Governance Bites #87: succession planning for business owners, with Josh Comrie

In this episode, Mark Banicevich talks with Josh Comrie about succession planning for business owners. Josh talks about considerations for family-owned businesses, and closely held companies. They discuss maintaining corporate culture and values while transitioning to new leadership, common challenges in transitioning ownership, and the role of the board in streamlining the process. They also discuss appropriate timelines for succession planning. In closing, Mark asks what advice Josh would give to entrepreneurs who are just beginning to think about succession planning.
Josh Comrie is a recovered serial entrepreneur. Now he is a business adviser and conference speaker, helping ambitious entrepreneurs to grow and exit profitable, fulfilling businesses. Prior to this, he founded or co-founded several businesses, including The Attention Agency, Flying Kiwi Angels, Ambit, Potentia and Aspire Executive Search. His governance career includes director roles on several of his startups, and former President of the Entrepreneurs’ Organisation (NZ). Josh’s ebook, “The Exit Factor: Sell your company for a life-changing sum”, is available at www.joshcomrie.com, and his podcast, "2 Commas", is available on Spotify and Apple Podcasts.
#governance, #leadership, #corporategovernance, #boardcraft, #decisionmaking, #makingadifference, #ceo, #governancebites, #boardroom, #entrepreneur, #succession, #2commas

Transcript

0:00

Hey, I'm Josh Comrie and a pleasure to be here on the Governance Bites podcast today with Mark. My background is entrepreneurship. I formed a bunch of companies and then went into the space of investor and advisor. So, been involved across 51 early-stage ventures through investment, and been on the board of a range of different types of businesses: start-up, scale-up and those that are entering the stage of exit as well. And as somebody who is doing a lot of exit advisory, you're great to speak to about succession planning for business owners. Yeah, it's a fascinating subject to me. Okay. Hi, welcome to Governance Bites. My name is Mark Banicevich, and as you just heard, today I get to spend some time again with my old friend, Josh Comrie. Josh, thank you very much for your time. What a pleasure. Now, you've been a serial entrepreneur and now a recovering entrepreneur and having done this a number of times and exited from a number of businesses and with your podcast about "Two Commas", of helping businesses understand how to exit with more than, you know, a million dollars in the selling price, you're a great person to talk to about succession planning for business owners.

So, let's start with: 1:11

what are the key factors you consider when you're planning ownership succession, particularly in sort of family-owned or closely held companies? Yeah, yeah. So, there's probably a category all of itself, which is the family category. And so there's some dynamics which are quite unique in that space such as there could well be an expectation to bring one of the children, one of the grandchildren into the business structure, when they may not necessarily have the skills that are present. And so, if that is the case,

