You are only as good as your number two

Agency owners should think about "succession planning" as a continuous process, writes Davis & Gilbert's Michael Lasky.

Davis & Gilbert recently designed a confidential survey on succession planning at independent PR firms. The good news: an overwhelming majority – 80% – of PR agency owners have identified the next generation of leaders at their firms. The bad news: 60% say they have not put any succession plan in place.

Major problem. Without proper succession planning, firms will likely not be able to achieve their growth goals, nor attract and retain the best talent.

So how should agency owners get started with the daunting task of succession planning? First, they should think about the task as an ongoing talent-management process for their next generation of leaders. In other words, agency owners should not think about the "succession planning" as necessarily synonymous with their own departure or exit from their firm, but rather as a continuous process to make their firm as strong as the CEO’s next-in-command.

Here are half-a-dozen tips that will help crystallize this new method of thinking:

•Set personal objectives. What are the personal long-term goals of the agency owner or owners? Would they like to make a clean break or just slow down on a part-time or consulting basis? When are the agency owners willing to give up control – which is usually 51% of ownership shares – to others? If there is more than one owner, do all of them share the same personal goals? Can the current agency principals envision working for another firm or even having an "owner"?

•Start early. Owners should begin the planning process five to seven years before they plan to fully exit from their businesses. Having a long-term planning process in place will enable owners to maximize the value of their businesses over time. It is much better to fix a problem in normal course and at a pace that makes sense for the current management than to do so when the present owners may be under the scrutiny of a possible buyer or on another pressing time frame.

•Manage for profitability. Not all growth is good growth. Whether the agency principals intend to stay active in their businesses for two months or 20 years, the single most important thing owners can do is manage their business for profitability. This is even more critical if the owner or owners are contemplating a sale. Owners should strive for a 20% profit margin after paying all bonuses and paying themselves a market-rate salary.

•Know the landscape. There are myriad options available to agency owners. These include selling to a third party or to key employees. Other options include merging with another firm, establishing an ESOP (employee stock ownership plan), or selling all or part of the company’s stock to an outside investor, such as a private equity firm. Still another possibility is to purchase a smaller or specialized firm as a prelude to an internal or third-party sale down the road. 

Only with a careful assessment of the pros and cons of all these scenarios can the owner of a PR firm fully appreciate the best option available to meet his or her individualized needs.

•Strengthen and incentivize your senior management team. No matter what succession option an agency owner may choose, the majority of his or her payment will most likely come from the future cash flow of the business. This means an owner will want to ensure the next generation of leaders has an economic interest to keep the agency financially strong and growing. As such, it is critical to incentivize these individuals. This can be accomplished by the purchase or grants of actual equity, contract equity, or performance-based incentives. It will also require a shareholder agreement if actual equity is used.

Implementing the right incentives will make the company stronger in the years before there is any change of leadership. It will also pay the current agency owners significant rewards after a leadership change. Here, too, it is vital to understand the options. For example, our survey revealed that a majority of agency owners have not used contract or "phantom" equity to retain the next generation of leaders. However, our data also indicates that 75% of the firms that had done so found contract equity to be a very effective way to incentivize and retain rising stars.

•Know what your firm is worth. It is often said in sports, "You can’t know the players without a score card." By analogy, it is similarly hard to plan succession, let alone an owner’s ultimate exit, if the agency owner does not have a clear understanding of his or her firm’s current value. It is also important for an owner to know the factors that could increase – or decrease – the agency’s value within the desired time horizon. And when 66% of agency owners who responded to our survey indicate they do not feel very certain about the current value of their firms, it’s an obvious sign that better understanding is required in this area.

Well-known scientist Louis Pasteur said, "Chance favors the prepared mind." If you get a firm grasp on the above six elements, you will indeed be prepared to have a successful succession. Happy planning… perhaps as an early New Year’s resolution.

Michael Lasky is a senior partner at the law firm of Davis & Gilbert LLP, where he heads the PR practice group and co-chairs the litigation department. He can be reached at mlasky@dglaw.com.

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