Your Business Needs a Succession Plan: Here Are the Basics
Succession planning may be the single-most neglected aspect of business ownership. Don’t make the same mistake that so many others do. Instead, get started with your plans today.
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In Part 1 and Part 2 of this series on selling your business, we’ve examined the questions facing owners who entered 2020 ready to make their move, breaking down how the COVID-19 pandemic changes the situation and how to increase a business’s value if you decide to delay bringing it to market. There’s another way forward, though — standing pat and not selling.
Tax Wrinkles for Work-at-Home Employees During COVID-19
If you were a business owner who was considering putting your company on the market but decided not to sell (or at least not anytime soon), what steps should be you taking now? The goals are to ensure preservation of the current business, as well as provide for an orderly and stable future transition when the proper time to sell arrives. Accordingly, the first and most critical step is setting a goal to implement both a business continuity plan and a business succession plan. The sooner, the better.
We have all learned a valuable lesson from the COVID-19 pandemic: A significant business disruption can happen with very little advance notice, and not being prepared can be disastrous.
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Developing a Business Continuity Plan
Armed now with the knowledge of how the pandemic impacted your own business operations, you can now plan. Did the travel restrictions impair your sales efforts? Did the substantial increase in employees working remotely overburden your IT infrastructure? Did your vendors and suppliers make requests that you couldn’t respond to effectively?
The goal of a business continuity plan is to identify that which is essential and that which is not and to place the business in a position where it can continue to operate during a disruption. Ideally, the business continuity plan would include:
- A comprehensive strategy for keeping the business operating day-to-day.
- An assessment of essential and non-essential operations and processes.
- An analysis of key employees/positions and how each would be impacted by a disruption and, specifically, the potential loss or unavailability of key employees.
- A review of facilities and analysis of how the business operates if one or more location becomes unavailable.
- A plan to protect, secure, back up and replicate, if necessary, critical data systems, infrastructure and applications.
These are only a few of the many issues for consideration when developing a business continuity plan. Many of the details are industry-specific, and you need to work with your key employees and advisers to address the challenges likely to face your particular industry. Consider meeting and discussing with your vendors, customers and suppliers the challenges that were presented by the COVID-19 restrictions. Get their views on how things could have been handled more effectively. Information is key to developing a plan that will actually work.
There’s Never Been a Better Time for Business Owners to Make a Move
Once you develop a plan, revisit it regularly and adjust and update it so that it is always ready to go when you need it. If, for example, your CFO retires, you will need to consider how the loss of that person and their particular knowledge will affect the plan. Will their successor have the wealth of historical knowledge necessary to obtain and transfer information in a timely manner? If not, consider how you address the gap. Every organization seems to have those “go-to” people who have been there forever and without whom things run much less smoothly. Consider how the plan is impacted if those individuals are unavailable. The key takeaway is that the plan needs to grow and change with the business in order to work effectively when the disruption happens.
Developing a Business Succession Plan
No matter what your plans are for the future of the business, eventually, you will transition it to someone. Perhaps that someone is a purchaser, or perhaps you will transition to your family, key employees or some combination of the two groups. The point is that transition will eventually be unavoidable. Ideally, you get to control and be part of the process. That, however, is not always the case. Unexpected death of an owner, key executive or employee can cripple a business if no successor has been identified and there is no plan for transitioning management.
Every business succession plan looks different. Not every business owner wants to transition their business in the same way or at the same time. Some owners want to exit completely at a certain date. Others want to stay involved to a lesser degree over time but never exit entirely. These issues, as well as many others, must be considered. The plan should be designed to:
- Address anticipated timing.
- Identify one or more successor.
- Address the value of the business.
- Provide for implementation of the plan.
- Discuss communication with employees, customers and family.
- Include tax planning.
- Provide for contingencies.
In my long career as a business lawyer, I have observed that succession planning is the single-most neglected aspect of business ownership. Maybe it’s human nature to think that we’ll always have time to deal with it later. The truth is, if you don’t get around to it and the unexpected occurs, the impact on your family and employees could be devastating. Also, we see many executive job candidates asking about a company’s transition planning before they are ready to commit to working there. Lack of a transition plan can therefore have a negative impact on attracting and retaining talented employees and executives.
The best way to approach the process, in my experience, is by dedicating a year to the effort. Spend three or four months discussing the process with your family, executive employees, your bank and other key stakeholders. Get your lawyer and accountant or other tax adviser involved from the outset. Develop and refine the plan over the next few months, and implement it over the last three or four months. One year is what you need. Negotiate the fees with your professional advisers in advance and get a budget for each phase. When it’s done, you’ll thank yourself, and your business will be better off for having gone through the process.
