what is corporate succession planning

Most boards and executives make the mistake of thinking that succession planning is only about deciding which people should be in certain roles. That’s hard and daunting if you don’t have any process or method on how to get there. —Retired CEO

Organizations using an informal, intuition-driven approach to succession planning leave these decisions to a small group of leaders who “know what’s important to us as an organization.” These leadership groups tend to select successors based less on objective data than on reputation and tenure. This approach is often found at founder-based, private companies that, even though they may have grown into large organizations, continue to conduct business in the old “family business” style. But while a “comfortable” approach helps maintain the old culture, it is fraught with bias and can often overlook hidden gems within the organization. Over time, this style can lead to complacency and stagnation, as the organization repeatedly recreates itself in its own image without evolving for the future.

“Compliant”—A check-the-box exercise that collects names and then files them away

Succession planning can be a lot of work for something many will file away in a drawer for the rest of the year. —Vice president, leadership development

Many other organizations recognize the importance of standardized processes, objective data, and a regular cadence of activities to structure their succession planning decisions. But with more immediate priorities competing for leaders’ time, these tools and processes likely fall by the wayside, and subjective decision-making takes over. This can be particularly evident at organizations where the onus for succession planning rests explicitly with the HR function. Without anyone taking up adequate executive accountability, succession planning can turn into an annual check-the-box activity where leaders fill out a variety of forms (such as the nine-box talent model) to record their opinions—and then turn to other matters, leaving HR without the political capital to question leadership’s input or deviate from existing plans.

“Competitive”—A rigid, rigorous process that ignores the people aspects

In a bigger organization, succession planning can be threatening. It makes leaders realize they are not indispensable. It can actually be destabilizing to an organization if not positioned well. —CEO

The “competitive” state is characteristic of organizations that take succession planning seriously and build substantial processes (including objective criteria) to evaluate and advance chosen successors. This type of succession planning typically identifies a select group of high-potential future leaders and puts them through a rigorous assessment and development program for future roles. While this approach may be effective at identifying and promoting future leaders, it also has the major drawback that it typically ignores the very real human reactions that can arise when a process fails to take people factors into account. In our study, we heard numerous examples of succession planning programs of this sort “blowing up” in organizations, resulting in high anxiety, frustrated leaders, or worse. The process can be perceived as a cold and threatening corporate program being done to individuals, not for them. As a result, instead of embracing the process as a key part of their leadership responsibilities, many participants tend to look for ways to “beat the system” or question the validity of diagnostics in order to raise their own stock or that of the candidates they support.

“Centered”—A balanced approach that blends objectivity and empathy

Our leadership succession program is very people-intensive, which I think it has to be. The tools and process should all support that. —HR vice president, supply chain

A “centered” approach is designed to put the people involved—both the leaders managing the process and the successors who are being considered—at the center, supported by processes that help decision-makers maintain objectivity. Recognizing that succession planning has a huge impact on the careers of the current leaders who are responsible for its success, and acknowledging the emotions involved for both current and prospective leaders, this approach focuses on creating an environment that channels emotions productively into the succession planning process. It uses people-centered design tools that allow organizations to consider objective talent assessment criteria without the process being perceived as threatening to the leader community. The aim is to create a succession program that leaders want to participate in, which can only happen when all participants appreciate its value and feel that it is fair and easy to navigate—and that it ultimately creates more opportunity for all involved.

What prevents organizations from practicing centered succession planning? As we stepped back to consider the challenges, we realized that there was a pattern to many of the reasons our interviewees gave for ineffective or half-hearted succession planning: self-preservation, short-term thinking, reliance on subjective opinion, and a lack of accountability. The consistent and common thread in these reasons is human behavior .

To some extent, overemphasizing process at the expense of considering how people will emotionally react is an attempt to correct for the way people naturally tend to behave. Many of the barriers to adopting a centered approach, in fact, could theoretically be overcome simply by changing how people act and think. But, of course, changing human behavior and thinking is anything but simple.

For incumbent leaders and their organizations to practice centered succession planning, it’s necessary for them to:

Five key practices can likely help organizations move their succession planning efforts toward the centered state.

1. Make succession planning worthwhile for the people most affected by its results

As one CEO we interviewed remarked, “The biggest barrier [to succession planning] is addressing ‘What’s in it for me?’ before I do it for others.” Asking leaders to fully engage in succession planning without an emphasis on their own interests is likely to result in apathy and avoidance. Organizations can manage these issues by offering bigger, bolder opportunities to current incumbents so that they will focus on succession. An organization that does succession planning well will align incentives and development opportunities for both the incumbent and the successor.

As for what incumbent leaders need to be motivated to do, it’s important that they take an active role in developing successors instead of approaching the process as a passive onlooker where their only responsibility is to identify names to go on a chart. It is often wrongly assumed that talent will be ready for the next role without much involvement from current leaders. A CEO of a large financial services company observed, “Succession management is often done in too passive a way. Most companies just ask, ‘Is that person ready?’ as opposed to, ‘How do we get them ready?’” This mindset is amplified by organizations’ frequent focus on performance over learning.

To counter this tendency, many leading organizations craft short- and long-term incentives that reward leaders for creating environments that develop successors, not just identify them. The most effective of these environments include an artful combination of three learning elements:

In an organization dedicated to developmentally oriented succession planning, career opportunities are plentiful for all, creating yet more incentives for both incumbents and successor candidates to actively engage in the process.

2. Establish accountability and advocacy

One common challenge that emerged from our research is the lack of clear accountability for succession planning. Who is responsible for identifying and developing top talent—the CEO, the CHRO, direct managers, the board of directors? Some organizations grappled with assigning responsibility across businesses, and in many cases, the lines of responsibility remained unclear. As one CEO remarked, “I don’t actually know [who is responsible for succession management in our organization]. Even though leaders get it that this is the right thing to do, they’re typically not incented or held accountable.” Behavioral science supports this idea: Research shows that, while people may acknowledge the importance of an activity, they won’t engage in it until clear accountability has been assigned. 4 Interestingly, we found that who specifically has organizational accountability for succession planning doesn’t much matter—as long as it’s clear where the accountability lies.

Equally important as clear accountability is strong executive advocacy. Having one or more senior-level advocates for succession planning is crucial in building an effective succession culture in the organization. Succession planning should be championed as a critical growth lever by these senior leaders, or it risks being considered a “nice to have” and not being discussed on the executive agenda.

In addition to establishing accountability and advocacy at the top, organizations with effective succession management practices push accountability for succession planning down through all levels of the business. 5 One fast-growing technology company in San Francisco has baked a key metric into its managers’ goals—the rate at which they develop and promote their own people. Bonuses are heavily influenced by this metric, and manager performance is rewarded for developing talent that is moved across the organization. 6

3. Orient toward the future

At its core, succession planning is about preparing an organization for the future. Yet ironically, many organizations build their succession processes around the needs of current roles, not what those roles will look like in the future.

Orienting succession processes toward the future rather than present needs yields two key benefits. The first is that it helps prepare the next generation of leaders to deal with a world that will differ, possibly drastically, from the present. The most effective organizations we talked to spent intensive effort on understanding future business dynamics and their implications for effective leadership. By keeping these implications in mind while developing and promoting leaders, an organization can prepare itself to thrive in a changing environment.

The second benefit is the vastly different way that many incumbent leaders view succession planning when it is considered for the future versus the present. It was clear from our research that succession planning activities oriented to the near term can evoke a sense of fear for many. When we asked a leading CEO, what got in the way of his company engaging in succession planning, he answered candidly, “It’s the fear factor.” Another HR executive stated, “I think there is such a gap between intention and execution in succession planning because leaders don’t want to have people ready for their jobs. They want to appear irreplaceable.” Focusing on future decision-making related to future roles can help address such concerns, making the discussions less threatening for current leaders focused on self-preservation.

4. Create short-term goals to sustain a long-term focus

Succession planning is a long-term discipline in a short-term world. As one CEO told us, “Organizations are wired for short-term thinking—quarterly results, dealing with rapid changes ... Succession planning is, by nature, a longer-term discipline that gets pushed because it doesn’t fit the cadence of most organizations’ planning timeframes.” Leaders are often too busy with day-to-day firefighting to spare thought and time for longer-term decisions; hence, succession planning remains low on their list of priorities.

One strategy organizations can borrow from behavioral science is to pursue longer-term outcomes by setting shorter-term goals. For example, instead of asking someone to plan for an event five years from now, organizations can break the task down into smaller, shorter-term components and ask people to complete one component in the next three months. An associate vice president of leadership development explained this process in his organization: “We’ve broken [succession] into smaller pieces to create more focus and depth. We have nine executive talent review sessions per year—so we’re doing this often and proactively.” Seeing leadership succession planning as part of their day-to-day job helps keep leaders engaged in the shorter term while also proactively pursuing long-term success.

5. Establish tools, processes, and messaging to cultivate transparency and trust

Many employees, and even organizational leaders, often feel that leadership succession and planning is done within a “black box,” without the transparency and simplicity necessary to inspire trust in the process. Distrust in the system can likely lead to disengagement and even unacceptable workplace behaviors. Organizations that use simple, accessible, and transparent data collection processes for succession planning and clearly communicate succession decisions using this data are more successful. As with many other business processes, many leading companies are taking a design thinking approach to succession planning, creating an experience that blends objective, disciplined methods with the intrinsic needs of the people for whom the process is designed.

Here’s one example we’ve observed of two contrasting companies, both involved in an executive succession exercise. One company instituted an objective assessment process to evaluate its top 50 leaders, but provided minimal context for the effort. It sent out an email to these leaders without clarity on the details, creating tremendous anxiety and frustration among this group. In contrast, the other company, while pursuing the same objective, embedded thoughtful communications into the initiative, including one-on-one meetings with each leader to discuss both organizational and individual objectives as well as to answer questions. The result? The latter company’s leadership team was far more engaged in and trusting of the process.

The “holy grail” of effective succession planning turns out to be surprisingly obvious but unsurprisingly difficult: balance empathy and attention to human factors with objective decision-making and the organizational discipline to see the process through. The hard part is encouraging current leadership to think and act in ways that enable the organization to achieve this balance. An understanding of human behavior can hold the key to successfully enlisting these vital stakeholders in the effort to identify and develop those who will follow them. Whether it’s addressing the anxiety of incumbents, motivating them to train potential successors, prompting them to plan for the future, or winning their trust that the whole process is worthwhile, how well an organization handles these very real human factors will have a significant impact on its ability to effectively find and develop its next generation of leaders.

Jeff Rosenthal is the managing director of Deloitte Leadership. He heads the executive readiness suite of services, which includes succession planning, executive development, and senior team effectiveness. He is based in San Francisco, CA. Kris Routch is an expert in the assessment, development, and coaching of senior leaders. He is based in Pittsburgh, PA. Dr. Kelly Monahan , Deloitte Services LP, is a manager and subject matter specialist at Deloitte’s Center for Integrated Research. She is based in Philadelphia, PA. Meghan Doherty helps clients align their leadership strategy to their business strategy and grow their talent through leadership development programs, custom leadership labs, and coaching. She is based in Boston, MA.

Acknowledgments

The authors would like to thank all the leaders who participated in our study via interviews and survey. The authors would also like to thank Junko Kaji and Ramani Moses for their thoughtful editing and assistance in the completion of this draft.

