“How do I tell my child?” Succession planning in a company is a sensitive issue. Entrepreneurs serve as leaders for many years. They are the first point of contact for employees, provide guidance, train staff, offer praise, involve them in decision-making, and occasionally offer criticism. They feel and embody this responsibility every day. This is how goals are achieved together—goals that benefit everyone—and over the years, a relationship of trust develops. The question of succession touches this foundation and is likely to bring about a profound change.
At the latest when the time is right, employees begin to ask themselves existential questions. Will my job still be secure in the future? Who will succeed the boss, and what role will I play going forward? The younger, more qualified, and more capable employees are, the greater the impact on employee retention. In times of a skilled labor shortage, this particularly includes key personnel. As with all such issues in the past, it is essential to handle this responsibly and tailor the approach to each individual case.
Succession Within the Family
For many business owners, the preferred method of succession is within the family. Ideally, children or nieces and nephews receive external training before joining the company. By the time they join the company, all employees have an idea of what is in store. If the handover takes place gradually through the assumption of increasingly responsible tasks, and if the potential successor is accepted by employees, customers, and suppliers, the question of who will take over is answered for everyone. The actual communication is then more or less a formalities. If the communication takes place beforehand, it tends to make the transition into the new role more difficult—the earlier it happens, the more so.
Handover to Employees
The situation is similar with a planned handover to employees. By promoting suitable employees and increasing their responsibilities and visibility, they emerge as potential successors. This allows communication to take place at the very end, much like in a family-internal handover. If the handover fails beforehand due to financing issues, at least a leader with a deputy role will have been developed, which represents a significant advantage for an external succession. My colleague Andreas Kopf wrote a widely acclaimed article on this topic at the DUB last year.
External Succession
The issue of communication becomes more difficult when no suitable candidate can be found within the family or the company. More than half of the companies facing succession find themselves in this situation. Every employee knows this—or at least suspects it. As time goes on, this puts increasing pressure on business owners to answer the question that’s on everyone’s mind. This raises the question of whether employees should be informed before a sale or immediately afterward.
About two years ago, a 70-year-old entrepreneur reported that a successor had already been found once, only to be rejected by the employees after a four-week “probationary period.” As a result, the sale of the company did not go through then—nor has it to this day. This is certainly an extreme case of failed early communication.
There are some general considerations that can be helpful in making this decision.
The advantages of early communication are obvious. The pressure on business owners eases, and they feel they are on the morally right side. It feels good to know that years of trust haven’t been “abused behind their backs” through unilateral action. But is it also responsible?
Now “the cat is out of the bag”—the employees are in the know. This can have a positive effect on employee retention, since the succession issue is (finally?) being addressed. Conversely, however, the previous uncertainty is replaced by a new one. Will the new owner also lead the company toward a bright future and value the contributions I’ve made? Will a takeover be accompanied by cost-cutting measures that threaten my job? How will this affect the currently positive work environment? These questions, in turn, weaken employee retention, as the factors that foster loyalty—which were tied to the entrepreneur’s personal presence—will no longer be there. Depending on how employees assess their current and future situations, they may now be more open to opportunities arising in the job market or actively seek them out. In times of a skilled labor shortage, this is easier to do.
The risks posed by leaks are now even greater than those of employee turnover, especially as the circle of those in the know grows. Customers and suppliers may also become unsettled, and competitors are invited to take over market share and resources. This poses an acute threat to the company’s very existence—and thus to all jobs, not to mention the company’s value.
Solution
EUROCONSIL therefore prefers, where possible, to communicate only after “the ink is dry.” The smaller a company is, the easier this is to arrange.
In larger medium-sized companies, however, this is often not feasible. Here, a larger group of people—mostly executives—must be involved in preparing for due diligence. It is therefore advisable to require them to maintain confidentiality and, if necessary, to further secure their loyalty with a “retention bonus” until the transition is complete.
Once the sale or handover to family members or employees has been finalized, the change can be presented at a staff meeting. The new owner has the opportunity here to explain the motives behind the takeover, the future strategy, and the transition. If this explanation is convincing and resonates with the audience, it has a reassuring effect. It can also be helpful if the person handing over the business actively supports the transition for a while longer. This is often in the best interest of the person taking over as well. To avoid pitfalls under labor law, it is always advisable to seek expert legal counsel, who should, however, be involved throughout the entire process.