As touched on in this article and the other parts of this series, the COVID-19 pandemic was and remains a major disruption that couldn’t have been foreseen by most business owners at the start of 2020. The confusion of the early days, however, is beginning to clear. For owners who were planning for a transition, there is path forward — be it bringing the business to a changed market, delaying the decision or staying put for a time.
No matter the decision, proper preparation and organization will make it easier.
Help! I Can’t Afford to Sell My Business
This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA .
Patricia Farrell (opens in new tab) is a corporate law attorney in Pittsburgh. With a primary practice in business services, she regularly represents privately held businesses in mergers, acquisitions, divestitures and other major transactions, both in the United States and in Europe, Asia and Australia. She also has a broad corporate practice where she assists with corporate governance as well as succession planning for business owners and a variety of other day-to-day business issues.
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What Is Succession Planning?
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Succession planning and diversity.
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Succession Planning Basics: How It Works, Why It's Important
Yarilet Perez is an experienced multimedia journalist and fact-checker with a Master of Science in Journalism. She has worked in multiple cities covering breaking news, politics, education, and more. Her expertise is in personal finance and investing, and real estate.
The term succession planning refers to a business strategy companies use to pass leadership roles down to another employee or group of employees. Succession planning ensures that businesses continue to run smoothly and without interruption, after important people move on to new opportunities, retire, or pass away. It can also provide a liquidity event , which enables the transfer of ownership in a going concern to rising employees. Succession planning is a good way for companies to ensure that businesses are fully prepared to promote and advance all employees—not just those who are at the management or executive levels.
- Succession planning is a business strategy for passing leadership roles on to one or more other employees.
- The strategy is used to ensure that businesses run smoothly after employees retire and leave the company.
- Succession planning involves cross-training employees to help them develop skills, knowledge, and an understanding of the business.
- Plans can be long-term, which are meant to account for future changes, or for emergencies whenever anything unexpected arises.
- There are many benefits to succession planning, including inclusivity if companies have a strong plan to diversify their workforce.
Understanding Succession Planning
Succession planning is a contingency plan. It is not a one-time event. Rather, it should be reevaluated and updated each year or as changes dictate within the company. As such, it evaluates each leader’s skills, identifying potential replacements within and outside the company and, in the case of internal replacements, training those employees so they’re prepared to assume control.
In large companies, the board of directors typically oversees succession planning in addition to the chief executive officer (CEO), and it affects owners, employees, as well as shareholders. A larger business may train mid-level employees to one day take over higher-level positions. For small businesses and family-owned companies, succession planning often means training the next generation to take over the business.
The process takes a lot of time and effort. As such, it requires:
- Recruitment or Proper Hiring: The goal is to choose candidates who are capable of rising through the ranks in the future. For example, an experienced person from another company might be courted and groomed for a higher position.
- Training: This includes the development of skills, company knowledge, and certifications. The training might include having employees cross-train and shadow various positions or jobs in all the major departments. This process can help the person become well-rounded and understand the business on a granular level. Also, the cross-training process can help identify the employees that are not up to the task of developing multiple skill sets needed to run the company.
Businesses may want to create more than one type of succession plan. An emergency succession plan is put in place when a key leader needs to be replaced unexpectedly. A long-term succession plan, on the other hand, helps the company account for anticipated changes in leadership.
According to human resources (HR) experts, succession planning involves preparation rather than pre-selection. This means that those responsible must identify the skills, practices, and knowledge. Although it may seem like a complex process, it doesn't have to be, especially if businesses and leaders are able to organize and plan ahead of time. The whole process can take anywhere between 12 to 36 months.
In small companies, the owner alone may be responsible for succession planning.
One way to succession plan in a business partnership is for each partner to purchase a life insurance policy that names the other partner as the beneficiary. This type of succession plan is called a cross-purchase agreement and allows the surviving partner to continue operating the business.
Here's how it works. If one partner dies at a time when the surviving partner would not otherwise have enough cash to buy the deceased partner’s ownership share, the life insurance proceeds make that purchase possible.
Succession planning is also commonly known as replacement planning and often involves passing on ownership of a company to someone else.
Benefits of Succession Planning
There are several advantages for both employers and employees to having a formalized succession plan in place:
- Employees know that there is a chance for advancement and possibly ownership, which can lead to more empowerment and higher job satisfaction.
- Knowing there is a plan for future opportunities reinforces employees' career development.
- Management's commitment to succession planning means that supervisors will mentor employees to transfer knowledge and expertise.
- Management keeps better track of the value of employees so positions can be filled internally when opportunities arise.
- Leadership and employees are better able to share company values and vision.
- A new generation of leaders is needed when there's a mass exodus of people from the workforce into retirement.
