Business succession planning: How and why?
Business succession planning is essential, but it is something many owners are struggling to get right. According to AIIR Consulting, 86% of leaders believe leadership succession planning is of utmost importance, but only 14% think their organisation does it well.
Moreover, a research project investigating the legacies of wealthy families estimated that 60% of all business succession failures are the result of a lack of trust or communication, and 25% are the result of an ill-defined or poorly executed succession plan.
Fortunately, this article is here to help. It explains what business succession planning is, why it’s important, and what the steps involved are.
What is business succession planning, and why is it important?
Business succession planning is the process of preparing and organising a business in anticipation of a transition of ownership. It involves identifying and developing potential successors, creating a plan for transferring ownership, and ensuring the continuity of the business. The aim is to be able to fill key roles effectively if a current post holder leaves the organisation.
Business succession planning is important because it ensures that the business continues to operate smoothly, even in the event of unexpected events such as the illness or death of the owner. It also protects the interests of the firm and its employees, customers, and stakeholders.
In practice, succession planning helps identify employees with special skills or abilities and moves them toward the executive level on a fast track. If an existing executive can no longer perform their role, the new talent can replace them rapidly.
Who is it for, and when should you start planning?
Business succession planning is vital for any business owner, regardless of the firm’s size. Many Fortune 500 CEOs engage in the process regularly, looking for ways to secure their personal legacies and the long-term future of their enterprise.
However, it’s especially critical for family-owned businesses where the transfer of ownership and management can be complicated by personal family relationships. Squabbling, conflict, and brand damage are much more likely to arise in this context if the path forward is unclear.
It’s best to start family business succession planning as early as possible, even if the owner isn’t considering retirement or leaving the business soon. Having a plan in place can provide peace of mind and ensure a smooth transition. It also helps to frame the psychological landscape. Everyone knows where they stand from the start. There’s no guesswork, vying for position, or power struggles.
How to make a business succession plan
Fortunately, building a viable business succession plan is relatively easy. Here’s what to do:
Step one: Define and align your goals
The first step is to define and align your goals with your business. You may need to meet with senior leaders to ensure your goals dovetail with your overall strategy.
Some questions to consider at this stage are:
- What is your vision for the future of your business?
- When do you want to exit or transfer ownership?
- Who do you want to sell or pass on your business to?
- How much money do you need from the sale or transfer?
- How will you measure the success of your succession plan?
Don’t worry if you don’t know the answers to every question in detail immediately. Simply get the ball rolling. As you progress, the plan will become clearer.
Step two: Create your succession strategy
The next step to a workable succession strategy is identifying the key roles critical for your business’s success, such as CEO, CFO, COO, etc. Determine who will fill the position in unforeseeable circumstances. For example, in the case of retirement, resignation or even death.
Don’t do what many firms do and solely focus on the CEO. In all likelihood, other valuable people exist in your enterprise who are essential for its growth and proper functioning.
Make sure you ask yourself the following questions:
- What are the skills, competencies, values, and behaviours required for each key role?
- Who are the potential internal or external candidates for each role?
- How will you judge who is best for the role?
- How will you communicate your succession plan to them?
- Will you allow two individuals to compete for the same position?
Step three: Identify potential candidates
The third step is to identify potential candidates for each key role based on their current performance and future potential. To make this process more objective, use assessments, tests, interviews, and feedback surveys, to gather data about their skills, abilities, and personal motivation.
Avoid the temptation to promote people you like. While it might feel good, it could be bad for the business.
Ask the following questions before you make a decision:
- To what extent do their values align with the culture of your business?
- What commitment do they have to remain with your business long term?
- How prepared are they to undertake additional responsibilities or face new challenges?
- How do they manage stress, change, conflict, and similar situations?
- How do they engage with customers, suppliers, partners, and other stakeholders?
Step four: Establish professional development opportunities
The fourth step is establishing professional development opportunities for each candidate based on gaps in their knowledge, career needs, and interests. Various methods are available, such as coaching, mentoring, training courses, job rotations, and special projects.
You’ll need to evaluate candidates on a case-by-case basis. Remember, even if an employee is good at their job, it doesn’t mean they will excel in a leadership position, and vice versa.
Step five: Implement and communicate the plan
Once the plan is complete, communicate it to all stakeholders, including employees, customers, and suppliers. This step is critical because it tells everyone where they stand. When people know in advance what will happen, their expectations adjust, making any future transition substantially smoother.
Step six: Review and update the plan
Finally, review and update the plan regularly to ensure it remains relevant and aligned with the business’s goals. Check if it makes sense every year. Don’t stick with a plan if it no longer serves you or makes sense given your firm’s circumstances.
For further guidance in creating a business succession plan, speak to our business advisory team today.