then my expectation, my suggestion would be: 1:42

be really aware of what it is that you are endeavouring to have the person bring skill-wise, what the company needs age and stage-wise and then make sure there's really good support around that person and the things that they're not that great at doing, they're able to have supplemented by others across the team. So, for example, if you're bringing them into a CEO [Chief Executive Officer] role, for example, you know, there's different forms and different stages of CEO, as we all know. Not all CEOs are made equal and not all CEOs can do the same job in a company at the same or different stage. And so, just being really clear about what it is that the business needs and then kind of going, well, that person perhaps may not be that strong on, I don't know, customer development, awareness of the sales and marketing side, so just have a great CRO [Chief Risk Officer] that can support that person, someone who's great head of marketing so they're aware of what's going on that may be supplemented across the board, as well as the executive team. And if they're in an executive role as well as being in a board role, just ensure there's that delineation of those responsibilities so that people, the lines don't get blurred between what my operation inside the business is, you know, what my function as an operational employee is, versus what my involvement at the executive may be. So, that's the family business. If you're in the situation of a privately held or even a publicly listed company, in an ideal world, you're able to do the Tim Cook, Steve Jobs situation. So, Steve was brought back into Apple in 1998 to conduct the reinvention after the disaster that was the predecessor, the Pepsi CEO, can't recall his name, John someone or other, [John Sculley] and the company had been driven into all sorts of spaces that it shouldn't be. So, Steve was the Messiah that was brought back. And he very wisely brought Tim Cook in in 1999, so it was about a year apart. He didn't know at that stage that he was going to develop cancer- Yes. - and ultimately pass in 2011, but Tim was a bit of a whiz kid around solving a whole bunch of different problems that they had inside the business. And so, both Steve and Tim worked super closely together to get themselves across the different things that needed to be done for the business. And so, the execution was there, the awareness of what the big picture was there, and the driving towards the same result. So, they could kind of really fill in the gaps as they needed, and then when the handover was done officially it was kind of a seamless thing from one to the other, and the vision was continued on. Have you noted since 2011, there haven't really been too many new products from Apple, they just continue to refine them exceptionally well. So, the visionary is gone, but the company hasn't suffered markedly. No, no. So, succession been done incredibly well. It's market cap certainly hasn't been hurt too much, has it. 12x compared to Microsoft's 14x over that same timeframe. You raised a good point there with Tim Cook and Steve Jobs because one of the things that was done really well there was bringing, planning succession early, and bringing somebody in early. Yeah. And I think quite often, specifically smaller- scale businesses will think at the last minute,"I want a successor and I want to leave in, you know, six months or two years." So, what value is there? How early should someone look at this, this issue of succession? Yeah. I think as early as possible, which isn't really giving too much insight, but - Oh hey, pal. Tui going in the background. - So, what I often see in small businesses is that the founder, the CEO, they get to the stage where they kind of go, "I'd like to be able to step back," and they hire externally. They believe that the right person is going to come from outside the business. From my experience and observation, about 75% of the time, that hire fails. And there's a huge array of reasons for that. One of them is that they're possibly not great at recruiting someone of the right seniority. One is they're probably not letting go of the reins. One is they're not providing a clear and a cohesive path for that person to walk on. And there's a few others that might sit in behind it, as well. And so, my strong suggestion to folk in that context, and even in a much bigger or a public company, is to be really conscious about where the needs of the business are going to go into the future. Have a regular dialogue with the critical people around the table. Have a risk register that's attached back to individuals, the"run over by a bus" kind of situation. And have a primary and a secondary back-up somewhere around the team, so that you're developing those folk continuously along the way, so that you're then at the right stage when you need to initiate it, it's not a six-month recruitment process, a wait for three months for that person to get to the business and then a six-month cross your fingers and hope that they are the right individual, and they have the right value set alongside the right capability, and that they can drive the business towards where you need to go. So, timing for me, to be clearer, I reckon if you're thinking now might be the time for me to consider getting out of my business, then you've got to have two years to hire or find the right person inside your company, and then develop them to the right set of capability. But ideally you've got five years in all reality. Absolutely. A lot of, the industry that I do a lot of work in, in financial services, if you're talking to a financial advice business, generally the person that subs in, it's not the case so much anymore, but it's traditionally always been another financial advisor. So, you're narrowing