Harry Gruber sold his last company for $2.8 billion, but there's one thing the 49-year-old San Diego entrepreneur couldn't do. "I kept trying to find my replacement," he recalls of his time at Intervu Inc., an Internet video delivery service he sold to Akamai Technologies in 2000. "I went through a lot of senior people trying to find that person, changing management and hiring and firing people."
Gruber never found his stand-in, which sealed his decision to sell. Without a replacement, he didn't see how he could retire from Intervu--or how the company would survive if he died.
The last scenario has become a bigger concern after September 11, when many small companies lost their founders. And with good reason, according to William Rothwell, a professor of human resources at Pennsylvania State University in University Park and an expert on succession planning. "What typically happens is the business goes bust, especially if the entrepreneur hasn't thought about the issue in advance," Rothwell says. "It's a major risk factor."
Plan for Continuity
Gruber felt he owed it to Intervu's investors to make sure the company could survive him. Continuity planning also benefits employees, customers, suppliers, family members and ordinary citizens, who benefit from taxes companies pay. "Often entrepreneurs are community leaders," Rothwell says. "So when they vanish from the scene, it impacts other people."
To get started, figure out what kind of person you'll need. Don't try to find a clone of yourself, experts stress. If your replacement winds up in charge, it will be at some unknown future date when different talents may be required.
Next, survey the available people. Look within and without the company and examine not only everybody's skills but also their willingness to take the job.
Gruber co-founded his current company, an online fund-raising service called Kintera Inc., with two partners, both experienced entrepreneurs, who back him up as CEO. If you have a retired CEO serving on your board, you also have a good choice for a temporary emergency replacement, says Tom McLane, vice chairman of The Directorship Group, an executive search and management succession planning company in Greenwich, Connecticut.
Once you have a candidate, determine what talents the person needs to develop and come up with a plan for how he or she will learn them. When your candidate is close to ready, give the scenario a test-run by taking an extended vacation. Gruber held such a test last summer at Kintera. "I was still on the phone every day," he says. "But between calls, [my backup] made the decisions."
Designating an heir can cause problems as well as solve them. "If you have more than one highly qualified person, the ones who aren't going to make it might very well leave the company," McLane says. If they stay, they may become trouble-making malcontents.
Just starting the search can create anxiety. "As soon as you say you're thinking about a successor, people will say 'What? You have cancer?' " Rothwell says. "Make it clear as soon as you start having that discussion that there's nothing wrong with you; you're just a prudent businessman who's managing risk."
The risk involves more than lack of management. When an entrepreneur dies, inheritance, tax, accounting and legal problems can crop up as well.
Add it up, and you could be making a big mistake if you don't plan for succession. It's the same rationale that keeps you from leaving all your computer files in one place. "You should always have a backup," Rothwell reminds. "And you should have a backup for yourself, too."
Effective Succession Planning: Ensuring Leadership Continuity and Building Talent From Within , by William Rothwell, is the updated and expanded edition of perhaps the most comprehensive book on systematic succession planning. It deals with replacing all key employees, not just the entrepreneur, and includes the latest advice about online and high-tech approaches to succession planning.
The Directorship Search Group
(203) 618-7000, www.directorship.com
(858) 795-3000, www.kintera.com
Pennsylvania State University
(814) 863-2581, www.ed.psu.edu/wfed/wjr.asp