- Proper succession planning benefits shareholders of public companies, especially when the next candidate for CEO is involved in business operations and is well respected years before the current CEO retires. Also, if investors observe a well-communicated succession plan, they won't sell the company's stock when the CEO retires.
Succession planning can also cultivate a new generation of leaders, thereby providing an exit strategy for business owners who want to sell their stake.
One of the key drivers to success for any company (whether it's a small business or a large corporation) is how inclusive it is. Companies are now recognizing the need to diversify their work environments in order to remain competitive and successful. Not only does it boost employee morale, but it also aims to broaden the pool of talent and make attempts to fight bias.
But how do companies do this? This involves a well-structured succession plan that includes hiring individuals from different backgrounds, those who have different leadership abilities, and people who bring different experiences to the table. The plan should also include removing any barriers that may exist internally for employees of all levels and ensuring a comfortable work environment for all employees.
This only works if succession plans are put into place wholeheartedly rather than to boost corporate images.
How Does Succession Planning Work?
Succession planning is used by businesses to streamline the process involving a change of leadership or ownership. It involves recognizing internal employees who merit career advancement and training them to assume new roles within the company. These plans only work if companies take the steps necessary to prepare. Plans are often long-term to prepare for inevitable changes in the future. Emergency plans can be set in place to account for unexpected changes.
What Is Succession Planning in Business?
Succession planning is an important part of any business to help it run smoothly and without interruption whenever there needs to be a change in leadership. Changes can be the result of people leaving the workforce (changing companies, switching careers, or retiring) or if there are unexpected circumstances, such as the death or displacement of a team member.
What Are Some of the Common Mistakes Companies Make During Succession Planning?
Succession planning requires careful organization and (as the name suggests) planning. Companies may miss opportunities or make missteps if they can't communicate their vision with employees, don't adopt a formal agreement or plan (including a shortlist of candidates and conducting regular reviews of positions and employees), assume their talent has the skills and knowledge to advance and succeed, fail to use succession plans for all employees, and ignore the need to diversify their talent pool.
SHRM. " Engaging in Succession Planning ."
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Small Business Succession Plan 101
Do you have a business succession plan in place? Here’s why this is important, how to identify potential successors, and how to create your plan.
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According to Deloitte, only 1 in 4 private company boards has a succession plan in place. For small businesses, the number of business owners who have a documented business succession plan is even lower, with just 1/3 being prepared for an eventual transfer.
Part of the problem is that the idea of succession appears to be in the distant future. However, pushing business succession planning into the background can backfire, leaving a business owner unprepared for a sudden sell-off or merger. As a result, a small business owner can also leave money on the table.
Drafting a succession plan is the first step toward a successful transition and ensures that the business owner gets a better deal.
What is a business succession plan?
A business succession plan is more than transferring ownership to a family member, which is common in family business succession planning. In fact, there are 4 common business succession plans:
1. Passing the business to a family member
In this case, a small business owner passes their business onto a child or another family member. This is often the most attractive option for a family-owned business. However, it’s important to have a thorough discussion with the family to determine whether anyone actually wants to take it over.
Sometimes it is assumed that a potential successor will want to continue the business. But people change over time, and it’s critical to regularly access whether or not the business is their passion.
Furthermore, to ensure a successful transition, a business owner should leave clear instructions on who will take over the business, and whether other family members should require compensation.
2. Selling to a co-owner
Businesses that have 1 or more owners typically have a loose succession agreement in place in the event that 1 of the owners is unable to continue working. However, it’s important to have a clear buy-sell agreement to guarantee a clear and successful transition.
It’s important to have a clear buy-sell agreement to guarantee a clear and successful transition.
The main downside to this is that if a co-owner wants to buy the business, they will need a lot of cash on hand. Furthermore, if the agreement stipulates that the co-owner should buy the remaining shares upon the death of their business partner, payment can become tricky. Life insurance is often used in this case.
3. Selling to an employee
While there are many candidates for a successor, the best may come from the employee pool. A business-minded employee may be able to keep the business profitable and even expand it.
However, employees typically don’t have the funds to buy a business. In this case, they usually pay the business owner in installments over time.
4. Selling your business to another company or outside owner
You may choose to sell your business to a new individual altogether. Unlike planning for a business partner, family member, or employee to take over the business, bringing in an outside party is often unplanned and unpredictable.
For this reason, it can be helpful to rely on experienced business transition experts to help you navigate the specifics of agreements and strategy.
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5 tips for creating a business succession plan
1. have a plan before you decide to sell your business.
In addition to identifying your potential successor, you will want to define an ideal timeline and price range based on your business valuation. When will you want to retire? How long should the succession plan take?
What procedures need to be taken over? How can you streamline your process to make the transition as simple as possible?
