Take the driver’s seat in founder-CEO succession

Often a headache for investors, succession planning in founder-led businesses can impede value creation if not managed effectively. We interviewed 20+ private equity investment professionals and CEOs, all with direct experience with founder-led companies, to delve deeper into the topic.

Rich with upside, succession planning can also be tenuous and time intensive

"It didn't make sense for the founders to have ownership when they are not active in growing the business. They are finally completely removed from the ownership. That took 15 years. It was a process a decade in the making."PE investment professional

"Fear of the unknown keeps us from pushing for a founder's exit. And that is exacerbated by the dominant personality of the founder. The fear is way more significant than the reality, if you handle it right."PE investment professional

Investors also have to weigh what the founder means to the organization. As one interviewee put it: what are the broader ramifications of how the founder affects the organization? Are they critical? Is keeping the founder long-term a net plus, a neutral, or really a loss?

Investors wear many hats. Flexibility is critical

"You need to embrace and enjoy difficult conversations. Be honest about what the transition is going to look like. Take advantage of the notion that you are trying to preserve the legacy of that founder. Leaning on their integrity and ego helps."PE investment professional

"It comes down to: one, you have to spend time with them and two, you have to show respect. If you are going to drink the water, you better appreciate the man who dug the well."Portfolio company CEO

Lay the groundwork before building the road

Investors need to calmly, dispassionately and repeatedly make the case that a capable bench enhances valuation and performance. Knowing when the founder is critical to culture, and when culture is a driving value proposition, is key to assessing the founder's essentiality. Seize natural inflection points to start the conversation: pre- and post-LOI, during the first 100 days, and when hiring new talent.

Build infrastructure without pressure to use it immediately

"We've had great success communicating honestly with each other around a plan. There is not a particular date; it's just, when the timing is right, that is the timing. You can't put a clock on it."PE investment professional

Establish yourself as a mentor

Convey an attitude of detached but supportive curiosity, rather than becoming emotionally attached to a certain outcome. As one investor observed, a common dynamic is a founder saying they want to retire at 60 who ends up working until 70. It might be ego; they love what they do and feel part of the company. It is part of their identity, and the thought of walking away leaves a void.

Ask good questions, and listen carefully to the answers

Probing questions that work

What's got you thinking about this, and why is it important right now?

Who have you talked with about this, internally and externally? How have those conversations gone?

Help me understand the big picture. As you look to the future, what is next for you?

What's the five-year business goal? What role will you play in driving it, and who else might play a big part?

Sources of motivation and resistance

Motivation commonly includes a mortality event, a promise to a spouse or partner, a long-standing personal wealth goal, or a desire to give back and fund a legacy.

Resistance commonly includes an inability to relinquish equity or control; fear of losing influence, prestige, meaning, identity or productivity; and the absence of strong relationships or interests outside the business.

Case in point: peel back a layer to decipher second thoughts

Twenty years in, she had built a retail empire with two blockbuster brands and $3B in annual revenue. The opportunity to cash out was appealing, but seismic industry shifts shortly after the transaction led to cold feet. No one knew the organization better, but fresh thinking was needed to pivot in the new landscape. After numerous fits and starts, Ampersand was engaged to address the founder's reservations: she was scared to take the leap into retirement. Focused coaching and introductions to outside boards eased her fear of losing influence and enabled her to envision what she could accomplish next. Two years later she completed a successful handoff to an internal leader. Today the brands dominate their space and have evolved effectively under the new executive.

Hazards along the road

Don't talk at the expense of listening. Ask thoughtful questions early. Listen to what is said and what is not said, and stay attuned to body language.
Don't assume you are on the same page. Pause frequently to pressure-test the ideas put forward.
Don't expect linear progression. This is a non-linear process with multiple starts and stops. Expect five or six conversations, not one.
Don't underestimate the existential components. If you fail to understand the legacy the founder wants to leave, expect a lot more starts and stops.
Don't delay unnecessarily. If the decision has been made and the founder won't budge, act sooner rather than later to force a change.

Succession is a process, not a person. The question is not "who will succeed you?" but "what kind of legacy do you want to leave, and how can we get there together?"