the market for those people, as well. Now, when I had my Taekwon-Do school, my martial arts school, you had to have a qualified Taekwon-Do instructor to step to take over. Right, yes. So that makes it even harder to find the right, you know, your universe, or your market for somebody to replace you is so very small - Yes. - that you, you know, five years in those cases probably isn't even enough. Yeah. I have a program that I run through with business owners and I call it the "Exit Ready" program and in reality, that needs to be kind of conducted two to three years before they're wanting to be able to walk away and hand over the keys. Yes. And that could be in the form of selling the asset or it could be of them walking away and having an executive team or a management team run that company on their behalf. They become the executive chair, or they step back completely and allow others to take it to where it could go. And otherwise the alternative is, there's a bell-shaped curve of exits. The average exit price globally, this is interesting, is 3.45 times EBIT [earnings before interest and tax] which is three and a half years of profit. Yes, yes. And so, for a lot of people that's quite a surprise when they first learn about that. And then when I talk about the 3Ds what sits at the bottom 20%: death, divorce or debt. The sudden exits. The sudden exits, right. Fire sales. And it's just a, it's a dreadfully sad and avoidable situation that people with a bit more planning and a bit more foresight, and a bit of thinking about what might happen to this business in the future, and I call those the 3Ds. But there's other situations as well. The divorce could be divorce of a business partnership,- Yes. - not just a life partnership, that forces the sale of the asset. But it could be that the, you know, desire to kind of pull in the same direction has changed and so the asset needs to be sold quickly. And that will always net a far lower price than something that's well prepared, thought out, and is well positioned for a potential buyer. Yeah, absolutely. Now, if you have, you know, you are finding the right person to succeed, and things are moving reasonably well, how do you balance the need for maintaining the company's culture and values while bringing in new ownership or new leadership? Yeah, great question. So, ideally that person embodies most of the values as they sit today. The classic situation, and this is quite common inside bigger businesses or listed companies, is that the new CEO rolls in the door, so someone's been appointed from outside the business within six, maximum 12 months, half, if not 75% of that executive team has gone. So, they've been brought in to mandate some form of change, and or they decide to move those folk on or restructure the business or the style and the approach that they have is incongruent with what that person joined in the first place. Yes. And so they essentially go,"I'm not going to be a part of this thing any longer." And so, you know, ideally you've got kind of some, some headwind, some opportunity to kind of, you know, get that values alignment pretty clear. If you don't, then you'll end up with that turmoil and with that change that goes on in the business. So, what are the, the idiom is that people join a culture, and a culture is a manifestation of the values. Yes. And it's brought to life through the behaviour and the communication they have with each other. So, they join a culture, they work for a strategy, and they leave a manager and so, you know, - Yes. - if you get that wrong, which many, many people do unfortunately at the senior level, then the consequence is that you have people that will exit the business. So, you know, being cognizant and conscious of what the values are is such an important thing. And then you're left picking up the pieces, because so much institutional knowledge has walked out the door. Disastrous. Yeah, absolutely. What are some of the common challenges you've faced in transitioning ownership, and how do you overcome them? Yeah. So the first I alluded to a second ago, but I'll unpack this a little bit more. It's the founder, the owner who brings on the general manager or the CEO [Chief Executive Officer] to replace that person, and they never really set themselves, set that person up for success at the outset. Yeah. They don't let go of the reins. Yeah. They don't let go of the reins. They don't want the person to initiate any change inside the business. They won't give that person ownership of anything critical. They shut them down when they're trying to make decisions. They don't go through an ordered process. Often smaller businesses lack effective governance anyway, and it's not all about governance, but having that structure in place so that you've got the independence of the board situation, so that it's not just about the outgoing owner and the new CEO kind of trying to tussle about things. Yes. You've got a forum which has been created to talk about these things and you have a constitution, or a, you know, a thing that kind of governs the way that you behave and how you talk about things, what's on the table for conversation, what the process for making those decisions are, and then a mechanism, as we mentioned earlier on, about reviewing those decisions down the path. So, not letting go is one of the, you know, massive early mistakes that I see a lot of people make. And the second is not having crystal clarity on what it is that you want that person to do. So, what are they doing with a business, you know? Is it the original vision? Did you have a vision? Is that still appropriate given where the market is at right now? A lot of people I find, they start a business because they desire to create lifestyle and freedom for themselves. You know, we've got a problem