2. Include key stakeholders in succession plan decisions
You will want to include your family, trusted friends, financial advisors, and business lawyers, as well as any other potential stakeholders such as upper management or key employees. This will not only help you plan what needs to be done, but you will also have a better idea of a timeline for when you sell.
3. Decide on your minimum requirements for payment
You should already have a general idea of how much cash you want in-hand and how you would like to be paid. Keep in mind that family members, employees, outside sources, and co-owners will all likely have a different payment plan and expectations.
4. Work with a succession planning professional or group
You will want to have a business broker or group that specializes in business transactions, especially when working with an outside buyer. This can be your CPA, a local attorney’s office, a mentor from SCORE, or even a specialist from your financial institution.
Having an expert in the field can ensure that your succession plan is solid, your exit strategy is clear, and that you don’t leave any money on the table.
5. Create a plan for your life post-succession
Finally, you need to have an idea of your life after the transition. Do you want to start another business? Where are you going to invest the money from the buyout?
A small business owner who is used to having $3 million in revenue can suddenly find themselves with $30 million in the bank. Having personal and financial support systems in place can ensure that you have a fulfilling post-succession life.
Business succession planning checklist
When putting together your business succession plans, it’s likely that you’ll have a lot of pieces to juggle. Here are some key considerations to get you started:
- In how many years do you expect to retire?
- What size will the business be when you transition?
- What will be the approximate business debt, if any?
- How will the business prevent the loss of a key employee?
- Who is involved in business decisions and will that affect the potential successor?
- How much does the business’s success depend on your skills and expertise?
- Does the business have systemized management and operations?
- What will be the approximate net worth of your business?
- Will you need a training program for your potential successor?
- Have you developed a clear estate plan?
- Have you considered how capital gains may be affected in tax planning?
- Would acquiring a product or business make your eventual sell-off more profitable?
- Are there provisions in case of bankruptcy?
- How will customers react to the new ownership?
Plan your business, automate everything else
It’s hard to make time to think about the future when you have a million tasks to complete in the present. But it’s possible to kill 2 birds with 1 stone with automation.
Using automation and templates in your business does 2 things. First, it takes some work off your plate. And second, it helps to systemize your business operations. This, in turn, makes it easier to sell your business down the road — even if you don’t have a plan in place.
To get started, check out these free templates for your HR and hiring needs:
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All You Need to Know About Small Business Succession Planning
Small businesses make up a significant portion of the United States economy. According to the U.S. Small Business Administration, they represent 99.7 percent of U.S. employer firms and 64 percent of new private-sector jobs.  However, when small businesses are owned by family, it can create complications when planning for a company's future. While many small business owners may be reluctant to hand over control of their business, having a succession plan is key to its future success.
The Importance of Succession Planning
Business owners need to plan ahead and have an exit strategy for what happens to their business after they retire, or if they encounter unfortunate worst-case scenarios such as severe illness, disability, or death. Without a good succession plan, your family or other heirs might be forced to sell the company under duress and be shortchanged on the value of the business you've built. If there's no clear plan in place for who's in charge of the company, your business might end up directionless and at risk for failure.
Building a successful small business is the work of a lifetime. Make sure that your legacy is secure — and your finances and family are protected — by creating a solid succession plan to decide how to manage, sell, or pass on your business to a new generation of ownership.
We talked with an expert in small business succession planning to find out more about what small business owners need to do starting now to secure their futures.
When to Get Started
As a small business owner, you're often focused on what's happening today, and might be reluctant to grapple with the emotional decisions related to succession planning, such as who to name as the CEO's successor and which family members or employees to sell the company to. But it's important to have these conversations and work through the emotions now, when you have time and flexibility to make careful decisions, rather than put your family and heirs in an emergency situation down the line.
“Statistics bear out that 60-70 percent of small business owners wish to pass along their businesses to the next generation of family members, yet only about 15 percent ever do that," says Eido Walny, founder of the Walny Legal Group, an estate planning boutique law firm in Milwaukee.  “The key to understanding that massive disconnect is in the lack of business succession planning. Business succession can't be founded on a wish. Handing over keys one morning is not a plan. There is a lot that needs to be thought through, and the facts bear out that very few business owners give enough thought to succession planning."
Walny says that the worst situation that happens from a lack of business succession planning is when the owner has a medical emergency.
“No one plans for the day a death or disability or even divorce will turn a business upside down," Walny says. “So the best time to plan for those events is well before they become a reality. That is especially true if there are multiple owners in the business. You want to plan so that you are not accidental partners with someone's ex-spouse or even their children."
So when is the right time to start? "At startup. If not then, the second choice is right now. Get a succession plan in place. You'll be happy to have it when you need it eventually. But that time could be tomorrow," says Walny.