Cover image by: Jurgen Ziewe

Adam Canwell et al., “ Leaders at all levels: Close the gap between hype and readiness ,” Deloitte University Press, March 7, 2014. View in article

The author team designed a year-long mixed-methods research study to understand why so few organizational leaders effectively engage in leadership succession planning activities. The study began in the summer of 2017 and was completed in July 2018. We sent out a survey to a random sample of over 200 leaders across industries to determine the barriers and enablers to their leadership succession planning activities. Our survey also included an assessment with how strong they believed their current leadership succession program was and what could be done differently to enhance its effectiveness. After analyzing the survey data, we then sat down with over a dozen CEOs, board members, and HR leaders to conduct semi-structured interviews to further investigate the effectiveness of their leadership succession activities. We then used qualitative text analyses for the interview transcripts to identify themes and patterns in the responses. This report includes the findings from this year-long study using both quantitative and qualitative research techniques. View in article

Jean Martin, “ For senior leaders, fit matters more than skill ,” Harvard Business Review , January 17, 2014 . View in article

Brenna Sniderman, Kelly Monahan, Tiffany McDowell, and Gwyn Blanton, Fewer sleepless nights: How leaders can build a culture of responsibility in a digital age , Deloitte Insights, October 31, 2017. View in article

Gerald Kane et al., Coming of age digitally: Learning, leadership, and legacy , Deloitte Insights, June 5, 2018. View in article

CHRO/former CHRO of technology and online companies, in-person interview, October 2017. View in article

Topics in this article

Deloitte leadership development services.

Kris Routch

Specialist leader | deloitte consulting llp.

Kris Routch is an expert in the assessment, development, and coaching of senior leaders. He has delivered numerous leadership programs to clients around the world and provides deep expertise in the areas of succession management and executive selection. He consults with his clients on a full spectrum of leadership solutions and is a highly requested facilitator, speaker, and coach.

Kelly Monahan

Manager, market insights | deloitte services lp.

Dr. Kelly Monahan, Deloitte Services LP, is a manager and subject matter specialist at Deloitte’s Center for Integrated Research. Her research focuses on the intersections of behavioral economics and talent issues within organizations. Prior to joining Deloitte, Kelly was an HR business partner supporting the CFO of Hartford Funds. She holds her PhD in organizational leadership with an emphasis in human resource development.

Meghan Doherty

Manager | deloitte.

Meghan Doherty helps clients align their leadership strategies to their business strategies and grow their talent through leadership development programs, custom leadership labs, and coaching. Additionally, she has experience leading the change, communications, and stakeholder alignment efforts for large-scale transformations.

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Talent management

succession planning

What is succession planning?

Succession planning is a process of developing talent to replace executive, leadership or other key employees when they transition to another role, leave the company, are fired, retire or die. It is relevant to all companies, from the largest to the smallest, in both the for-profit and not-for-profit sectors.

The planning process is meant to create a talent pipeline of successors that will keep the organization running with little to no interruption when inevitable staff changes occur. Effective succession planning works by assessing staffing needs that may arise as well as creating long-term goals and strategies to manage those gaps, including through leadership development. HR departments, sometimes referred to as the human resources management ( HRM ) department , are typically a key driver in succession planning, although support from top leadership and other stakeholders is critical to success. Succession planning is also sometimes referred to as replacement planning.

Succession planning ensures that a business can continue running smoothly after an important role becomes vacant. An organization may want a succession plan to retain internal company knowledge, identify skill gap needs for training and to invest in employees. The process helps identify employees with the right skill sets and talent that can fill the vacant position.

In the event that a higher position suddenly becomes vacant, like a CEO , a succession plan ensures that there is already a method in place to replace that role. It gives an organization time to prepare candidates with high potential to fill that role. During this time, potential candidates are evaluated, strengths and knowledge gaps are identified, then the candidate receives training in needed areas.

This article is part of

How to choose an HR software system in 2023: A complete guide

Succession plans should also fit into larger strategic visions. Used narrowly, succession planning refers to replacing the CEO or executive director. When used in a more expanded sense, the term can refer to board members, key leaders or the C-suite . When used only in the sense of replacement plans for the top leader or leaders, succession planning has specifics that may not apply when used more generally. For example, if referring to the CEO, the board of directors must be involved, whereas this will be less likely when discussing role replacements farther down the corporate ladder.

Still, while the top executive is a key factor in a company's performance, taking a wider lens to the concept of succession planning is increasingly seen as critical, particularly in the current challenges facing talent management in companies today.

When an employee leaves, there is a ripple effect. It may be most evident when the key leader leaves, but the hole created when an employee leaves his or her position can be profound, even at lower levels. Replacing employees can be a difficult task, especially in industries with noted talent shortages and skills gaps . It can be a lengthy process to get a replacement employee to full productivity. A lack of planning can especially sink smaller and family businesses, which don't have the sheer candidate numbers to choose from.

What are the benefits of succession planning?

The need for succession planning relates closely to its benefits. Some benefits include the following:

How does the succession planning process work?

Depending on the size of the organization and its goals, the strategic planning for the succession planning process can vary wildly. However, fundamentals include the following:

Best practices for succession planning

Some best practices to follow when enacting succession planning include these:

Different uses of the term succession planning

It's important to note that succession planning is often used narrowly in reference to the CEO or executive director, or slightly more expanded to include board members, key leaders or the C-suite.

However, extending the concept of succession planning to a broader range of employees is also gaining widespread traction, especially through the use of HR software, generally, or talent management software , specifically. Succession planning may also be used to indicate the passing of company ownership onto employees.

Real-world succession planning example

As an example, for several years before Steve Jobs stepped down as CEO of Apple in 2011, he had groomed successor Tim Cook to take the top leadership role. This included Cook working a wide range of operational roles and directly with Jobs for CEO-specific experience. Cook also stepped in to lead day-to-day operations twice when Jobs was on sick leave.

In addition to a succession plan for the top leadership role, Jobs also founded Apple University in 2008 as a way to provide a leadership curriculum based on Jobs' experiences and business savvy.

Learn more about different key aspects of a succession planning strategy .

Continue Reading About succession planning

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The High Cost of Poor Succession Planning

Many large companies fail to pay enough attention to their leadership pipelines and succession practices. That leads to excessive turnover at the top and destroys a significant amount of value—close to $1 trillion a year among the S&P 1500 alone, say the authors of this article. The biggest costs are underperformance at companies that hire ill-suited external CEOs, the loss of intellectual capital in the C-suites of organizations that executives leave behind, and for companies promoting from within, the lower performance of ill-prepared successors.

Companies and their boards can (and must) do better. The solution isn’t that complicated: Firms need to start succession planning well before they think they need to; make sure they identify and develop rising stars; appoint the most-promising executives to the board to help prepare them to take on the top job; and look at both internal and external candidates. In addition, when working with search consultants, firms should avoid perverse incentives like contingency and percentage fees.

A better way to find your next CEO

Idea in Brief

The problem.

Many large companies fail to pay adequate attention to their top-level leadership pipelines and succession processes, which results in excessive turnover and significant value destruction for companies and investment portfolios.

The Research

Analysis suggests that the market value wiped out by badly managed CEO and C-suite transitions in the S&P 1500 alone is close to $1 trillion a year. Better succession planning could, by contrast, help the large-cap U.S. equity market add a full point to the 4% to 5% annual gains Wall Street projects for it.

Companies—and especially their directors—must plan leadership changes before they’re needed, identify and develop rising stars, give them access to the board, look at both internal and external candidates, and partner cautiously with executive search firms.

In August 2013, Steve Ballmer abruptly announced that he would step down as chief executive of Microsoft as soon as his replacement could be found. Thus began one of the most important CEO searches in the past decade—and a case study in the dos and don’ts of senior leadership succession.

At the time Microsoft was the third-most-profitable company in the United States and the fourth most valuable. Nevertheless, this well-respected global technology giant didn’t seem to have a plan for replacing Ballmer, even though he had, according to most informed observers, underperformed for years. (Critics cite his slow move into mobile, social media, and video along with ill-fated acquisitions and product reboots.) While a few high-profile executives, such as Windows chief Steven Sinofsky and Xbox head Don Mattrick, had jumped ship during his tenure—another sign of trouble—with a workforce of 100,000, Microsoft surely could have identified other promising candidates in senior management roles, not to mention outsiders, who’d be ready to step in for Ballmer.

Instead, Microsoft seemed to start from square one, concentrating mostly on external candidates. According to the director who chaired the search committee, the board cast a wide net across a number of industries and skill sets, identified more than 100 candidates, talked with several dozen, and then focused intensely on about 20. Among them was Steve Mollenkopf, the COO of Qualcomm, who fell out of contention when he was promoted to that company’s top job. Alan Mulally, who had just turned around Ford and was the favorite candidate, took his name off the list in January—at which point the press described Microsoft’s board as turning to Plan B.

Finally, in February, six months after Ballmer had declared himself a lame duck, Microsoft announced that an insider, Satya Nadella, would become the third CEO in its history.

We know now that despite that bumbling succession process, Nadella was a terrific pick. He moved Microsoft away from fiefdoms and a “know-it-all” culture and toward a more open, collaborative “learn-it-all” one; built up the cloud-computing business; made Office available on all smartphones; and executed dozens of accretive acquisitions, including the purchase of LinkedIn. In his first nine months as CEO, Microsoft’s stock rose 30%, increasing its market value by $90 billion. As we write this, seven years into his tenure, it is the world’s second-most-valuable company.

But what if Microsoft hadn’t promoted Nadella? What if its hastily put together, extremely broad, and externally focused search had resulted in the hiring of an outsider? What if Mulally, who had no tech sector experience, had been appointed? Why hadn’t the board already been grooming Nadella—a 21-year veteran of the company with clear leadership competence, cultural fit, and expertise in up-and-coming areas of technology—or any of his similarly qualified peers?

While Microsoft did make the right decision in the end, its lack of planning could have led to a costly disaster.

Like Microsoft, many large companies fail to pay adequate attention to their leadership pipelines and succession processes. And most of them don’t get as lucky as Microsoft did. In our combined nine decades of experience in executive search and talent development (Claudio), professional investment (Carrie), and management and financial research (Gregory), we’ve seen flawed succession practices lead to excessive turnover among senior executives and, in the end, significant value destruction for companies and investment portfolios.

In our recent research we’ve attempted to quantify those costs. According to our analysis, the amount of market value wiped out by badly managed CEO and C-suite transitions in the S&P 1500 is close to $1 trillion a year. We estimate that better succession planning could help the large-cap U.S. equity market add a full point to the 4% to 5% annual gains that Wall Street projects for it. In other words, company valuations and investor returns would be 20% to 25% higher.

In this article we’ll examine those findings and then make recommendations for how to significantly improve corporate performance and investor returns through better practices for grooming and selecting CEOs. Of course, these lessons can apply to succession planning for other key senior management roles as well.

Quantifying the Problem

In our opinion large companies’ excessive tendency to hire leaders from outside is one of the biggest problems with succession practices. This propensity incurs three major kinds of costs: underperformance at companies that hire ill-suited external CEOs, the loss of intellectual capital in the C-suites of the organizations that executives leave behind, and for those companies promoting from within, the lower performance of ill-prepared successors.

