company to where it is today, am I the right person to take it to where it needs to be in its next stage of growth?”
For founder-led businesses, their success has usually been due to the vision and character of the founder themselves. One person has managed to take an idea from nothing and turn it into a successful business while holding the reins of all departments, but there is only so far one person can go. No one is extraordinary at everything.
This is why many founders begin thinking about the succession process. Because they are running an entire business – commercial, operations and finance – and they are burning out. They might find it hard to let go, or just can’t find the right people to bring on to support them. In either case, private equity investors can help. Both founders and their buyers should discuss succession before a deal is made so that they can ensure the right people are in place to scale the business in line with their value creation plan.
On average, an unplanned CEO change will typically add 18 months to an investment timeline. Creating a succession plan will prepare the company for change so that performance is not disrupted and investors can be reassured the value creation plan is on track.
7 steps to succession planning
Every portfolio company, no matter its size, whether founder-led or not, should have a succession plan ready to ensure they are always ready for a leadership change.
This is a short preview of our step-by step guide to the succession planning process in any high-growth company. For more detail, read our full article: How to Manage Succession Planning in Private Equity.
Be clear on your value creation plan
Identify gaps within a leadership team
Identify high-potential talent within the business
Model the impact of leadership change before it’s taken
Map out the timeline
Build development plans
Monitor & ensure the long-term sustainability of your leadership team
Founder succession planning best practice
Founder succession does not necessarily mean replacing the founder as the head of a business. It is simply identifying what the founder is good at and repositioning them as the business starts to professionalise, industrialise and corporatise so that it can scale beyond the founder’s capabilities. If the business is part of a private equity investment, succession planning means it can meet the targets of the value creation plan.
#1 Build a diverse team around the founder
The pitfall founders often make is they try to find someone like themselves, an entrepreneur, when what they should be doing is hiring people who are better than them at specific areas of the business, especially at the jobs the founder doesn’t enjoy.
For example, if a founder is great at the big picture and enjoys talking about and selling their vision, but finds the detail of the daily operations tedious, it makes more sense to hire (or promote from within) a CEO, CFO and a COO, and move the founder into a chair role. These types of people, who enable a company to scale by working on the details are called “integrators”. In large companies they have job titles around “strategic transformation” or “change management”.
Functional balance and behavioural complementarity are key to the effectiveness of a leadership team. As long as the new leaders complement each other and the founder in terms of experience and behaviours, the team will perform well.
Bringing in people who are too similar to each other creates an imbalance. If too many people have the same type of experience, there is no one to learn from. If the team has the same skill sets, there will be gaps in capability, and if they have the same behavioural profile, they are more prone to group-think.
A functional balance chart ensures diverse and effective teams
The key to a high performing team is diversity, especially cognitive diversity. A study published in Harvard Business Review in 2017 found cognitive diversity (ways of thinking, approaches to problems) to be even more important than physical diversity (age, gender, race). The more diverse the thinking styles on a team, the quicker they solved problems in the study.
#2 Involve data-led people analytics
Founder succession can be an emotional journey. The company is their baby they’ve grown and nurtured for years of ups and downs. Investors are also emotionally invested in their portfolio companies having championed and believed in them from the earliest point in the investment journey well before they’ve even made a transaction.
So when discussing succession, it helps to remove emotion and bias on the part of both parties. By involving people analytics tools that rely on objective data, both sides can look at a dispassionate assessment of the people requirements of the business.
#3 Assess behaviours as much as functional experience
To get the right people in place, it’s important to understand their behaviours and how those behaviours influence their interactions with other leaders. While personality traits show "who they are", behaviours show "how they act".
Through our work, we have spent years studying the link between leadership teams and business performance; we have built a model that assesses the behavioural profiles of leaders and leadership teams specifically focused on the needs of high-growth businesses.
Behavioural assessment tools are a people analytics tool examining whether people with certain behavioural profiles will work well together. They offer a detailed analysis, including the behaviours of other people that they complement. (Our behavioural analytics tool is called PACE and you and your teams can take the test yourselves for free.)
An example screenshot of the Leadership Dynamics PACE assessment
#4 Assess internal employees first
In 2019, 70% of FTSE 100 CEOs were internal hires (having joined within three years before appointment). By identifying high-potential employees you can retain company culture and be more targeted to the position if you are developing competencies.
When looking externally, it can take 3 months to find a suitable external candidate and another 3 months to serve their notice, while the readiness of your potential internal hires depends entirely on how long it takes to develop the competencies needed.
Challenges of founder succession planning
Due to the intertwined nature of a founder and their business, the challenges of succession planning come in both the strategy and its implementation.
In situations where founder succession is triggered during private equity company buyout, there can be misunderstandings during negotiations about each side’s objectives. This can happen because neither side wants to jeopardise the deal. The founder may not be completely honest about how happy they are in their position. And investors may not be clear about their value creation plan for fear of spooking the founder that they are going to be replaced.
For example, a founder thinks that telling his investors he wants to leave in a year will sink the deal, so he keeps it quiet. Or an investment team keeps parts of their plan to reposition the founder post-deal hidden to avoid disrupting the deal.
The reality is that if succession is discussed openly pre-deal, objectives will become aligned and they can avoid missteps further down the investment timeline. Leaders with the skills necessary can be brought in earlier to take on the work that founders don’t enjoy. And founders can maintain performance because they have a clear path along with the growth plan.
The danger of not being aligned is that often PE firms will force succession on the founder later on, which can cause internal rifts and distrust, which will impact the ability of the leadership team to meet the growth plans. Using third parties to facilitate honest conversations can cut through the assumptions and biases of the two sides and make sure everyone is on the same page from day one.
Hiring in one’s own image
In those cases when a founder manages their own succession, one of the pitfalls they can fall into is hiring another entrepreneur, i.e. someone who is capable of building a business but doesn’t have functional expertise. Most founders are looking for people who are better than them. But what they should be looking for are people who are better in defined functional roles, such as operations or finance.
Building a team of diverse experience and functional expertise will complement the founder, and allow them to continue as the heart and vision of the organisation.
Planning for long-term success
Going forward with a clear and honest relationship, private equity houses and founders can create a succession plan that takes into account the founder’s hopes and dreams while maximising their capability to drive the vision and direction of the business. A good partnership will be able to build the right team around them to facilitate it.
Leaders are a company’s biggest asset but can also be a liability, especially in the pressurised timelines of a private equity house’s VCP. This is why building the right team is critical to its success.