Pay Attention to Tax Efficiency
One challenge for business succession planning is that it requires the business owners to adopt a different strategy for running their businesses. For most businesses during normal operations, they try to operate as tax-efficiently as possible by maximizing deductible expenses and minimizing profits. However, this strategy can backfire during the lead-up to selling the business. If you're planning to sell in a few years, it's worthwhile to adjust your tax planning strategy to maximize the value of your business to prospective buyers.
“Most small businesses are run for tax efficiency, which usually means low profit statements," Walny says. “Any business owner knows that low profits does not mean the business is doing poorly. But low profits mean that an outside buyer will not make an offer for the full value — the true value — of the business. Buyers look at historical financials. As a result, good succession planning means that a business owner will stop running the business for tax efficiency and start running the business for maximum value, even if it means higher taxes.
"The results will be a much stronger offer from prospective buyers, even at the expense of tax dollars," Walny continues. "But it takes time to do that and work up the historical financials. So this is another reason why succession planning needs to be done well in advance."
Get Power of Attorney
Keep in mind it helps to put your wishes in writing ahead of time by using the durable power of attorney — a written document that lets you designate a trusted person to act on your behalf in case you become incapacitated by illness, accident, or disability.
A durable power of attorney lets you instruct who will manage and control your affairs while you are incapacitated. As part of making these advance directives for your financial affairs, you can also set up a comprehensive business plan to be enacted by your designated person with power of attorney, to include transfer of assets and business holdings into a newly formed business entity, if you so desire. The benefits include valuation of your business, tax considerations, asset protection, and preparing for the next phase of management.
Watch Out for Estate Taxes
Business succession planning is not only a matter of managing business operations and choosing an ideal CEO-of-the-future; it's also important from a tax planning standpoint.
Depending on the size of your business and the state where you live, estate tax can be an underrated issue for business succession planning.
Business succession planning touches on every vital issue that affects your business and personal finances: taxes, business operations, grooming the next generation of leaders for your company, and securing your family's financial future. It can be a complex and emotionally fraught topic, but it's essential to the future of your business and your family's well-being to have the tough conversations now and create a solid business succession plan.
All of these issues reinforce the importance of creating a business succession plan as soon as possible — but even "today" is not too late. Talk with a professional estate planning attorney, tax attorney, or other professional advisers to make sure your interests are protected — and that your company is ready for a prosperous future without you.
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Succession planning for owners of small and medium businesses.
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Many small and medium business owners lack succession plans. Often the owner has no family members active in the company, so no obvious successors are in line to take over. This article focuses on such owners; multi-generational transitions are a different subject.
The most common reason for not creating a succession plan is that the owner doesn’t know where to start. That’s understandable. Although we all know that we will die one day (and possibly become incapable of running the business before death), many business owners don’t have good ideas about what will happen when the time comes. And the hardest task to begin is the task that does not have clear first steps.
The first three steps are fairly simple and easy. Taking them will help the business owner identify the succeeding steps. Eventually, a succession plan will be developed enabling the business owner to stop worrying. That will also enable employees, key customers and suppliers to stop worrying.
The great first step is to learn what the owner’s choices are. And the best way to do that is to talk to ten business owners who have retired or developed successful succession plans that don’t involve family.
A business owner may very well know a few people who retired and sold their companies. Reach out to them. But many business owners will be acquainted with only a couple of such people. A full set of the possibilities requires more cases to study. So part of this first step will be to talk to people who can refer the owner to others who have sold their businesses and retired. Good referral sources would be fellow members of trade or professional associations in the company’s industry. Ask people who may be retirement age what their succession plans are. Other good referral sources from the same industry would be suppliers and customers as well.
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Beyond the industry, accountants, attorneys, bankers and insurance agents would probably be able to make referrals. Keep at it until at least ten conversations have been held.
The business owner could do a good bit of research online, finding good articles such as Thienel Law’s or Robert Newcomer-Dyer’s . However, personal conversations with people who have gone through the process will add texture to the bare facts, as well as pitfalls to avoid and opportunities to embrace.
The second step is based on these conversations and research. The owner needs to keep notes on the possibilities that others not only used, but also those considered and rejected.
After learning what the options are, the third step is simply to plan the next few steps. It is possible that a single option will stand out. For example, the best option may be to sell the company by the owner’s 65 th birthday. If that’s the case, then the next steps are to ensure that the company will be attractive to a buyer at that time. Identifying what needs to be done to make the business salable is the next step.
In other situations, the owner will have narrowed the choices to a couple, such as liquidating the company’s assets or selling to a current employee. In this case, the next step would be to sketch out action items for each of these possibilities.