A landmark study that Rakesh Khurana and Nitin Nohria of Harvard Business School conducted years ago sheds light on the first kind of cost. Khurana and Nohria examined the impact that different types of CEO succession had on operating returns in 200 organizations over a 15-year period. They compared four scenarios: (1) an insider promoted in a firm doing reasonably well; (2) an insider promoted in a firm doing poorly; (3) an outsider hired in a firm doing reasonably well; and (4) an outsider hired in a firm doing poorly. They found that, on average, insiders didn’t significantly change their company’s performance. That makes sense: Similar people working in similar ways at the same company will produce similar results. With outsiders, the change was much more extreme. In the infrequent cases when a company was doing very poorly, outsiders added great value, on average. But at companies doing reasonably well, outsiders destroyed massive value. This suggested that companies looking for a new CEO should hire external candidates only in exceptional cases, when a major turnaround or cultural change is called for.

Other research has confirmed that external hiring usually doesn’t deliver on its promise. For example, Matthew Bidwell of the Wharton School of Business found that while outsiders often appear to have better experience and education than insiders do, they are paid more, perform worse, and have higher exit rates. Additional studies support that: One by Cláudia Custódio, Miguel Ferreira, and Pedro Matos showed that external CEO hires were paid 15% more than internal hires, on average; and one by Sam Allgood and Kathleen Farrell revealed that CEOs brought in from the outside have an 84% greater chance of turnover than insiders in the first three years, usually for poor performance.

Another recent study found that companies often choose outsiders because they have already served as CEOs elsewhere—indicating the firms value previous experience in the role over insiders’ potential to excel. But that experience rarely guaranteed success: When the researchers looked at S&P 500 CEOs who had led more than one company, they found that 70% had generated better performance the first time around.

Despite those downsides, S&P 1500 companies hired their CEOs from outside 26% of the time from 2014 to 2018, according to ExecuComp data—perhaps because, as Wharton’s Peter Cappelli has found, companies have an irrational bias toward exciting and unblemished external hires whom they know less about.

We wanted to investigate how external CEOs performed relative to what insiders might have done in the same positions. Without the ability to rewind time and play out different scenarios, that would seem impossible to do. However, we believe that with statistics, we can predict what would have happened with different CEO hires.

We used a technique known as structural self-selection modeling (SSSM), directly derived from Nobel Prize winner James Heckman’s research. It is similar to the multiple regression modeling that companies frequently employ in forecasting and scenario-planning exercises. We first identified 80 independent variables, including firm characteristics (like size and capital expenditures), sector, risk, board structure, and short- and long-term performance before and after a change in CEOs. The performance metric we used was cash-flow return on assets, which unlike operating return on assets accounts for the reorg and restructuring costs that are frequent following the arrival of an outsider CEO.

We then looked at every instance in which an outsider CEO was hired to lead a public U.S. firm over a 17-year period and calculated the change in cash-flow return on assets for his or her tenure. We plugged the 80 independent variables for each of those companies into the SSSM to create a “counterfactual”: what the expected change in cash-flow return on assets would have been if the company had promoted an insider. We found that only 39% of outside hires would have done better than a theoretical inside hire.

Large companies’ excessive tendency to hire leaders from outside is one of the biggest problems with succession practices.

Of course, nobody knows in advance what the performance of any appointed executive will be. But boards should base consequential and risky hiring decisions on their best estimate of future outcomes. Our analysis shows that in only 7.2% of instances will an outside CEO hire have a 60% chance of outperforming an insider, and in a mere 2.8% of cases will he or she have a 90% chance of outperforming an insider.

Dramatic as those figures are, they tell only part of the story. One key knock-on effect of external choices for CEO and other senior positions is the loss of intellectual capital in the C-suites of the firms those executives were hired from. And because on average executives perform worse at the company they jump to, the negative impact on the entire market is even greater. We can calculate the effect that loss of intellectual capital has on market valuations by both analyzing the impact of sudden CEO departures and using the economic model provided by Hanno Lustig, Chad Syverson, and Stijn Van Nieuwerburgh to track how much intellectual capital a departing manager can transfer to his or her next employer.

Our analysis shows that the decrease in intellectual capital at new executives’ previous employers leads to a 0.7 percentage point reduction in total shareholder returns for the S&P 1500, or $255 billion, each year. When we add in the underperformance at the firms hiring external CEOs, total shareholder returns fall by about another half a percentage point, costing investors an additional $182 billion. The final impact, where companies do promote CEOs from within but fail to properly prepare them to take over, costs an additional 0.3 percentage point, bringing the total loss across the S&P 1500 portfolio to $546 billion. To calculate the third cost, we drew from a study of 2,900 companies done by Olubunmi Faleye of Northeastern University, which found that the return on assets of firms with poorly prepared internal CEO successors is significantly lower than that of firms that properly prepared them. A simple extrapolation of these findings to global equity markets, collectively worth about $58 trillion at the time of this writing, implies that the total annual costs to global shareholders would amount to $870 billion. This global estimate is probably conservative, given that governance, succession, and talent practices usually are significantly better in the United States than in most other countries. We’re currently extending our analysis to other major equity markets to try to confirm it.

Another negative by-product of poor succession planning and excessive outside hiring is rising CEO compensation as companies compete for the same top executives. Financier Worldwide reported that at the top 350 U.S. companies, average CEO pay had climbed to $17 million in 2018, or about 278 times a typical employee’s compensation. From 1978 to 2018, CEO pay had jumped by more than 1,000%, while the average worker’s pay had risen just 12%. Though those figures are shocking, our analysis shows that skyrocketing CEO compensation actually plays only a small role in value destruction. The main costs of ill-considered successions remain poor performance by outsider CEOs, loss of C-suite intellectual capital at the firms that CEOs and other top executives leave behind, and ill-prepared internally promoted executives.

One final note: We intentionally focused this analysis on large firms because we believe that’s where the problem of poor succession at the top is most acute. Small firms usually lack a deep talent pool, so they can be better served by hiring CEOs from the outside.

Implementing Solutions

Why are some of the world’s biggest and most powerful organizations getting CEO appointments so wrong? For five main reasons: lack of attention to succession, poor leadership development, suboptimal board composition, lazy hiring practices, and conflicted search firms. Here are some recommendations for fixing those problems.

Plan succession well before you think you need to.

According to PwC’s latest Strategy& “CEO Success” study, in 2018 turnover among CEOs at the world’s largest 2,500 companies reached nearly 18%—the highest rate PwC had ever tallied. A disturbing 20% of those departing CEOs were forced out, and for the first time in the study’s history, more CEOs were dismissed for ethical lapses than for financial performance or conflicts with their boards. Looking forward, we suspect that unanticipated CEO turnover will continue to rise because of the growing attention to moral issues (such as sexual harassment) and industry and market volatility.

Despite this trend, boards continue to be caught off guard because they haven’t spent enough time developing talent and mapping out possible lines of succession. Some believe that having a casual “if the CEO gets hit by a bus tomorrow” plan, which picks a replacement but doesn’t prepare or vet that person or weigh alternatives, is enough. It is not. Others delegate succession planning to the CEO, which is an equally unacceptable abnegation of duty. For instance, we know of a major company, valued at hundreds of billions of dollars, with a CEO in his late sixties who has been unwilling to properly develop any potential replacements. Unfortunately, because the firm’s recent results and stock market performance have been good, board members are afraid to confront him.

Succession planning should start the moment a new CEO is appointed. Take Ajay Banga, the former chief executive and current chairman of Mastercard: He began discussing when he might cede the CEO role to a successor even as he was interviewing for the job himself. The process should remain robust, with directors constantly monitoring and if need be adjusting the pipeline. If there isn’t already a potential successor among the CEO’s direct reports, the board should look to the next level and consider advancement and development opportunities that will help executives there progress. If that level is empty, directors can promote or hire high potentials into it or the C-suite. While hiring externally is usually not ideal, it’s much less risky to do it at a lower level than in the top job.

Purposefully identify and develop your rising stars.

By now most directors know the attributes and skills that senior executives need. At the leadership advisory firm Egon Zehnder, where one of us (Claudio) worked for three decades, the list used for CEO searches includes intelligence and values. The firm also assesses candidates on strategic orientation, market insight, results focus, and customer impact, and their competence at collaborating with and influencing others, organizational development, leading teams, and change management. Meaningful succession planning calls for finding rising managers who either have the right levels of all those capabilities or, more likely, the potential to develop them. Four critical traits—curiosity, insight, engagement, and determination—signal potential, and with the proper coaching and support, people who demonstrate them can be groomed for high-level positions. (For more on this subject, see “ Turning Potential into Success: The Missing Link in Leadership Development ,” HBR, November–December 2017.)

One important development area for any CEO is emotional intelligence, which encompasses flexibility, adaptability, self-control, and relationship management. You might think that those soft skills would be more challenging to learn than hard ones such as calculus or coding. But as Richard Boyatzis of the Weatherhead School of Management has conclusively demonstrated, people can pick up these crucial leadership competencies even as adults.

Another way for boards to help potential successors get ready is to insist that they be given challenging rotations and stretch assignments, as was common at General Electric in its glory days and is practiced with great success at Unilever and McKinsey today. When you expose your highest potentials to new geographies, businesses, situations, and functions, you can become a leadership factory.

Appoint the most promising executives to the board—or give them more access to it.

In the United States, in part because of regulatory mandates following executive malfeasance at Enron, Tyco, and other companies, most large companies’ boards have become fully independent, with the CEO as the only employee director. Faleye found that the proportion of U.S. boards set up this way exploded from about a third in 1998 to more than two-thirds in 2011. Our analysis shows that the percentage of fully independent boards has continued to increase, rising to 76% by 2018.

While there are clear benefits to getting oversight and advice from outside experts, we believe independent boards are less equipped to manage CEO succession. With so little exposure to internal up-and-comers but extensive knowledge of potential external hires from their own organizations and other board experiences, directors are understandably more likely to favor outside CEO candidates or be unduly influenced by individual opinions. As one veteran director recently told us, “It’s scary to see how little insight boards have about top internal executives these days; a lot of the views are painted, either too positively or too negatively, by the sitting CEO.”

We believe that boards should make room for one to three executives who are potential successors to the CEO. Not only does that allow directors to see likely candidates in action, but it better prepares those individuals to take on the top job. When Faleye compared the performance of internally promoted CEOs who had prior director experience against that of insiders who lacked it, he saw that during their first two years the CEOs with board experience had an average return on assets that was 12.5 percentage points higher. Interestingly, this massive difference disappeared during year three, suggesting that while both types of executives had similar levels of competence and potential, the exposure to strategic board-level discussions as well as the relationships established with directors drastically flattened learning curves.

Indra Nooyi, for example, joined PepsiCo’s board when she was the company’s CFO—five years before becoming its CEO. Watching her firsthand, the board became confident in her competence and potential and, after her appointment as CEO, was more open to her plans to radically transform the company by expanding its portfolio beyond sugary drinks and steering it toward greater social responsibility. During Nooyi’s tenure as CEO, PepsiCo’s net profit increased 122%.

Boards should make room for one to three executives who are potential successors to the current CEO. Board experience helps prepare those individuals to take on the top job.

