Succession Planning: 6 Steps for Business Succession Planning
Jun 23, 2021
Plan for business succession early and protect your family business from risk and uncertainty
What Is Succession Planning?
Succession planning is the complex process of transferring company ownership to its next generation of leaders. Business succession plans keep the company running smoothly during this delicate period, ensuring the business owner can move on or retire in peace, knowing that the company is in good hands.
This process can produce unexpected and wide-ranging effects. Even the most experienced owner-managers may struggle to plan for business succession effectively.
This is easy to see in the case of family-owned businesses. Fewer than one in three family-owned businesses survives into the second generation. Around one in ten survives into the third generation.
Only 3% of family-owned businesses survive into the fourth generation and beyond. There must be more to succession planning than meets the eye.
How to Create a Solid Succession Plan for Family Business
Most owner-managers have a personal vision to retire and sell their business “someday.” But relatively few undergo the hard work of preparing to make that vision a reality.
Major transitions like these are full of risks and pitfalls. Even well-managed businesses can lose a great deal of value through a badly managed succession plan. Creating a robust succession plan requires skills that don’t always coincide with the demands of running a business.
Business leaders have to cultivate a deep understanding of their business and use that insight to prepare new leadership for the task of transition. You need to know how your business operates, where its value lies, and what your customers’ needs are and be able to communicate that knowledge to your successor in a meaningful way.
6 Steps to Creating a Great Business Succession Plan
Business succession is something that owner-managers typically have little experience in. Unless your business is already a second-generation family-owned business, you may not have any familiarity with the process. Follow these steps to ensure your family business succession planning strategy is a success:
1. Be Proactive
Well-organized business succession initiatives ensure the survival of the business and the growth of its assets. They preserve harmony in family-owned businesses, reduce estate and income taxes, and make it easier for leaders to enter gracefully into retirement. However, these goals won’t achieve themselves, so business leaders need to be proactive in achieving them.
Your long-term plan should include a formal development program for likely successors and outline contingencies for many of the problems that business leaders face when implementing succession plans. It’s hard to disconnect from the day-to-day urgencies of running a business to focus on long-term planning, but it’s an investment in your future, and in the people you have spent years working with.
2. Pinpoint Succession Candidates
Acknowledging which personnel should remain on the management team but not be in line for ownership can be incredibly difficult. Nevertheless, when leaders neglect to establish succession candidates in an open, transparent manner, it undermines the entire succession initiative.
During a delicate time like this, strong, decisive leadership benefits everyone – including the people who are not succession candidates. This helps establish a clear and level playing field among potential successors and enables fair treatment for all parties involved.
3. Communicate Effectively
Every business succession plan relies on effective communication. Leaders who take charge of communicating succession guidelines to three main groups have the greatest chance of successfully performing the transition:
- Family. Articulate your goals to family members, including long-term targets for personal and professional development. Retirement plans, investment advice, and estate planning all fall into this category.
- Stakeholders. Most succession plans involve tense negotiations and uncertain outcomes. Your business stakeholders know this and will rely on you to assuage their concerns and instill confidence in the process. This may involve updating your shareholder agreement, adjusting compensation planning, and choosing a stock transfer technique.
- Employees and Customers. Your succession plan must be informed by a business strategy assessment, a comprehensive talent assessment, and business valuation data. This will help you make decisions that instill employee and customer trust, ensuring a smooth transition.
4. Invest in Professional Development Efforts
Once you have nominated a shortlist of potential successors, it’s time to invest in their professional development. None of them has the owner-manager experience that you bring to the table, so it’s up to you to cultivate their leadership potential.
This involves reconciling the tangible and intangible elements individual members of your team bring to the business. One way to do this is using the “Four Es” model:
- Experience. Assign delicate, long-term tasks to high-potential leaders and frame them as an opportunity to learn and develop new strengths.
- Exposure. Spend time mentoring potential successors in ways that tie personal assessment and professional qualification together.
- Expectations. Align performance expectations with natural incentives and job mobility so that your successors feel motivated to cultivate their leadership potential.
- Education. Embrace initiatives that teach potential successors to think differently instead of relying on uncritically accepting traditional workflow models (including your own).
5. Do a Trial Run of Your Succession Plan
The ability to test your approach is one of the main differences between small-scale, ad-hoc succession and the systematic, process-driven approach. Once you have invested time in exposing a potential successor to a combination of coaching, networking, and educational initiatives, you can readily test their abilities and validate your approach.
Family businesses with a well-organized succession plan can afford to delegate responsibilities to potential successors in ways that establish authority and cultivate experience in a positive way. Distributing these responsibilities also helps business leaders reduce their own workload and dedicate more time to succession planning itself.
6. Integrate Succession Into Your Hiring Strategy
Family members and non-family members will have a different frame of reference when it comes to managing human resources. Leaders who take the time to develop a clear, transparent succession plan can appoint employees to specific roles to help reinforce that plan.
This is especially important in the case of family businesses, where two distinct interpersonal systems coexist.
- The family system’s key purpose is nurturing family members and developing young people into mature, responsible adults.
- The business system prioritizes the needs of customers and the ability to generate profits and increase shareholder wealth.
Family business succession planning initiatives need to take both systems into account or risk the dual extremes of family strife and outright nepotism.
Lay the Foundation for a Smooth and Equitable Business Succession
Business succession planning demands careful preparation. Leaders who want to make sure their family members, employees, and stakeholders are left in good hands will need to set the stage for a smooth transition well in advance. The more thought and consideration you put into family succession planning, the better the transition will go.