Succession planning means different things to different people. It is often thought of as simply naming a family member to take over, or even overhauling the structure of the business to align it with long-term objectives. Many business owners avoid the topic altogether. Still fewer see the true scope of the challenge. In many cases, buyers of businesses are as concerned with succession planning as they are with anything else. If a business owner is considering selling their company, they should start implementing the succession plan sooner rather than later. Having a track record of the business moving forward with less input from the current owner is helpful in easing the minds of potential buyers. Effective succession planning isn’t only about deciding who will run the business — it’s just as important to determine what kind of business they will run.
According to the National Association of Corporate Directors, fewer than one in four private company boards say they have a formal succession plan in place. In the case of family-owned businesses, only 30 percent survive into the second generation, 12 percent survive into the third, and only about 3 percent operate into the fourth generation and beyond. An owner-manager usually has a personal vision to retire and sell the business someday, but he or she may not have adequately considered what it will take to make that vision a reality.
Succession planning starts with the owner of the business thinking about their future and how the business will live on without them at the helm. The business owner first needs to assess their own wants, needs, financial objectives, and other factors that will determine the path for transition or sale. Once objectives are clearly laid out, business owners can more aptly address the transition of the company.
For private and owner-managed businesses, a thought-out succession plan can not only set the stage for retirement of the owner, but can also drive the growth of the business, reduce taxes, and provide a clearer path to the next stage of the company’s life cycle. As buyers are assessing the acquisition of a company, seeing a plan in place for the owner’s transition out, and a history of the plan being implemented effectively, will be helpful for them to know the company can operate with new ownership.
Business succession planning can also assist in retaining and motivating high-potential employees. By providing them with clear career paths and opportunities to grow and succeed with the company, owners can show them that their contributions are valued and that they have confidence in their abilities. This can increase employee engagement, loyalty, and commitment to the success of the business.
Creating a business succession plan requires careful planning, communication, and execution. Here are some steps business owners can follow to design and implement an effective succession plan:
1. Identify the key roles that are critical for business success.
These are the roles that have a significant impact on strategic goals, operations, or customer satisfaction. They may include senior executives, managers, or specialists.
2. Assess the current performance and potential of employees.
Use objective criteria such as skills, knowledge, experience, performance reviews, and feedback to evaluate employee strengths and weaknesses. Identify the employees who have the potential to grow into key roles in the future.
3. Monitor and evaluate the succession plan regularly.
Create development plans for high-potential employees. Based on the requirements of key roles, design individualized plans that outline specific actions, resources, and timelines for
4. Communicate the succession plan to employees and stakeholders.
Share the vision, goals, and expectations with employees and stakeholders. Explain how the succession plan benefits them and the business. Solicit their feedback and input to improve the plan.
5. Track the progress and results of development plans.
Provide ongoing feedback and coaching to employees. Recognize their achievements and celebrate their successes. Review and update the succession plan as needed to reflect any changes in business needs or environment.
Business succession planning needs to be an integral part of any private or family-owned business. It is an important and evolving process that requires thoughtfulness and ongoing attention from the owner. This is not a task to be put off until later. To be done successfully, it needs to be a consistent part of a company’s business strategy and operations. Doing so can increase the confidence of buyers and potentially maximize the amount they are willing to pay for the company.
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