If you have too many directors already or too many promising potential CEO successors in your ranks, an alternative (though suboptimal) approach is to ask your rising stars to frequently attend and present at board meetings. This will improve their exposure, contributions, and development. Before the pandemic, good boards ran dedicated off-sites or group trips where directors and top executives, and even their spouses, could connect professionally and personally. As boards get back into their rhythms post-Covid, we hope that such in-person social interaction will resume. For further development, you might also encourage some of your most likely successors to selectively join other companies’ boards.

Look at internal and external candidates.

The best practice is to carefully outline your ideal CEO profile and then look both inside and outside for the person who best matches that description. While we believe that every company should first master the art of spotting internal talent and create succession plans based on its current roster, we also see value in external searches for benchmarking and comprehensiveness. (And so do companies like Mastercard, PepsiCo, P&G, and American Express.) Research from the Center for Creative Leadership has consistently shown that when companies consider wide pools of insiders and outsiders, executive appointments are more successful. Whether you’re shopping for a house or for your next top executive, comparative evaluations produce better decisions.

Make sure to conduct thorough assessments of all candidates, even the insiders who are well known to the board. Consider not who has performed the best until now but who is ready to meet the future challenges of the CEO role and has the potential to continue adapting in a volatile, uncertain, chaotic, and ambiguous world. Judge everyone against your job specs, grill candidates in well-structured interviews, and conduct in-depth reference checks. This is the only way to avoid appointing the wrong people to the job.

If you partner with search consultants, avoid the usual perverse incentives.

Executive search firms can usually add great value to succession efforts. Consultants with the right training and experience can identify the competencies that each senior position requires, get more out of interviews and reference checks, and distinguish potentially great performers from the rest. Such consultants also tend to have trusting relationships with candidates, sources, and references.

However, the search profession as a whole still probably hurts as much as it helps, owing to two blatantly perverse incentives: the contingency arrangement and the percentage fee. Most search consultants are compensated when they produce a hire, regardless of that person’s fitness for the job or origin. They make no money on inside hires, who don’t need to be found and brought in. Traditionally, search consultants are paid a third of the new executive’s annual cash compensation (salary plus bonus). As a result, whether consciously or unconsciously, many oversell high-priced outsiders and shoot down internal alternatives. The solution is to swap the percentage fee with a prearranged fixed fee that’s based on the importance of the position and the complexity of the search and to replace the contingency fee with a retainer so that the consultant is paid the same no matter who is appointed. (Of course, the retainer fee makes financial sense only if you’re planning to use the consultant for enough search and advisory work to justify the cost.)

Even if you have those two things right, you should still use search consultants only in special situations—for example, if your internal candidates are unsuitable, you can’t identify or access appropriate external candidates on your own, or your company is entering a new business, region, or period of strategic change. Then approach the selection of your consultant as you would any other people decision: Ask for recommendations, consider multiple firms, and check references. Once you’ve developed a short list, meet the recruiters in person to get a read on their relevant experience, as well as their level of professionalism, candor, and concern.

Companies and institutions must do a better job of getting CEO succession right—their organizations, their industries, and their market returns depend on it. We hope this article helps senior executives, directors, and investors recognize the magnitude of the problem and act accordingly. Microsoft shouldn’t have required a long and public search to conclude that Nadella was the right leader to get the company back on track after Ballmer’s years of struggle. It should have already had him—and even other potential successors—waiting in the wings. How many rising stars like Nadella do you have at your company—and what can you do tomorrow to put them on a path to becoming your next (and ideally best ever) CEO?

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Create Your Business Succession Plan with This 10-Step Checklist

Do you need to create a business succession plan, but are feeling overwhelmed on how to get started? Use this business succession plan checklist.

Patrick Hicks , @PatrickHicks

Head of Legal , Trust & Will

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As the holidays and new year quickly approach us, we often find ourselves reflecting on the past year and all that we’ve accomplished. We also tend to look to the future and what we’d like to accomplish. We also spend a lot of time thinking about family, as well as gratitude for the life that we do have in the present.

What all of these themes have in common is our legacies: what we’ve built in the past, what we’ve built now, and what we hope to continue to build and then eventually pass on in the future.

Estate planning is a critical aspect of this, of course, but if you own a business, then you also need to be thinking about your business succession. If you’re not sure what a business succession plan is, or how to go about it, look no further! We’ve got you covered on all fronts. Here, we present to you our 10-step business succession planning checklist .

Why create a business succession plan?

Before we get into the checklist, let’s review why you should create a business succession plan. A business succession plan is a process of creating a framework for what should happen if you were to exit the business, and how that will happen successfully.

If you were to retire, have an emergency, etc., who would step up and step in? How would they do so, and will they have the tools and resources needed to make sure that operations continue smoothly? Answering these key questions, creating a strategy, and implementing the strategy are all important aspects of business succession planning. Without a proper plan, it could cause your business to lose value, clients, shareholders, or even go bust.

If you have a business of any kind, even if you are the sole employee, you should have a business succession plan in place, and without delay.

Business succession planning checklist

The process of business succession planning can be daunting, and frankly it can be a lot of pressure. After all, it’s the blueprint that should ensure the successful operation of your business for years after you’ve made your exit.

In cases like this, it’s helpful to break processes into smaller, actionable steps and to follow a checklist. Below, you’ll find the 10 steps included in our business succession planning checklist.

1. Have the necessary conversations to determine family + employee interests for the future

If you run your own business or family business, it’s time to start thinking about who will eventually replace you. In most cases, it’s ideal to have a family member succeed you before going to outside sources.

Have critical conversations with family members, or current employees, to determine who might have the interest in passion to be involved in the future of the company. Here, you can’t entertain someone who is only half-interested. When the stakes are high, you’ll want to name someone who absolutely wants to take charge.

2. Decide who you want to run the business when you are no longer able to

Once you’ve had the necessary discussions with potential candidates, make a decision about who you want to run the business. This can mean multiple things. This could be the person who you trust to step in if you experience an emergency where you’re temporarily unable to run the business, or it can be something more permanent, such as when you retire or pass away.

Make a private list of those who you select to take over. Who is your first choice? Do you have a backup choice?

If you do not have a family member or existing employee whose shoulder you can tap, you may also consider external recruitment. Oftentimes, a solopreneur will take on an apprentice, intern, or mentee who they can groom to eventually take over. Make sure to consider the financial requirements of adding a new person to your team.

3. Create a management succession plan

Once you’ve figured out what your succession might look like, it’s time to write out a concrete plan.

Make sure to address scenarios, such as who will step into your role if or when you:

Pass away unexpectedly

Experience an emergency that renders you unavailable

Take a sabbatical, long vacation, or other temporary leave

Going through these potential scenarios methodically will help you realize the need to have a succession plan in place right away, even if you don’t plan to retire for decades. Unexpected situations can arise without a moment’s notice.

In your plan, be sure to address the training and resources needed for this individual to be successful. This could include training and education, mentorship, access to systems, and financial resources. You also likely will need to address certain logistical issues and marketing requirements that only you would know about your business.

In this case, over-communicating is better than under-communicating. Cover any little detail that you can think of. Assume that your successor only has this plan and associated instructions to go off of, and that you cannot serve as a consultant, in case you are unavailable.

4. Put a life insurance policy in place

The next few steps will focus on several measures you can take to provide added protections. The first one is acquiring a life insurance policy. If you were to pass away, your family will benefit from the financial support provided by the policy.

It may surprise you, but taking out a life insurance policy can benefit your business as well. That’s because it can serve as your transfer vehicle. If you were to pass away before divesting from the company, then the death benefits will be used to buy out your share of the business and will be distributed equally to your business partners.

It can also be used to fund a buy-sell agreement.

5. Put a buy-sell agreement in place

A buy-sell agreement arranges what should happen if you were to pass away or otherwise exit the company. Typically, the agreement is such that your share of the business is sold and distributed amongst the remaining partners.

Although it may sound complicated, it’s possible to take out life insurance policies on each partner. Each partner would be both owner and beneficiary on the same policy. When one partner passes away, then the face value of their portion of the policy is paid out to the remaining partners so that they can buy out the deceased partner. This is often referred to as a cross-purchase agreement.

6. Consider family retirement planning

While you’re thinking about the future of your company, also be thinking about your family. What is your current income and your projected income at the time of retirement?

When you retire, will you be able to meet the financial needs of your company? Make sure that you are including this as a part of your business succession plan. For example, perhaps you plan to retire but hold onto your share of the business. That way, you could continue earning profit (dividends) until you’re eventually bought out from the business.

7. Plan for estate taxes

The value of your business may grow significantly between now and the time you retire. You should also be thinking about the size of your personal estate and how your business could contribute to your tax liabilities.

Earlier, we discussed the option of a buy-sell agreement. This means that when you exit your business, or upon your death, your interest in the business will automatically transfer to your business partners. This will help make sure that your estate plan beneficiaries (such as a spouse or child) won’t inadvertently become owners of the business and become subject to estate taxes . Consider creating an irrevocable life insurance trust (ILIT) to hold the life insurance that will fund the agreement and avoid probate.

8. Confirm you have the proper business entity in place

Another approach is making sure you have the property business entity in place. For example, you could establish a family limited partnership or a limited liability company (LLC). These options provide better protection for your business assets and provide more flexibility for your business write-offs and income taxes. Check out our article on how to transfer business interests into a limited partnership .

9. Consider creating a revocable living trust

In addition to forming a family limited partnership or LLC, consider establishing a revocable living Trust. A Trust is a legal instrument that allows you to transfer ownership of assets, property, and business interest out of your name and into the Trust itself. It’s a fiduciary agreement that allows you to skip probate, protect your assets, and benefit from certain tax advantages.

The revocable living trust can own the general and limited partnership interests of your business. While you are alive, you can serve as your own trustee and beneficiary and maintain complete control of your business interests. Be sure to name a successor trustee to your Trust in the event you pass away or become incapacitated.

10. Create your personal estate plan (in addition to your business succession plan)

The final, but not necessarily last, item in our checklist is the creation of your personal estates plan . You may have started noticing how your business succession plan can become closely intertwined with your personal estate.

You deserve it! You will have spent decades building up your business and ensuring its success, of course, you should be able to keep a piece of the pie for yourself and your family. Be sure to establish your personal legacy alongside your business legacy.

Create your business succession plan today

Today we talked about how important a business succession plan is, as an aspect of creating, protecting, and sustaining your legacy. A business succession plan is a process of creating a strategy of how your business will get passed on when you decide to make your exit. It will also cover your bases in case you become temporarily or permanently incapacitated.

In comparison, an estate plan is a process of planning how your personal assets are passed on. Because so much of your personal assets can be tied to your business, your business succession plan and estate plan are often interrelated. That’s why you should think of them as two separate but complementary strategies. When they are working synergistically, it can significantly bolster the value of what you can eventually pass on to loved ones.

At Trust & Will , we’re here to help you keep things simple. You can create a fully customizable, state-specific Estate Plan from the comfort of your own home in just 20 minutes. Take our free quiz to see where you should get started, or compare our different estate planning options today!

Is there a question here we didn’t answer? Browse more topics in our Learn Center or chat with a live member support representative!

Trust & Will is an online service providing legal forms and information. We are not a law firm and we do not provide legal advice.

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Guardianship, estate planning, end of life planning.