in New Zealand with the 3Bs, they call it: 11:26

the bach [holiday home], the BMW and the boat. Yeah. And then they kind of sell the company. Luckily, we moved on a little bit, but there's been a bit of a threshold lately of about $100 million. We've had some companies that have been sold for more than $100 million, and there is nothing wrong with exiting a company for $100 million. I could cope with it. Yeah, most people can, most people can. That's inter-generational wealth. But the mindset of people not necessarily thinking big enough is a bit of a risk. Yes. And so, the point that I'm making there is about the vision for the company. And so establishing what a new one for the future could be when you bring on the new blood. If you're wanting them to, you know, grow, change, develop the company into different ways, then you need to give them that ability to be able to envision what the future could look like. Great example for me when I sold my first company, we were doing circa $20 million, been running the business for about 20 years. Sorry, not 20 years, 10 years. And was actually wanting to move the business into a space that it didn't want to go. So, I spent a lot of money on re-engineering the business and it turned out that the market didn't want that, and the staff weren't really kind of able to move the business in that direction. So, I had a bit of a come-to-Jesus moment, and the right thing for me to do was actually sell the shares, and I opted to go through a management buyout process because it was the people that had been on the journey with me growing the company, very ambitious people wanted to go to the next level. So, the next two and a half to three years, the company was doubled in size. I'd tapped out. I was done, it was time for me to go and do something different. And then it's doubled again over the subsequent three years. Market leader by far and away. It's a recruitment firm, right? Yeah, executive search and resourcing firm. Yeah, that's right. Yeah. And so, you know, wonderful firm, wonderful group of people and they've just done an incredible job of kind of bringing their vision, and what they wanted to achieve with the company. And because of the way that I structured my exit from that company, I've maintained equity in the business. And so I've been selling it down over time, and I was a part of the governance group for three or four years, but then it was time for me to step back from that as well and so I maintain essentially a kind of silent shareholding these days. And these, you know, younger folk and the ones that had the desire and the enthusiasm to make the business as it was the best version of that particular business, as opposed to try and change the business which is what I wanted to do. I was bored after 10 years. I see it all the time, Mark. Founders that are meddling with their business in ways that it shouldn't be done, because they want to go and do something different, but the needs of the business, and the other stakeholders, you know, because the business is made up of a bunch of stakeholders. Yes. They're not being met appropriately because they're not being considered in the right way. Right. So, the founder goes, "We should go and do this," and it's not right for the business. It's interesting that both of the examples that you gave there feel like if you have a good governance board in place, a couple of independents, that could help you really solve a couple of those issues. 100%. If the existing owner isn't letting go, well, if they're stepping back to a board, the CEO needs to be given the reins to do day-to-day, - Yep. - the independents will be saying, "Stay out of that conversation, that's management." Yep, yep. Yeah. So, for both of those, governance can be a good solution. Totally agree. Yeah, great. Okay. What role do current owners play in selecting their successors, and how do you ensure some sort of smooth handover? Yeah, so ideally you have a situation where this kind of, you know, "committee" is a bad word, but you get a group of people that are going to be responsible for working alongside, or have the position that they'll be doing something with that new person that comes into the business. Presumably they'll have the mantle of CEO or managing director. And so that there's people that can kind of contribute their views. And you've got a decision-making process that you can go through which is quite clearly defined and documented. So, you list the requirements, the skills that that person needs to have, talk about the values which are important to them, and then give them a weighting criteria. Because different things will carry different weightings. Yes. You know, an awareness of revenue operations, for example, might be 30% of a job, and an awareness of how to run a finance function might be 5%. So, don't treat them all as being equal, give them all a score out of 10, but then weight them accordingly along the way. What was the second part of the question? So, effective process is the first part, second part? How do you ensure that smooth handover? Yeah, so clarity of objectives, making sure you're communicating regularly with the individual, and that you're being clear with them about how their performance is going. So giving them objectives that they can work to and then pushing them to encourage overachievement of those things. I always try and see what people are capable of. Yes. My personal mantra with new staff is to push them really hard during the first four to eight weeks. I want to see what they're capable of because this will be, "Are they able to fit the brief as it stands?" And we agree upon what the objectives are. But are they capable of much more? Yes. And that's the way that you find out. It's embedded my core belief that we're actually here physically - and this is a little bit woowoo, Mark, apologies - but we're physically here on this planet to see what we can achieve in a positive sense. Yeah, yeah, I like that. And we are such an infinitesimal part of this little planet. Tiny. Yes. You want to try and achieve something before you go, right. Something positive. Yeah, absolutely. How much in your experience does a successor have the skills and ability to effectively - sorry, encumbant, the owner - have the skills and ability to choose a good successor, and how much do they really need a little bit of guidance and help from somebody, maybe a recruiter, maybe somebody that has an external viewpoint? Yeah, so I think it's such a critical decision, and so easy to get wrong. Yes. Because even if a person might be an effective recruiter of talent into the company, they probably haven't had to bring that level or profile of person - Yes. - into the business before. Yeah. And so they possibly treat them in the way that they might do an individual contributor, which is quite different. So having people that can have a contribution to that process, having people that can offer some insight and some experience into what they're trying to achieve, is just invaluable. Yes, absolutely. I can understand that. What role does the board of directors play in succession? Yeah. It depends. In an ideal world, they will be responsible for putting together the criteria of the individual and making sure that they're capturing what it is that the skills that that person will need to bring along. And that there will be some form of oversight that they have across the, probably CEO, and probably head of talent if the company has that sort of person in there. And so that they're kind of checking and balancing the things that are going on along the way, and that the CEO or the head of talent is not kind of you know hiring someone that's perhaps just a little bit out of kilter, but they like. Because a classic thing in recruitment, of course, is that people hire someone like them, or someone that they like,- Yes. - and then the company can't grow beyond that point. We call it "the Peter