So the business owner who lacks a succession plan has three steps to get started: talk to others who have exited their businesses, identify viable choices for the owner’s particular situation, and then sketch out the next three steps in developing the plan. With this simple plan to get started, there’s no excuse for a business owner to leave a mess behind when death or incapacity comes along.
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Do you think succession planning is just for family businesses or for business owners who are close to retirement? Think again.
Whether retirement is 30 years away, just over the horizon, or not in your game plan at all, a succession plan is vital to ensuring the continued success of your business.
A good succession plan can help:.
- Transfer ownership when the time comes
- Maintain your lifestyle in retirement
- Provide for your heirs financially
- Prepare the business to handle unexpected events
Why is a succession plan so important?
Life happens—and unless you have a plan to deal with the unexpected, the business you worked so hard to build could crumble if you become disabled, die, get divorced, or decide to split with your business partner.
Think of a succession plan as peace of mind for the business you’ve worked so hard to build.
In this guide, learn how to develop a succession plan that works for your business.
Some items covered include:
1. Decide how to exit your business. Should you:
- Transfer the business to your heirs
- Sell the business to your business partner/s
- Sell the business to a key employee
- Sell the business to an outside buyer
2. Conduct a business valuation
Even if you aren’t planning to sell your business, conducting a business valuation has many benefits. It helps you develop a retirement income strategy, properly value future owners’ shares, and purchase adequate insurance for protection planning. It can even make it easier for your business or potential buyers to get loans or attract investors.
3. Prepare for the transition
The transition period to new ownership is a vulnerable time for a business. Prepare both your successor and your business for a smooth hand-off.
4. Review your plan regularly
Creating a succession plan is a big accomplishment, so give yourself a pat on the back. But don’t just file your plan away and forget about it. Over the years, key employees may leave your business, family members may lose interest in taking the reins, and your own plans for your future may shift. Reviewing your succession plan annually with your team of advisors will help ensure a successful and seamless transition — no matter when or under what circumstances it happens.
Founded in 1851, MassMutual is a leading mutual life insurance company that is run for the benefit of its members and participating policyholders. MassMutual provides products to help meet the financial needs of clients, such as life insurance, disability income insurance, long term care insurance, retirement/401(k) plan services, and annuities.
Covering Your Back: The Buy-Sell Agreement Whether you’re launching with one partner or 10, the buy-sell agreement protects stakeholders from sticky situations that could rock the entire boat.
7 Legal and Financial Steps to Closing Your Small Business Exiting a business requires filing paperwork to officially dissolve your business with the state and taking care of other legal and financial formalities.
Copyright © 2023 SCORE Association, SCORE.org
Funded, in part, through a Cooperative Agreement with the U.S. Small Business Administration. All opinions, and/or recommendations expressed herein are those of the author(s) and do not necessarily reflect the views of the SBA.
Business Succession Planning: A Step-by-Step Guide
Business succession planning is a valuable tool for both small businesses and growing enterprises. In small businesses, succession planning means effectively managing changes in ownership or leadership. In larger organizations, it that can help to avoid potential talent gaps that have a detrimental effect on the company. The right strategy can help you plan ahead so that you can transfer knowledge and retain employees in key roles. And this is a top priority in these uncertain, post-pandemic times.
With that in mind, we have created a step-by-step guide to help you design and implement a plan that sets your business up for long-term success . We will take a look at the benefits of succession planning in HR and break down the succession planning process to help you understand everything that’s involved.
Table of Contents
What Is a Succession Plan?
So, what is the definition of succession planning? How can you apply it to your business?
Business succession planning is a process that helps you prepare your company for the future. Essentially, it’s about creating a strategy and process for identifying potential future leaders and developing their skills so that they are ready to take on a new role when one of your key employees leaves the company.
Through careful planning, communication, training, and feedback, you can create a successful change management strategy that prepares you for potential transitions in your business. This helps you avoid key player talent gaps. It also helps you proactively develop your inclusive leaders of the future.
Despite its valuable role in business planning, according to a survey conducted by SHRM last year, only 44% of HR professionals claim that their organization has a succession plan in place. What’s more, only 21% of those that do have a plan in place have created a formal succession management plan.
Do you have a detailed succession plan in place? If not, then you’ve come to the right place.
Why is Business Succession Planning Important?
According to the 2021 Global Leadership Forecast , companies around the world are facing a leadership crisis. In fact, only 11% of surveyed organizations reported that they have a “strong” or “very strong” leadership bench, the lowest rating in the past 10 years (it has been in decline since 2011’s reported 18%). This drop has been attributed to a decline in leadership development and transition training in organizations.
Understandable given the distractions the world has had over the past couple of years.
Nonetheless, this figure shows just how important it is for organizations to work on their succession management strategies. This is the most effective way to ensure that the leaders of the future have the right skills and experience to guide them to success . And this is what business succession planning is all about.