Succession planning is a guarantee of future-proof healthy…

Succession planning is a guarantee of future-proof healthy business

Anthony Sammut

A few days ago, a survey published by the Malta Chamber brought to light the lack of succession planning in Maltese family business. From my years of experience working closely with local SMEs, mostly family-run, this comes as no surprise. Succession planning is a delicate topic commonly avoided by the vast majority of businesses. This warrants a follow-up question “ ...but why?”

The reasons vary but I tend to classify them mainly in two categories, both of which are closely linked to the intrinsic human nature of experiencing discomfort in situations of conflict and change.

The first category is that comprising those business owners who genuinely do not believe they have the need. Typical underlying reasons are because these business leaders feel healthy, still energetic and in full control of their business, seeing no need for such a succession plan. This is the category of non-awareness. Business owners in this category are not usually convinced by an awareness campaign; it is more likely for them to eventually change their position subsequent to an unexpected life event. These could be health scares, marital issues of themselves or their children or the discovery of hidden agendas by other stakeholders.

The second category is made up of those who have the awareness, yet avoid the topic out of fear of triggering conflict within the family. In a genuine attempt to prevent conflict situations, business owners sometimes avoid the topic altogether, leaving it to the next generation to sort it out between themselves, in the hope that things automatically will fall into place… but they rarely do! I would not be objective if I do not spend a word in defence of this category. The fear of conflict does not originate from incompetence or incapability but it tends to emanate from the knowledge of the characters involved. Parents are those who know best their upcoming generation and typically stress themselves into anticipating the reaction of their children. This stress brings about the avoidance response.

So, a vital element to the success of any succession plan is the recognition by all involved that the process is predominantly a human one before being a technical one.

A successful succession plan has three distinct phases – it primarily starts as an internal conviction of its need by all those involved, and this step is most often underestimated. At this crucial phase it is paramount to identify any stakeholders who may be willingly obstructing or undermining the process. These are those who see the succession plan as an obstacle to their agenda. Any of these characters need to be addressed before moving on to the next step, and this is often the toughest part.

Then comes the actual planning and implementation. This is the process of considering and deciding on the various aspects of the plan itself. This process is particular to every organisation depending on the sector and nature of the business itself, the size of the organisation, the size of the family and is a vast subject that would require a volume of work of its own. Anyone interested will find plenty of easily accessible material and research on this process.

Third and most importantly comes the mentoring and coaching of the main stakeholders. It involves the process of coaching and mentoring the upcoming generation, the identification of the right point in time for handovers to take place and an objective assessment of whether reality is in line with the plan or whether the plan requires updating. An important aspect is that a succession plan is not a finite project but an ongoing process because albeit we can do our utmost to plan the future, life can give us surprises. An emblematic example is the Agnelli family story that lost both contenders to succeed at the helm of the Group in a very short span of time – Edoardo and Giovanni Alberto. Albeit sure to have a proper succession plan in place they had to face the tough realities that sometimes life may throw at us.

So, provided that looking out for hidden agendas and tackling them appropriately is vital to a successful process, some common reasons behind unsuccessful succession plans and how to prevent them can be discussed.

First and foremost there is a key difference between family succession planning and corporate succession planning. This distinction has to be kept in mind in the choice of consultant. To give an example of how important this distinction is, the GE succession process comes to mind. The process kicks-off with 64 candidates, is eventually reduced to 24, then further reduced to eight, until the final three candidates have to spend a whole year with the outgoing CEO who has the responsibility of giving his final recommendation to the Board. These final three candidates have to accept that in case they are not the chosen candidate, they must leave the organisation. This may seem draconian but is done to ensure a smooth handover. In any case the unsuccessful two would normally have quite a few options lined up. These approaches cannot work within the family context because parting ways with family members may not be possible, since these are legitimate heirs who would someday be vested with the legal rights and powers given to them by virtue of their shareholding. This can also be related in politics because one cannot dispose of those who are democratically elected.

Second, albeit any succession plan is to be documented and codified in order to cater for easy interpretation, the constitutive document must not be seen as an end result. On the contrary a succession plan is a concept in itself, to be ingrained in the company culture. As a legally trained professional I hereby bring the analogy of the constitution – the constitution is yes documented but in itself is a concept not a thing. Few people know that the English Constitution, which modelled many modern constitutions (including ours), is nowhere to be found in writing as a single constitutive document. I am saying this to send across a message that a family succession plan is a modus , a culture and not simply a document. The document serves for reference, interpretation and application.

Careful succession planning can avoid crisis situations that impact the ongoing operations of a business. Internal politics should be put aside and resistance to change should be neutralised by a two-way communication revolving around the common goal. There are times when non-family members may be a better fit for particular positions. What to do? Getting an external perspective to the table always eases the intrinsic challenges of designing a succession plan.

A typical pitfall, which I experience, is the expectation of the founders that the engagement of consultants should be enough to complete the three phases above, whereas the main elements of the plan should be the people involved themselves and not just the consultants. Shifting the attention to the consultants, unfortunately too many take the approach of handing over a deliverable but fall short in the hand-holding required for its implementation. The report in the directors’ office will not get the job done. The typical consequence of this approach is for the person in charge to start losing motivation and start seeing it more of an expense rather than a necessary investment. Consultants need to be seen as enablers and guidance but not the factotum of the succession plan.

The consultant’s role, just like in most other engagements, is not to take the decisions himself but to assist the key people into taking decisions. The reason behind the result of the survey I cite at the very beginning, is unconsciousness and inexperience. Throwing money at a succession plan in the form of external consultancy is not a guarantee of a successful outcome. The actual plan roll-out and implementation is what the founders should be immersing themselves in.

Business founders would not have experience or the learning curve in such an exercise, since succession planning is practically done once in a lifetime. The best starting point in such a context is starting by your own awareness. The initial awareness and willingness to implement a successful succession plan is usually the element which augurs well for the succession plan to work.

Instilling formality and professionalising the work environment are two crucial enabling factors of building a succession plan. Having well-structured communication channels and escalation paths are key. Eliminating the emotional and romantic variables from the equation, from experiences, make the transition a more seamless and frictionless one.

Founders should invest in themselves to tackle succession planning practically and pragmatically. Succession planning should be, at the right time in life, the way of life inside and around the SME.

The next column shall focus on the concept of lifelong learning and its commonly underestimated benefits

Dr Anthony Sammut is an advocate, business advisor and SME specialist

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What is succession planning? A key talent strategy for business

Succession planning helps businesses cultivate a pool of talented workers who are poised to take over leadership roles as the business grows, changes and develops.

succession planning grow nurture cultivate share hands diversity collaboration

What is succession planning?

Succession planning is a talent management process that builds a pool of trained workers who are ready to fill key roles when leaders and other key employees step down. Organizations with succession planning programs in place foster a talent-oriented culture by recruiting skilled workers and top talent. Once recruited, businesses focus on developing these workers’ skills, expertise and knowledge so they are prepared to take on leadership roles in the event of organizational growth, talent loss or management turnover.

A change in leadership can be sparked by more than a resignation — an employee might retire, get fired, get sick, take leave or quit without notice. Succession planning ensures there’s a strategy in place for someone to step in, get promoted and take over that person’s duties without a loss in productivity and morale.

However, the goal of succession planning isn’t to prepare one person to take over a specific role. That’s called replacement planning, which is different. Succession planning relies on a large pool of talented workers ranging from entry-level to senior leadership who are being prepared for key roles. These employees have the right skills, energy and leadership qualities that will benefit the company across a spectrum of roles, departments and seniority levels. Replacement planning is linear — you are preparing a worker to take over or replace specific senior management positions; succession planning is about cultivating a flexible, large selection of talent.

Succession planning process

The process of succession planning is unique to each company, but there are general guidelines that you can follow to help your business create a successful succession strategy.

Succession planning template

It’s important to create a template that outlines what succession planning will look like in your company. The goal is to create as seamless of a transition as possible and to avoid hurting morale and productivity. The template should reflect the specifics of your succession planning — whether you’re a business owner preparing for the day you pass the company onto someone else or an executive planning your future exit strategy. Some companies even publish their own templates online, which can help offer guidance if you’re struggling to create a template for your business.

Your template should at least include the following:

Succession planning best practices

Succession planning is a great way to build your next generation of IT leaders . Your succession plan should take into consideration current and future business challenges, critical skills, future skills, all core and technical competencies and a strong plan for career development. Succession planning involves multiple steps but there are four core objectives that you’ll need to build a strong succession planning strategy .

For more on succession planning best practices, see “ How to build the next generation of IT leaders ” and “ CIO succession planning in the digital age .”

Who benefits from succession planning?

Succession planning is as important in small organizations as it is in large organizations. For smaller companies, with less resources, smaller budgets and fewer employees, succession planning helps avoid disruptions in workflow. This is especially true for owner-operated businesses once the owner steps down or sells the company. In large organizations, succession planning is important because there’s a lot at stake and an unexpected loss can leave the business in chaos. With a complex organizational structure, there needs to be enough talent to go around so leadership and management changes can be addressed quickly.

Succession planning examples

At Apple, Steve Jobs founded Apple University to support succession planning by educating Apple employees and leaders to understand how he built the business and how to think like Steve Jobs. It’s highly secretive, but it’s designed to help keep consistency in the organization. Apple also demonstrated a commitment to succession planning when Tim Cook seamlessly took over as CEO after Jobs stepped down. Cook has since indicated that succession planning is still an important strategy for the organization, with a “deep bench” of successors poised to take over in the future.

IBM demonstrated its succession planning strategy in 2011, when Samuel J. Palmisano stepped down. The company’s first female CEO, Virginia Rometty, was ready to take over in his place. Rometty worked for IBM for over 30 years, so she already had a deep knowledge of the company culture and business operations. It allowed for an effortless transition, so the company could continue working to its full potential despite the organizational changes.

The future of succession planning

A key component of succession planning is talent development. For key players that are identified as potential candidates for succession planning, it will be important to figure out how to keep them engaged and motivated. Currently, it’s millennials who are coming up in the workforce and are largely the target of succession planning.

Millennials comprise 38 percent of the workforce, according to Gallup, and they’re poised to take over leadership roles as baby boomers start to retire. The report points out that if organizations fail to meet millennial’s needs, they’re more likely to “function as free agents, always looking for fresh opportunities.” The survey found that 60 percent of millennials in the U.S. workforce say they’re “currently looking for a new job opportunity.”

According to a report from Gallup, employees used to care about salary, satisfaction, having a good boss, annual reviews, their weaknesses and their job. But today, employees are focused more on having a purpose, developing their skills and working with mentors. Employees are also less focused on annual reviews, and more concerned with maintaining ongoing discussions about performance throughout the year. These workers are also interested in cultivating their strengths and finding a healthy work-life balance.

The good news is that millennials are eager to learn and grow under “high-quality management.” They want to feel interested in their work, with a sense of purpose, and they want to know they have opportunities to advance. Understanding your employees will make it easier to develop their talent in the modern workplace, so they’re prepared as future leaders.

Succession planning tools and software

Succession planning is a skill that requires business acumen, communication skills, leadership skills and other hard and soft skills. But there are tools and software designed to help make the process of succession planning easier on an organization. Talent management is critical to succession planning, so tools that help manage employee training and progress will give you more insight into how talent develops in the organization. Here are some popular succession planning tools and software:

Succession planning training and certification

Succession planning requires collaboration, buy-in and effort from leadership in the organization. It also requires working across departments to understand and fill talent gaps, and then communicating those to HR and recruiters. If you want to get a better understanding of succession planning and how it will fit into your business, here are some training and certification programs you can choose from:

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The show must go on: planning for succession.

