Eric Hehman knows handing over the reins of a beloved advisory business isn't easy, but he believes founders should keep in mind that it's no cakewalk for the successor either.
The chief executive of Austin Asset, a $640 million registered investment adviser in Austin, Texas, took over for the firm's founder, John Henry McDonald, last year after a seven-year transition that included detailed planning for the next chapter of the firm.
“The biggest tension is figuring out what the founder wants,” said Mr. Hehman, 40. “Is he looking for a successor or a mini-me?”
He likens the time when a founder is transitioning control and ownership of a business to when someone sells a home to another family. It's unrealistic for them to expect the new owners not to repaint the walls and replace the carpet, but it's hard for the original owner to see the updates as improvements.
These emotional challenges can be compounded during a succession because founders sometimes have a difficult time letting go of their former identity, said Mr. Hehman, who recently co-authored the book “Success and Succession” (John Wiley & Sons, 2015).
It takes frank and empathetic conversations, and sometimes opinions from outside experts, to get the owner to a shared vision with the buyer. The owner must understand that a good successor will want to make changes to improve the business and the successor must fight for the tools that will bring it about, he said.
EMOTIONAL DEPOSITS AND WITHDRAWALS
“The process requires the successor to make huge emotional deposits and withdrawals along the way,” Mr. Hehman said.
Founders who don't allow their successor to make operational changes to technology, client strategy, hiring and firing of staff, adjusting service models, or even rearranging and updating the office “will run successors out the door,” he said.
At Austin Asset, Mr. McDonald was an “amazing rainmaker,” but he was slow to recognize that not every client was an ideal one for the firm, including some long-standing clients who required too many resources for what they contributed to the firm's bottom line, Mr. Hehman said.
It was a struggle, but finally the firm “fired” 30 clients and began to focus on those it could offer the most value to and who would in turn provide the firm's greatest profitability and growth for many years to come.
• Find a new identity for the founder during the transition period, such as working on local boards of directors, as it can be hard for him or her to let go of interaction with clients.
• A successor should use “best practice” or other research to support changes a founder may be dragging his or her feet on supporting or implementing.
• Hire an expert for issues that are especially contentious between the founder and successor; a third-party can make an objective assessment of the next move.
• Structure compensation for a founder so pay goes down over time, but his or her equity value increases, thereby incentivizing a long-term view.
• Have a plan for making a firm less founder-centric, including marketing that features the team and not just the founder's image. Think about every client touch-point and communication so that every interaction is a reminder that the firm is their financial partner, not one individual.
• Beyond creating an enduring business, help ensure the founder's legacy, be it a scholarship fund, golf tournament or something else with the founder's name on it.