By preparing strong leaders for the future, you can help your organization reach its long-term goals, reduce employee turnover , and build a stronger and more resilient business that’s ready to thrive.
Benefits of Business Succession Planning
In case you’re still not convinced, let’s take a look at some of the specific benefits of business succession planning in a bit more detail.
- Identifying and developing your existing employees for future leadership roles helps you to promote from within . Aside from reducing turnover and hiring expenses , this also helps you ensure your future leaders have the right organizational knowledge and internal relationships , something which external recruits will lack.
- Promoting the development of your existing employees shows them that you are willing to invest in their future . This can be a great morale boost that motivates employees to stay at your company. This helps you stay competitive and attract top talent to your business.
- A well-designed succession plan helps you formalize training for both present and future leaders. It keeps your business moving forward and helps you retain your top performers .
- Business succession planning is also an effective tool for mitigating the risks of organizational change . This helps you avoid any potential talent gaps when someone leaves your company. It also helps you pass on valuable institutional knowledge to future leaders before it’s too late.
What is Succession Planning in HR?
Succession planning in HR consists is a vital part of talent management. It’s all about your role as an HR professional in identifying key roles and positions that may need filling in the future and finding and developing internal candidates who may have the right skills and experience to fill them. The right strategy can help you retain staff, cut recruitment costs and better manage your internal recruitment processes .
HR succession planning is the process of identifying, selecting and developing employees who could potentially become key players with the right development. This helps you prepare for potential organizational changes so that you have skilled and engaged employees waiting to fill key leadership roles when the time comes.
As an HR professional, you play a significant role in preparing and facilitating your organization’s succession management strategy. However, for your succession planning in HR strategy to succeed, it’s equally important to get the support of senior management so that your plan is as effective as possible and aligned with your organizational goals .
Talent Management and Succession Planning: Employee Buy-in
Business succession planning is also about managing your existing talent so that you are able to retain as much institutional knowledge and experience as possible. This means that, aside from working with senior management, you also need to rely on the feedback of your employees.
What do we mean by this?
Essentially, it’s all good and well managing and developing your existing talent, but they need to be on board with your succession plan and have a genuine interest in remaining at your company and developing their skills. Otherwise, the time and money you invest in preparing them for future leadership positions will be wasted.
Make sure the potential succession candidates you select are:
- Interested in learning new skills
- Comfortable with change
- Motivated and engaged
- Able to adapt to uncertainty and new working environments
- Willing to take on more responsibilities
- Up for a challenge
The Business Succession Planning Process in 5 Steps
Now that we’ve discussed what business succession planning is, let’s take a look at what you need to include in your succession planning process.
Make sure your succession planning framework includes the following 5 key stages.
Define & Align Your Goals
The first step is creating a succession leadership plan. This means you need to define your goals and align them with your business. You may need to meet with senior leaders for this phase to ensure your goals are aligned with your overall strategy.
You also need to have a clear idea of who you are as a business before creating your succession leadership plan. Once you understand “who” you are, you will be better equipped to identify your potential new leaders.
Finally, to complete your plan, you need to:
- Define the roles, skills, and experience that each successor will require (your succession profiles). Make sure you gather as much feedback on this as possible from your team to help you get a full picture of what you need to include in your succession plan.
- Create a forecast of your company’s needs . Where do you need to be as a company within the next 5 years? How will your organizational structure change over this time? Think about your turnover trends, compensation strategies, who may be due to retire, and training and development plans for the future.
- Update your job descriptions to reflect the information you’ve gathered. Make sure you are clear about your expectations . This will help you define the right candidate profiles for your succession plan.
Create Your Succession Strategy
Defining your goals is one part of your plan, but you also need to create a comprehensive succession planning strategy to make sure you are on the right track – you need a business strategy game plan !
So, what does this mean, exactly?
Put simply, you need to define a series of actions and strategic moves that help you align your succession goals and objectives with your overall HR strategy .
Consider the following:
- Where do you want to be as a business? What roles, positions, skills and experience will you need to succeed?
- Which senior/leadership roles do you need to create a succession plan for?
- Will you take business succession planning into account during performance appraisals in order to identify potential candidates throughout the year?
- Does your business have any specific vulnerabilities that may affect your succession plan? (For example, a high percentage of employees that are due to retire soon)
- Have you considered adjusting your hiring strategy to account for successor roles?
The key here is to be as proactive as possible with your strategy. Anticipate potential gaps in your workforce before they occur.
Identify Potential Candidates
The next step is to evaluate your current workforce in order to identify key positions that may need filling in the future, and key employees that may be suitable replacements. This is where you will implement the succession profiles and job descriptions that you created in the previous step. The more information you include in your profiles and descriptions, the easier it will be to identify the right match within your existing workforce.
