Corporate succession planning is the process of identifying and internally developing talent with the specific objective of replacing key business leadership positions in the company.
A business succession plan helps ensure that your family business, startup or any other self-employed enterprise that you run will continue to operate successfully if you or the other owners or leaders were to exit, retire, die or become incapacitated suddenly or in the natural course. It is a process of identifying people in key positions and finding their replacements so that it provides for a smooth transition from one generation to the next without impacting the flow of wealth or operations.
What are the Advantages of a Succession Plan?
One of the most disruptive things that can happen to a company is the sudden need to replace a leader. Without a defined plan in place, a leader’s departure can create confusion and risk to an organisation’s stability.
Secondly, it helps retain the stakeholders’ trust and confidence, as well as protect the interest of lenders and creditors. In difficult times, the business may die due to lack of direction if there is no plan.
In case of small businesses or professional services, the plan protects and preserves its goodwill and value, which helps the family get regular royalty or dividend.
Why is Succession Planning Important?
We’re talking about what happens after you exit – so why should that bother you as a business seller? In fact, we’ll come to see that succession planning can be of vital importance to optimizing the deal structure you are able to enter into, the legacy you leave behind for family and employees and, crucially, the sum you raise on exit.
It worries us greatly that 58% of small business owners don’t have a company succession plan. But what’s worse is that the reason cited by 42% of these respondents for not addressing succession planning is that they are too busy running their company.
If these businesses can’t cope without their CEO while he or she devotes some time to creating a succession plan, how could that business get by after the CEO leaves the office for the final time? Such a business is surely devaluing itself in the eyes of professional buyers looking for a business that not only has a history of success, but a future too.
How to do Succession Planning?
Now you have an appreciation of what a succession plan is and why it plays such a crucial role in your future, you’re probably wondering how to approach this process successfully.
The purpose of succession planning is to hand over control of your business in a way that not only ensures its continued commercial success, but provides assurances over the continuity of your business to potential buyers, helping your company command a higher price at exit.
But how do you approach succession planning to realize this purpose? Above all else, you should aim to satisfy the following areas:
- Defining the role – what are the responsibilities of your current role, and what qualities will a person need to be able to take on the role?
- Gauging interest – is there a genuine appetite among your middle management team to take a step up?
- Assessing talent and identifying potential – if there is interest, do the candidates at your disposal have the skills, experience and drive to take on your business? Or will you have to look beyond the walls of your company?
- Alternative successors – even if you have suitable candidates within your family or your middle management team, are there other viable fits outside of your business?
- Developing your business through your succession plan – once you have a vision for your succession in mind.
Benefits of Succession Planning
The benefits of succession planning are numerous, but not always well recognized. Most corporate entities today, regardless of size and location, cannot do without a carefully crafted management succession plan. In order to minimize risks associated with the loss of valuable personnel, companies must engage in talent pool management by first realizing the benefits of succession planning.
Even though the concept of corporate succession planning is not new, it has received increased attention due to numerous advantages of succession management. These benefits are particularly important in a global business environment.
1. Disaster-Proofs your Business
You buy insurance to protect the company from hurricanes, floods and fires. You install security systems to defend the company from theft. And you back up data to an off-site location to safeguard your business’s proprietary information.
Many business owners get so busy with the day-to-day operations of their company that they fail to make succession planning a priority. These leaders may think they’re too young to be hit with a serious illness. Or they forget that a key player (or several) could be lured away by another company that needs their skills and is willing to pay top dollar for them. Any of these scenarios can leave a business uniquely vulnerable.
2. Identifies your most-Qualified Future Leaders
Formal succession planning requires your company to:
- Identify those positions most critical to the future success of the company. These might not all be C-suite positions.
- Identify internal candidates with the values, skills and desire to take on those critical jobs.
- Talk to potential candidates about their interests and career plans.
These crucial steps in succession planning lead to several benefits. First, a thorough look at your org chart helps your leadership better understand potential vulnerabilities, and can bring a sense of urgency to cross-train key employees in certain roles.
3. Creates Structure for Training and Development
Once your company has identified that Sally, Bob and Bruce are interested in moving into senior positions; you can identify any competency gaps and begin grooming them for their eventual succession.
Some of the employee’s professional development may come in the form of coaching, mentoring, job shadowing or a gradual increase in more advanced responsibilities. Other positions may even require the candidate to go back to school to get additional education or professional certification.
4. Keeps extra eyes on a Job
Once your top prospects are being groomed, your company has a chance to reap perhaps its best tool to grow and thrive. This happens when a junior manager is sitting and talking with their senior leader about why they’re doing things a particular way.
The simple process of explaining the status quo helps reveal weakness in processes and procedures, uncovered sales opportunities and opportunities for positive change. This natural process allows your company to keep an extra set of eyes on its senior roles and encourages questioning of the corporate norms that may have become dated or inefficient.
5. Maintains Brand Identity
The benefits of succession planning are that it helps your company avoid this. By identifying and grooming an internal successor, your company ensures it will be led by someone who shares its values and deeply understand the company’s brand promise, its customers and its employees because they’ve lived it themselves.
6. Helps the Company plan for the Long-Term
Change happens fast. When your company knows where it’s going, your team can plan for the future.
If you position succession as part of your company’s overall growth plans, you create a path for retiring employees to hand off their years of hard-earned knowledge and transition important working relationships before they leave.
Challenges of Succession Planning
Realizing the need to create a succession plan is the first hurdle in securing the future of your business. But this isn’t the only challenge you’ll contend with during the process of developing it.
If you are one of the many business owners who does not have a succession plan in place, the challenges you need to face can appear overwhelming at first glance. But, they will impede you from creating the most secure strategy for your company’s future, hurting its potential and your legacy in the long-term.
Knowing is half the battle, so it is important to understand the potential hurdles you’ll need to take on before starting your strategy. The standout challenges to those developing their succession plan are as follows:
- Lack of time
- Procrastination
- Psychological barriers
- Delegating responsibility
- Remaining objective
- Maintaining company morale
- Retaining top candidates