ORLANDO, FLORIDA - SEPTEMBER 30: Bob Chapek, (L) Walt Disney Company CEO and Bob Iger, Executive ... [+] Chairman of Walt Disney Company speak during "The World's Most Magical Celebration" Walt Disney World Resort 50th Anniversary at Magic Kingdom on September 30, 2021 in Orlando, Florida. (Photo by Gerardo Mora/Getty Images)

The theater world clearly understands the importance of uninterrupted operations. There is usually an understudy in theater for most of the significant roles. It is the job of the understudy to be able to step into a role on short notice should one of the principal actors fall ill or be otherwise unable to perform their duties.

Regrettably, corporations and other business organizations still need to fully embrace the value of an understudy. In other words, so often, if a principal player, i.e., a CEO or CFO CFO , can no longer fulfill their duties (either voluntarily or involuntarily), no one is waiting in the wings to take over.

Succession planning is not an option for businesses that want to stay relevant and competitive. Succession planning is "the identification and development of future leaders within an organization." A lack of succession planning can lead to chaos and uncertainty at the top, which can quickly trickle down throughout the organization.

While some may view succession planning as a daunting task, its importance overrides any and all effort. Succession planning must begin with the belief that everyone has tenure and no one is irreplaceable.

Let’s take a look at succession planning at Disney. Bob Iger assumed the CEO role at Disney in 2005. He took over in what has been described as a “clearly delineated six-month interregnum where outgoing CEO Michael Eisner brought him up to speed.” 1 Fast forward to 2020, when Disney named Bob Chapek as CEO to replace Iger. Just about two years later, in June 2022, the Disney Board extended Chapek’s employment agreement by three years, and five months after that, in November 2022, they terminated him. Shortly thereafter, Iger returned to his CEO role.

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Part of this story that is no longer mentioned but bares noting is that Iger was originally set to retire in 2016 and had chosen then COO Tom Staggs as his likely successor. The board was not unequivocal in their support of Staggs, so Iger decided to stay on until 2021, and Staggs left Disney.

In this latest starring role at Disney, Iger has stated that he will stay no longer than two years. But we have heard this before. The fact of the matter is that no matter how long Iger intends to stay, he and the board should be diligently planning for his succession today and almost every day going forward. Yes, Iger is seen almost mystically at Disney, but he cannot and should not be the only person on the planet who can run the company.

One of the key and critical roles of the Board of Directors is succession planning. CEO succession planning is most important, of course, but having succession plans for other key leadership roles ensures uninterrupted operations when changes inevitably happen. At its core, this is a cost-effective and risk-mitigation strategy.

Lest we walk away thinking that Disney is unusual, on February 13 th , 2023, the Wall Street Journal reported that Chevron’s CVX Board of Directors is considering waiving the company’s mandatory retirement age (65) to allow CEO Mike Wirth to remain CEO. 2 The article stated that the company does not have an internal candidate ready to succeed Wirth. While I agree with the board’s idea that pushing out a well-performing CEO is unnecessary, it is also essential to have a succession plan in place and ready, no matter the circumstances.

A well-thought-through and planned strategy for uninterrupted leadership at the top of the (mouse!) house is the least that boards can offer their stakeholders. It takes time to cultivate and develop the skills and expertise necessary to guide an organization and to do justice to the process all options need to be considered. In an ideal world, the understudy is always ready and waiting to step into the spotlight so that the show can just go on.

1-https://www.axios.com/2022/11/22/disney-ceo-succession-iger-chapek-board

2-https://www.wsj.com/articles/chevron-weighs-extending-ceo-mike-wirth-past-mandatory-retirement-age-82cd233c

What Is Succession Planning and Why Is It Important?

Succession planning is the process of passing on the leadership of a company to others. Often, it involves training employees internally or recruiting qualified individuals from outside the organization.

Definition of Succession Planning

No one is guaranteed to stay with any given company forever. A business’s current executive leaders and owners may retire, move on to other opportunities, or pass away, leaving a void that needs to be filled.

Succession planning is a strategy that’s used by companies to make sure key leadership roles and general ownership of a company are taken care of after the current leadership moves on. It involves advance planning, recruitment, training, and other strategies.

Importance of Succession Planning

More and more old business owners are retiring, leaving many companies with high-level positions to fill. Succession planning aims to make sure those positions are filled immediately, and it affords businesses the following benefits.

Business Continuity

One of the primary reasons to perform succession planning is to make sure the business can transition from one set of hands to the next as smoothly as possible. To ease the transition, a business needs capable leaders already in a position to inherit key roles within the organization. It requires choosing the right candidates and making sure they’re properly trained.

When the right people are chosen and prepared, they can succeed the current leaders without disrupting the company.

Training A New Generation Of Leaders

Training from within the company is one way that succession planning takes place. By going through the process of choosing eligible candidates from within the organization and preparing them to perform leadership duties, the company transfers important skills to the next generation, effectively creating a new generation of capable leaders.

Maintain Or Improve Business Culture

When candidates are trained from within the business’s own organization, it goes a long way toward preserving the existing business culture the current leaders have worked so hard to build. Assuming the current culture is a positive one, that can be a very good thing.

On the other hand, recruiting from outside the company allows for the possibility of introducing new energy into the organization, potentially transforming the culture once leadership is passed on to them. If the current culture needs improvement, that could benefit the company as a whole.

Getting Started with Succession Planning

Naturally, succession planning begins with a plan. It should start as early as possible to make sure qualified candidates are ready to take over. That means:

In addition, the process of succession should be well established within the company. Heirs to the company should be named in advance, and any potential conflicts should be resolved.

Financial matters may also need to be accounted for. For instance, shareholders might all hold life insurance policies in case if one of them passes away. The policy allows others to purchase the deceased individual’s share in the company and carry on ownership without interruption.

Outside counsel is often necessary to make sure succession planning is handled in the most effective way possible. Legal assistance from a corporate attorney can help businesses plan for the future.

Original text

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:.

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:

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.

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University of Washington Human Resources

Professional & organizational development, succession planning.

Succession planning is the process of identifying the critical positions within your organization and developing action plans for individuals to assume those positions. Taking a holistic view of current and future goals, this type of preparation ensures that you have the right people in the right jobs today and in the years to come.

In the long term, succession planning strengthens the overall capability of the organization by:

A succession plan identifies future staffing needs and the people with the skills and potential to perform in these future roles. Professional & Organizational Development’s Succession Planning Toolkit will help guide you, though we strongly suggest you involve your assigned HR consultant and/or HR administrator in this process as well.

We’ve broken succession planning down into three phases with clear steps, and the Succession Planning Toolkit (PDF) comprises a series of worksheets that move you through the succession planning process. Within this document, you’ll find templates and tips for:

Assessment phase

Step 1: Identify significant business challenges in the next 1–5 years.

Step 2: Identify critical positions that will be needed to support business continuity.

Step 3: Identify competencies, skills, and institutional knowledge that are critical success factors.

Evaluation phase

Step 4: Consider high potential employees.

Step 5: Select the competencies individuals will need to be successful in positions and to meet identified business challenges.

Development phase

Step 6: Capture the knowledge that individuals possess before departing the organization.

Step 7: Develop a pool of talent to step into critical positions through targeted career development strategies.

Access and print the entire Succession Planning Toolkit (PDF) .

Buying and Selling a Business | Templates

Succession Planning Template & 5 Steps to Write a Succession Plan

WRITTEN BY: Robert Newcomer-Dyer

Published October 14, 2019

Robert has over 15 years of experience in sales leadership, finance, and business development. His expertise is highlighted throughout Fit Small Business in content around startup financing, business loans, and buying and selling a business .

A business succession plan includes step-by-step instructions that establish procedures in the event a business owner or key employee leaves the business. Our succession planning template helps business owners as they answer questions like who will take over the business, how long will it take, and what standard operating procedures need to be passed on.

There are five common steps involved in succession planning:

Download Succession Planning Template

Click below to download our succession plan template as a DOCX or PDF:

How Succession Planning Works

Succession planning is the set of events, timelines, and standard operating procedures that are established ahead of a change of ownership in a business. Business owners can create a succession plan in a number of ways, including by following this succession planning template, as well as by engaging a professional who’s well-versed in the process.

Who Should Create a Succession Plan?

Any business owner with a successful, thriving business should consider creating a succession plan. Often thought about in the context of retirement or sale of a business, a succession plan is also a critical tool in the event of untimely death or illness. A properly constructed succession plan acts like a will for your business, ensuring the best interests of the business are carried out.

When to Create a Succession Plan

Business owners wondering when to use this succession planning template to create a plan might wonder when they should get started. Much like a personal will, the answer depends on a variety of factors, but generally comes down to as soon as possible.

Creating a succession plan takes time and effort, and answering the questions accurately is not easy. For this reason, many business owners start planning for succession at least five to six years before a transition. Creating a succession plan should be considered as a contingency in case of death, illness, or other circumstance that creates an unexpected need for transition.

Succession Planning Resources

Finding help with succession planning may mean working with your current accounting firm (provided they have experience with helping to develop succession plans). The amount of help you need will likely scale up with the urgency of your succession planning needs, as well as the size and complexity of the business. Consider whether to bring in a temporary accounting and finance professional, or hire an accounting firm to assist you.

Some resources you can tap to help you with succession planning are:

As one of the accounting industry’s “Big Four,” PricewaterhouseCoopers (now doing business as PwC) is a firm with extensive experience in succession planning. The company’s self-described focus on small, privately held businesses minimizes the risk of becoming just another number and means it commonly deals with the sort of obstacles that you’ll encounter.

SCORE , the nation’s largest network providing small business mentoring, has developed a quick guide to succession planning. The real value is that small business owners can apply to be matched with mentors who offer their assistance on a volunteer basis. For business owners in need of simple succession planning help, this option is worth consideration.

Local Accountant

Small business owners may wish to consider working with a local accountant (provided that accountant is well versed in succession planning). Entrepreneurs who choose this route can ask around in their personal network, tap in to their local Chamber of Commerce or other local business support groups, or search for a certified public accountant in the directory provided by the American Institute of Certified Public Accountants.

The Five Steps to Writing a Succession Plan

Writing a succession plan can be a daunting task. Indeed, many business owners put it off because they’re not ready to tackle the complexities. We’ve narrowed the process down to five simple steps to direct you along the way, including choosing your successor and determining whether to sell your business using life insurance, an acquisition loan, or other methods.

The five common steps to preparing a business succession plan template are:

1. Timeline of Succession

There are two key types of succession plans: an exit succession plan and a death-or-accident succession plan. You may wish to write a death-or-accident succession plan well in advance of when you think you’ll need it to protect your business and successors in the event of unanticipated events. An exit succession plan should be written when you have a specific plan to transfer ownership of your small business.

The two most common types of succession plans are:

While an accident plan should be considered at any age, an exit succession plan should be written when you are within several years of retirement or wish to otherwise exit the business. When writing an exit succession plan, you should have a specific date that you would like to transfer the business, and indicate whether you will remain involved in the business post-succession or prefer a clean separation.