Principle". I've seen this again, as well, which is companies reach a certain point. They grow, they grow, they grow. It could be $5 million, it could be $50 million, it could be $500 million. Probably not, probably not the last one. But the first two, definitely. And then it caps at that level, and they stay there for two, three, four, five, eight years. And that's not the ability of the team that holds them there. It's the lack of ability of the CEO or the founder to grow past that point. I don't know who Peter was originally, but they call it the Peter Principle. Right, okay. In this, we've talked before about how far in advance you should consider planning succession. You know, ideally sort of five years, in some cases more. At least two. What milestones would you have in place during that process of succession? Yeah, understand clearly what it is that you're solving for. So, are we looking to make sure that we can, you know, move Uncle Bob out of the business, if it's a family business. Or that the founder goes, "I'm going to reach a certain age and stage," 55, 60, whatever that number might be. "And I want to be able to enjoy the fruits of my labour, spend more time with my kids"or grandkids or go and pursue some form of a passion project." And so getting the, I've totally wandered off my point here, Mark. We're talking about the milestones. Yeah, the milestones. Yeah, yeah, so the milestones are being clear that within, you know, three months or six months, they'll have to pick up a functional unit inside the business. There's some targets that are attached to that, so there's some performance that they need to demonstrate. There's some key relationships that they'll need to have across the business, both at the executive, and also with the individuals, and perhaps with other stakeholders, you know, suppliers, partners, customers, those sort of folk. And then just kind of having checks and balances along the way. I believe that starting a company, running a company, changing a company, there's a series of hypotheses that we have along the way, right. There's an idea or a thought, a consideration that we have, and so just being really clear that this person, you know, Steve is going to be the right person to replace Wendy, and we need to kind of check these kind of four or five things over the course of the next 12 to 24 months to ensure that they're doing the right things, in the right way, at the right time, with the right people. It's not always perfect. You know, you might find somebody, you put them in place, and you think everything's going right. How often doesn't it go right? How often do you find founders having to start the process again? How much of a setback is this? What's your experience? Yeah, yeah. So that number that I quoted before, about 75% of the time when a founder goes off and hires that person, sometimes through a committee structure, sometimes with the right advice externally, but about 75% of the time it doesn't provide the result that they hoped for. This is the saddest thing in the world, Mark. Because you have a founder who's running probably a great business and then they feel stuck, because they've tried it once, and the whole, you know, they kind of go out to the market, and then they think that there's a problem with the talent, or there's a problem with the world. Unfortunately often enough, not prepared to look in the mirror and kind of go,"Actually, something needs to change here, and it's probably me, to be able to achieve a result." And so then they don't enable the full realisation of the value inside that asset. So, too often unfortunately those processes fall apart. And if you look at the appointment of executives inside companies, they say that more than half of those appointments result in an unsuccessful outcome. And so, you know, the cost of this is horrendous. An individual contributor [IC], they always said historically, a failed hire for an IC is around about a year, maybe 16 months of salary. Yes. For an executive it's about three years. But that's the visible stuff. Then you've got the less visible stuff, which is the loss of opportunity, the opportunity cost of having the wrong person in the seat. Yes. There might be investments in key business units, there might have been markets that you moved into, there could have been a decline in sales or profit along the way. So those are all measurable things obviously. But I think the cost of getting this wrong is both horrendous, and it's also ubiquitous. Yes,. Right, right. And clearly, the earlier you start process, the more opportunity you have - So much better. - to have another go,- So much better. - to fix the problem if it doesn't work. Yeah, it's kind of akin, sorry to interrupt your train of thought there, but it's kind of akin to having a business partner. I've often seen individuals that either meet someone, and they don't really know them terribly well, and they decide they're going to start a company together. And they don't work together for a few months. Yes. And, or, you have a situation where a founder wants to bring a senior member of staff onto the team. And the idea is that that's their succession plan. Yes. And they do the succession plan, the contract stuff, before they kind of work with this person for a period of time. So, I think there's a lot to be for, you know, having the,'doing the dance', you know, - Try before you buy. - for a prolonged period of time, three to six months. Yes. And then really try and either manufacture, or get yourself into the situation where you've got some really, really decent tension happening, and maybe some conflict. Yeah, right. Because duress is the thing that brings out people's worst characteristics. Yes. Everyone can behave super-well when things are going great, but when things go badly, and they descend into to a nasty place, that's when you've kind of, you know, you bring out the negative traits of people. Yeah, right, that's a really good point. How do you manage the risk of talent gaps or leadership voids, particularly during succession gaps, you know, when, how do you... Yeah. Back to that risk, risk analysis and risk planning things. Yes. So, having a really clear risk register, having the things stated that you're going to be looking for, and then working those things quite clearly. Nice, short, succinct. Great answer. Yeah. Final question for you. Yeah. What advice would you give to other entrepreneurs who are just beginning to think about succession planning? Yeah, start now. So, if you're just beginning to think about it, then get a vision clear on your own mind as to what your kind of plans for the future are, because you're the key lynchpin around this thing, the founder or the owner is. And so is it two years you want to be down to part-time, you know, five years you want to be out full-time. And then get clarity on what life looks like for you after that point, as well. This is also important because founders can end up as the CMO, not marketing officer, Chief Meddling Officer. So they haven't given themselves a good job to do. Go and get a passion project, go and coach kids' little league baseball team, whatever the thing might be, but don't stick around the business and meddle in that thing, because you've got to hand the reins over to the person once you've given them that responsibility. Absolutely. Give them the authority to make the decisions and don't undermine them, - Exactly. - in that decision-making. Exactly. Yeah. Josh, thanks very much for your time, really appreciate it. Pleasure, Mark. It's been great to catch up as always. Nice. See you next episode. Cheers. Thank you for watching this episode of Governance Bites. We have more episodes on YouTube and your favourite podcast channel where I interview directors and experts on various topics relating to boards of directors and governance. We'd love to see you back and please like, subscribe and share the videos and podcasts.