Generally speaking, the best candidates will be supportive, proactive, engaged with learning and development, great problem-solvers, adaptable and able to take on more responsibility.
It’s important to be as objective as possible in this stage. You also need to consider that potential candidates may not currently be in leadership roles. It’s all about finding potential. The most effective way to do this is by using succession planning tools and metrics, rather than relying on personal opinions. More on this shortly.
Establish Professional Development Opportunities
As soon as you have your list of potential candidates and you know what skills they need to work on in order to eventually fill the role you have matched them to, it’s time to create a professional development plan to help them get where they need to be.
Which skills does each candidate need to develop? What learning opportunities would help them get the right experience and expand their current skillset? Are there any knowledge gaps that you need to address?
Create a list of the skills each candidate currently has vs. the skills they need to acquire, then work out the best way to offer them suitable opportunities for learning and development. Create individual development plans, offer formal training, consider creating a mentoring or coaching program to support them, and encourage continuous feedback and communication.
Implement Your Plan
The final stage is implementing your business succession plan. This will usually be a gradual transition with multiple short and long-term layers.
The first layer involves officially announcing your succession plan and notifying potential candidates. You then need to roll out your individual development plans and arrange training. Introduce candidates to their mentors, if you are using them, and encourage them to meet regularly. This will show your employees that you support their professional development, and you can see that they have potential.
Most importantly, make sure you collect regular feedback to see how your individual development plans are progressing, and if potential candidates are on track to reach their succession objectives.
Business Succession Planning Best Practices
Here are a few business succession planning best practices to help you create a plan that sets you up for success:
- Formalize your plan . The sooner you create and formalize a detailed succession management plan, the better. Make sure your succession planning process focuses on all key stages. That means not just identifying the roles and skills you need for your future leaders, but also implementing individual development plans to get your workforce where they need to be.
- Make sure your succession planning in HR plan is dynamic . Succession planning is all about change management. Be prepared to adapt to change by constantly updating your plan.
- Collect regular 360-degree feedback . This will help you keep track of your employees’ interests, skills, performance, strengths, weaknesses, and opportunities.
- Promote open communication . This will help you build trust and set clear expectations.
- Consider your entire workforce . Don’t just focus on your managers. Your leaders of the future might be hiding in lower-level positions. Look for potential, not existing skills.
Succession Planning Template
One of the most valuable tools you can use for this strategy is a succession planning template. The right template will help you define key roles within your company and identify suitable replacements. Make sure you include a template in your HR audit checklist (check out this HR audit checklist template if you don’t already have one!)
Here are a few examples of the information you can collect with a succession plan template:
- Current key employees and potential replacements
- Key skills and experience that each position requires
- Candidate training and/or experience level
- The time it would take to onboard a candidate for an existing position
- An overview of upcoming vacancies (for example, key employees that are due to retire)
Succession Planning Tools
In order to create and manage an effective business succession planning strategy, you need to use the right succession planning tools. These are the tools that will help you identify which candidates could potentially be future leaders at your organization. They also help you identify potential succession gaps and map the right candidates to the right positions.
Ideally, you should be using a range of tools to help you get a full picture. Here are a few examples of succession planning assessment tools that will help you with this:
- Personality assessment tools : to help you get a comprehensive picture of your existing culture (e.g. tools for tracking motivation levels)
- Behavioral assessment tools : to help you identify and analyze employee leadership skills and assess how they behave at work (e.g. situational judgment tests)
- Cognitive assessment tools : to evaluate critical thinking and reasoning skills related to performance (e.g. a cognitive aptitude test)
- 360-degree feedback : to gather valuable input from employees and their peers in order to understand their readiness to take on future roles (included in most performance management software solutions)
Succession Planning Software
Finally, once you have designed and implemented your business succession plan, you need to regularly monitor progress. This will help you determine if your plan is working and if potential candidates are on track to reach their succession goals.
And this is where succession planning software can help.
Succession planning software isn’t as daunting as it sounds. In fact, most HRIS systems can provide you with the data you need.
The first thing you need is access to key metrics and KPIs . This includes turnover rates, retention rates, cost-per-hire, time-per-hire, and the rate of planned positions being filled. You also need to evaluate performance metrics to determine if business succession planning candidates that have taken on their new role were ready for it.
Did they achieve the training and experience they needed during the development phase in order to take on their new leadership role? If not, what could you have done better?
By analyzing the right data, you can determine what areas of your business succession planning strategy you need to work on in order to continuously improve the quality of your succession candidates. And by using the right HR software and performance management software you can easily identify talent gaps, make comparisons between employees, and simplify the succession management process.
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