Template Tip

On the succession planning template, answer all the questions in section one. If you’re writing this succession plan to exit your business on a known date, fill out any remaining details, including how long you expect the transition to last.

2. Determining Your Successor

A highly important aspect of writing a succession plan is choosing who will take over the business. Many business owners plan to have a family member, such as a child, take over the business. Other common choices include a business partner or key employee in the business. And of course, an outside buyer is always a possibility.

Common successors business owners choose are:

Choosing a successor may be difficult, and requires considering what is in everyone’s—including the business’—best interest. While keeping the business in the family may seem like a clear choice, keep in mind that second generation businesses have a high failure rate. For this reason, many business owners choose instead to sell the business and provide a cash inheritance for their family.

Consider filling out profiles for at least three potential candidates. This will give you a good preliminary comparison of everybody’s skill and experience. Even if you’re already set on a candidate, you may wish to have a backup plan in the event the person leaves your business or doesn’t want to become an owner.

3. Formalize Your Standard Operating Procedures (SOPs)

As a small business owner, you should understand the importance of recording and formalizing day-to-day functions. Standard operating procedures should be documented for your managers and employees to reference, as well as any future owners of the business. Important items to document may include a daily checklist of opening and closing procedures, training for new employees, and a performance management system .

SOPs vary from business to business, but often include the following items:

Common Standard Operating Procedures

In our succession plan template, we’ve provided a checklist for these items—feel free to add or remove any, if necessary. Once you have completed an up-to-date document, attach it to your succession plan and check it off the list.

4. Value Your Business

Figuring out the value of your business should happen early—and regularly. It’s an unfortunate fact that many business owners tend to overvalue their enterprise, and these misjudgments can snowball into financial errors when planning for retirement.

There are several ways you can determine the value of your business, from using a simple business valuation calculator to provide a rough estimate, to following more advanced methods for how to value a business , as well as hiring a professional appraiser. You may also consider working with a company that offers business valuation services, such as BizEquity or Guidant Financial .

A good practice is to consider the lowest price the business should sell for. When the business is eventually listed for sale, it may take a long time to find a buyer who is willing to pay your asking price. The succession plan should provide stipulations regarding how long to wait before dropping the price, how much to lower the price, and the lowest acceptable offer.

5. Fund Your Succession Plan

Few buyers out there have enough liquid cash to pay for your business upfront. This is why every succession plan needs a specific plan for how the buyer will make the purchase, whether it’s a loan, installment payments, or other option. The last thing you want is to reach your retirement date, or triggering event, and find that your chosen successor has no way to afford your business.

This is also why your funding plan will often need a buy-sell agreement. This is a legal document in which your buyer agrees to a specific course of action (like taking out a loan or life insurance policy) in order to afford the purchase. Once you’ve settled on a specific method of funding, make sure you meet with a legal professional to draft your buy-sell contract.

Common Succession Plan Funding Options

Life insurance.

Most commonly used when a family member or co-owner is taking over the business, a life insurance policy can help your successor purchase the business from you or your heirs. Contrary to how it sounds, life insurance isn’t only used in the event of one’s untimely death. Permanent life insurance builds cash value that can be taken out at any time, so it can also be used in the event of retirement, disability, or any other triggering event.

Life insurance arrangements are common in family successions, especially when you may have multiple children, but only one is taking over the business. With your chosen successor as the beneficiary, a life insurance payout can enable them to purchase shares from your other children, thus leaving everyone with some compensation and financial security.

Acquisition Loan

An acquisition loan is money borrowed by the buyer in order to purchase the business. This is common when a key employee or outside party is taking over and they need some funding to afford the purchase. Buyers can typically get 70% to 80% of the purchase price financed from a bank or the Small Business Administration (SBA) —which is great news for sellers who want to be paid in full upfront.

Acquisition loans are secured against future profits of the business. While this makes them a generally reliable option, it also means a bit of work for the seller. Prior to the purchase, you’ll need to provide a lot of details about your business for the bank’s due diligence. Even then, however, the loan is not guaranteed. Pre-approval can provide some security, but it would need to be undergone regularly (every six to 12 months) up until the transfer date or triggering event.

Seller Financing

Seller financing is when the buyer pays you back gradually over time. This is one of the easiest and most flexible arrangements, as the business owner and buyer can set whatever terms they like. Most agreements involve a down payment of 10% or higher, followed by monthly or quarterly payments with interest until the purchase is paid for in full. Again, however, the exact terms can vary widely.

The key downside to seller financing is the time it takes to get paid back. Especially if you’re relying on the sale to fund your retirement, a 20-year term may be less than ideal. However, given the flexibility of seller financing, it can be possible to find an arrangement that works for everyone.

Business Succession Planning Tips From the Pros

We asked industry experts in succession planning to provide some tips for business owners thinking about creating a succession plan. Choosing the right successor is a critical step, as is ensuring that you have realistic expectations throughout the process. Many business owners also ask themselves whether they should consider creating a succession plan.

Some tips when creating a business succession plan are:

Groom Your Successor Ahead of Time

Ray mckenzie, founder & managing director at red beach advisors.

“A majority of businesses do not have a formal business succession plan and never anticipate it being needed.

“The most common mistake business owners make is they retain and keep information only for themselves. This can be signatory rights, passwords, access, or key phrases.

“Review your company succession plan every six months and every time a critical employee leaves the business.”

Keep Your Expectations Realistic

Ed alexander, esq., founder at alexander abramson pllc.

“The biggest mistake small business owners make in their succession plans (aside from not having one) is having unrealistic expectations.

“First, business owners regularly have an unrealistic conception of what their business is worth. It’s their baby, and they have an emotional connection to it, but this connection can’t be laid out in a profit and loss statement.

“Second, Family Business Institute data has shown that 88% of small business owners believe that transferring the business to their children is a viable succession option. The reality is that only 30% of small businesses will pass to a second generation, and only 12% to a third generation.”

Patrick Hicks succession planning template - Tips from the Pros

Consider the Risk of No Succession Planning

Patrick hicks, head of legal for trust & will.

“Having a business succession plan becomes more important if your business has valuable assets or has employees. If you operate your own business with just yourself and no business assets, the downsides of having no plan may be smaller.

“If you have employees, consider who will be able to make payments to those employees and who will carry on operations after your death.

“Machinery, equipment, materials, intellectual property, and customer lists can all be valuable assets—the brand and reputation associated with your business—that can all disappear if you don’t have a plan in place to deal with those assets.”

One of the most common mistakes business owners make in succession planning is failing to review their plan regularly. Time changes many things, and in order for your succession plan to be effective, it needs to be reviewed regularly and updated to reflect any changes. These could be company changes, tax law updates, changes in valuation, or new industry developments, among other things.

For family-owned businesses, you’ll also need to consider aspects such as changing family dynamics—do all members have the same desire regarding what to do in the future, or are all key players still with the business? It’s essential that business owners update and adjust their business plan to reflect changes such as these.

Bottom Line

Often, the most difficult part of succession planning is answering difficult questions. What unexpected events should you prepare for? Who will take over your business? How will you compensate yourself, your spouse, or your children? You can answer these questions with the help of our succession planning template. You may also wish to engage legal or financial experts with experience in succession planning.

About the Author

Find Robert On LinkedIn

Robert Newcomer-Dyer

Robert has over 15 years of experience in sales leadership, finance, and business development. He recently spent six years leading a team of small business financing professionals, facilitating the deployment of critical capital to over 9,000 small businesses across the US.

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Succession planning is a vital part of ensuring the smooth transition of leadership and the continued success of a business. In this blog, we will provide an overview of succession planning so you can see why this is necessary for your family business.

What is succession planning.

Succession planning is the process of identifying and preparing the next generation of individuals who may take over key positions within a family business. The goal of this planning is to ensure a smooth transition between those involved in the business while the day-to-day continues, and maintain the original motive of the family business.

WHY IS SUCCESSION PLANNING IMPORTANT?

Ensuring business continuity: Succession planning ensures the smooth transition of leadership while maintaining the day-to-day operations of the business, even when key team members leave.

Preparing future generations: Not only does planning identify and prepare the next generation of individuals for their upcoming roles, but it also ensures the wishes of the business owners are kept in the future.

Protecting reputation and minimizing risk: A well-planned succession process protects your business's reputation by showing a commitment to the future, as well as reducing future risk if integral team members leave.

Supporting succession planning: Planning helps family businesses allocate resources and assets effectively, and builds a more resilient and adaptable workforce that helps the business to grow.

HOW TO START SUCCESSION PLANNING

For such an important part of your business's future, you want to make sure you have everything in place correctly. A trusted advisor will not use a one-size-fits-all template for your succession planning but will get to know your business, understand the dynamics of all the individuals involved, and create a plan with the business's future success as the goal.

This takes investment on the current leader's behalf by attending meetings with your trusted advisor, so they can assist fully. Homestead Agribusiness is here to be invested in planning and securing your business's future.

If you would like to begin your essential succession planning journey, give us a call today on 07 4632 5777 .

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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.

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:

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:

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:

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:

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:

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:

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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Succession Planning

Recruiting, developing and training employees to fill key senior roles within a company

What is Succession Planning?

Succession planning refers to the process in which employees are recruited and developed with the aim of filling a key role within an organization . It increases the availability of experienced and competent employees who are prepared to replace old leaders as they leave, retire, or die. The preparation for the employee to take over leadership involves a transfer to a specific department or job and on-the-job-shadowing to give the employee an opportunity to learn and observe the role being carried out.

Succession planning ensures that there is no leadership vacuum after the retirement or exit of a senior officer in the organization. In the case of a family business , it ensures that the business continues to run even after the exit or death of important persons in the business.

The process starts by looking at the exiting leader’s skills and finding potential replacements from within or outside the organization. If there is a perfect fit internally, the employees then undergo training so that they can oversee the roles performed by the leader. In most cases, they work closely with the person as a way of learning how to carry out the various functions with ease. In large companies, succession planning is an ongoing event in anticipation of changes in leadership.

Some organizations even put in place an emergency succession plan to allow for a smooth transition when a leader expectedly resigns, is incapacitated, or dies. A long-term succession plan guarantees an organization that there are employees waiting and ready to take over key management roles.

Processes and Practices

The succession planning process continues to gain popularity among companies in recent years, with North American and European firms taking the lead. In major companies such as Nike and IBM, succession planning is identified as part of an ongoing talent management program to groom future executives. In addition to annual performance evaluations, senior executives engage in a series of discussions about employees who’ve shown readiness to take on more significant roles, especially when there are anticipated vacancies. The top management prepares a list of candidates based on their potential and readiness for future job opportunities to make it easy to fill in gaps as they arise.

Candidates identified to fill future vacancies undergo assessments to measure their ability to manage complex management operations. Although there is no standard formula to conduct the assessment, senior leaders use various tools to analyze the individual capability of the candidates. Such tools may include simulation, cognitive testing, team-based interviewing, and personality testing.

Elliot Jaques, a Canadian psychoanalyst and organizational psychologist, suggested that the assessments should be narrowed to only focus on critical differentiators of future performance. According to researchers, the most effective practices for evaluations are those that involve multiple raters and methods. Performance calibration meetings involving more senior leaders provide an opportunity to discuss succession at greater levels of depth. The meetings provide an avenue for top business leaders to discuss talent information and reach agreement on performance appraisal ratings.

Organizations are now moving away from the once-confidential process of hand-picking successors to a more transparent process of identifying high-performance leaders and preparing them for top leadership positions. Succession planning helps reduce cross-training that involves preparing employees to perform specific functions temporarily when key officers resign.

In cross-training, the employee’s role is to keep the company’s mission on track until a suitable replacement is found. Cross-training is not as effective as succession planning since the latter involves getting a fully trained employee to take over the role of the former occupant of the position. Also, an effective succession planning strategy will help boost employees’ self-esteem and self-respect.

Importance of Succession Planning

Succession planning offers the following benefits:

1. Helps identify future leaders

Succession planning can help identify employees with unique abilities and skills that can help them move up to higher executive roles. The process of succession planning can also help identify an employee’s weak areas and where talent training could help to improve performance outcomes.

Replacements who come from within the organization understand its operations inside out and are better placed to undertake specific executive roles, especially in firms where knowledge is specific. The need for available replacements when making changes to the organizational structure allows senior management to make changes without being affected by a lack of qualified personnel.

2. Minimizes recruitment costs

Since succession planning takes replacements from within the organization, the organization can save on costs that would otherwise go to external recruitment. Companies spend millions of dollars annually on hiring reputable HR firms to find suitable external candidates.

The cost of hiring a senior officer can be significantly higher than when sourcing potential candidates from within the organization. Moreover, it is more advantageous and cheaper for the organization to get an employee to work alongside a retiring senior executive before the knowledge escapes the organization.

3. Helps identify and address competency gaps

An organization can identify competency gaps among its employees through strategic succession planning. The competency gap is the distinction between the current competency level of the employees and the required competency level. The gaps may be due to lack of employees with the requisite skills, current needs for key executive positions, or key competencies that may be needed in the future. The gaps will guide the organization in structuring the training or talent management programs to make sure that the employees are equipped with the required skills to perform more demanding functions.

4. Keeps company buoyant

Any change can make or break an organization, depending on how the management handles it. With the exit of a key member of the top management, a company should find a replacement who can perform duties better than the previous officer.

If there is no perfect match for the position, the company may experience challenges that, if not addressed early enough, can potentially lead to its downfall. If done the right way, it can inspire employees to be involved in critical decision-making functions. Employees can also maintain loyalty to their employer since succession planning prepares them for career progression.

Other Resources

CFI is the official provider of the global Financial Modeling & Valuation Analyst (FMVA)™ certification program, designed to help anyone become a world-class financial analyst. To keep learning and advancing your career, the additional CFI resources below will be useful:

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What Is Succession Planning? Exploring this Element of HR Management

By Ashley Brooks on 12/07/2020

illustration of a organization chart with one professional helping another up

You’re no stranger to the inner workings of the human resources department. You’re well aware that HR is about more than processing payroll and hiring new recruits—especially when you reach the management level.

With your HR experience, you’re thinking it might be time to take the next step up the career ladder. But there are still a few details about upper-level HR tasks that you’d like to get a better handle on. Succession planning is one of them.

What is succession planning? It boils down to making sure that there’s a plan for filling vacant positions that are key to your company’s operations. It sounds simple on paper, but in practice, things can get a bit more complicated.

We reached out to HR professionals and business owners to gain their insights on the importance of succession planning and the steps that can make it a success.

What is succession planning?

Succession planning at its heart is simply preparing for the future so that your organization doesn’t experience any hiccups when important team members leave the company. No one stays in the same job forever. Whether an employee leaves due to retirement, another opportunity or an unexpected illness, it’s important to be prepared to fill those positions rather than scrambling when the inevitable happens.

“It is ultimately planning for your future self and what you want for your organization and your team,” says Shannon Walker, founder and president of WhistleBlower Security . She adds that many companies, especially small businesses, are “so busy running their day-to-day operations that they don't think about what three or five years down the road looks like for their company.”

There are two sides to succession planning: identifying roles and skillsets that require a plan, and finding and training the right employees who are already in your organization. “What it really breaks down to is improving or creating talent-management opportunities. You're securing your talent pipeline,” says Ty Stewart, president and CEO of Simple Life Insure .

This talent pipeline can lead to seamless transitions when the time comes for one employee to leave and another to step into their place. Rather than facing a stressful period of uncertainty, your HR team can calmly enact the succession plan you’ve had in the making for years.

The importance of succession planning

Succession planning may seem like a luxury rather than a necessity. Sure, it would be nice to fill a vacant VP of sales role immediately, but does it really matter if it takes some time to find the right person? In short, yes, it does.

Losing key team members can mean that other employees experience a lack of direction and momentum. The affected departments may begin to flounder and see decreased productivity. Other team members could even begin to wonder if it’s time for them to look for a new job elsewhere—so don’t ignore the potential negative ripple effects of lacking a solid plan.

“This planning is critical to supporting smooth operations, managing labor budgets and keeping morale high,” says Michael Alexis, CEO of TeamBuilding . “Failing to succession plan can result in a swift departure or loss of engagement for other team members.”

However, just because succession planning is important doesn’t mean every organization gives it the attention it deserves. “Succession planning is often an overlooked but critical function within the HR department,” Walker says. “Learning about best practices and assessing business needs are key aspects of what any HR specialist should strive for.”

If your organization needs to up its game in this area, the following best practices are here to help you get started.

Best practices for succession planning

Succession planning will look different for every organization depending on its unique needs as a company, but these expert best practices hold true across most situations.

Gain a strong understanding of the roles involved

You can’t just look at a job title and assume you know all the responsibilities an employee has taken on. Talk to employees to get a good sense of what their jobs actually entail. “In some cases, a team member may have unique skills that allow them to perform multiple roles within [one job title],” Alexis says. In this case, you may be looking for more than one person to fill their shoes someday. “Knowing the specific team members and their strengths and competencies will support this.”

Facilitate mentorships

What better way to build talent and expertise in lower-level employees than by asking more experienced professionals to share their resources and knowledge? “We know from HR industry research that employees who participate in one mentor-mentee relationship are almost 15 percent likelier to be retained year after year over non-mentored colleagues,” Stewart says. Those retained employees will be well positioned to step into the roles of their predecessors down the road.

Adopt an entrepreneurial mindset

Entrepreneurs are constantly looking toward the future, anticipating change so they can be ahead of the curve. This is exactly the type of forward-thinking mindset you’ll need to adopt when succession planning, according to Alexis. Five years down the road, your company and your industry could look very different than they do today. Being aware of these developments will help you prioritize the skillsets various roles will need in the future.

Common mistakes to avoid when succession planning

Just as there are best practices followed by successful HR professionals, there are also common mistakes to avoid when succession planning. Stay away from these pitfalls to make sure your succession plans run smoothly.

Don’t create a succession plan for every role in the company

It’s a waste of your time and energy to worry about a succession plan for every job in your organization. Rather than planning for roles that are easy to fill, focus on the key players in your company. High-level executives are an obvious choice, but don’t forget about the beloved manager who keeps morale high or the specialist who seems to have irreplaceable knowledge.

Don’t expect immediate results

It’s always satisfying to see the results of your hard work next week—but that’s not how it works in succession planning. You may have years of planning ahead of you before you get to see your work succeed. “The fruits of your succession-planning labor happen at exit time,” Stewart says. “You have to realize this is playing the long game, not something you can set up and measure effectively in a year or two.”

Don’t ignore succession planning

By far the biggest mistake an organization can make is choosing not to prioritize succession planning. It can take years to fully create and implement a strong succession plan, and the future is coming closer every day. Don’t wait to start planning until it’s too late!

Is succession planning in your HR future?

Now you can cross “What is succession planning?” off your list of HR career questions and move on to planning your own future.

You can see the importance of this HR management role. Get the game plan for moving forward in your own HR career with our article, Navigating Your HR Career Path: Expert Advice on How to Advance .

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Ashley Brooks

Ashley is a freelance writer for Collegis education who writes student-focused articles on behalf of Rasmussen University. She believes in the power of words and knowledge and enjoys using both to encourage others on their learning journeys

Posted in Human Resources and Organizational Leadership

Own your future: Answers to some of the toughest succession planning questions

A candid discussion about planning for and going through farm transitions by a panel at a recent conference..

Succession planning is about owning your future and controlling your farm’s destiny. While nobody likes to think about what will happen when they’re gone, it is a necessity for dairy farm families that manage multi-generational family businesses.

Communications and Marketing Manager / Center for Dairy Excellence

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In a recent panel discussion at the “Own Your Future Forum” hosted by the Professional Dairy Managers of Pennsylvania (PDMP) and Center for Dairy Excellence, five panelists from all sectors of the industry had a candid conversation about taking control of the future.

The panel included Jennifer Voss from The Voss Group, a business and family management consultant with nearly 20 years of business management experience; Mike Hosterman of Horizon Farm Credit, a seasoned ag business consultant who works with farms across Pennsylvania; Mike Peachey of Acuity Advisors and CPAs, who has decades of experience helping agribusinesses as an unbiased third party; Tony Brubaker of Brubaker Farms in Lancaster County, Pennsylvania, who has been a receiver of the farm from his parents – along with his brother – and is now looking to structure a partnership for the fourth generation returning to the farm; and Lucas Waybright, a former next-generation farmer who – after attempting to find a partnership path within his family’s dairy business – now leads the Dairy Grazing Project at Pasa Sustainable Agriculture and is certified to help other farm families with succession planning.

Together, the panelists tackled some of the most challenging and frequently asked questions about starting difficult conversations and building succession plans that benefit everyone.

How do you start that initial conversation between generations?

When it comes to conversations about sensitive topics, Voss reminded dairy farm families that it is a two-way street between generations.

“If you’re the current generation, you have to open yourself up to talking to the next generation about their future. Give them line of sight to what might be out there, and address their concerns,” Voss said. “You’ve made a livelihood and accumulated assets. The next generation wants the same opportunity, and they need to figure out how to do it within the structure you’ve built.”

For the next generation, Voss also reinforced the importance of taking ownership of their growth and professional development.

“You can’t sit there and wait for someone to hand you these things. Articulate your goals and interest [to the older generation] about where you want to go,” Voss added. “What skills are missing? What are the things you don’t know? Own your own growth and development for the future.”

To have respectful communication between each generation, Voss shared these questions as conversation starters:

Generation One: What do you hope happens to the farm when you’re no longer running it? Is farm continuity important to you? What will your retirement lifestyle be?

Generation Two: What skills do you need to learn to be successful? What is your desired role and responsibility? Do you need to own the farm, or would you be excited to be influential in changing the direction of the farm and creating wealth for your family?

When navigating these conversations about the future and what different partnerships might look like, Voss shared the qualities that each generation should value and appreciate in one another. Generation One has accumulated land, cattle and equipment. Possibly even more important than those assets, they also have deep-rooted relationships and years of experience. They have systems and processes and bring tremendous value.

For Generation Two, they want to take the business to the next level, so they bring drive, hard work, commitment and passion. They are a fresh set of eyes and a new, extremely valuable perspective.

Why should I make a plan if don’t have a successor?

Many dairy farmers wonder why they should prioritize succession planning if they don’t have an heir or successor. Peachey led the conversation by challenging that way of thinking.

“How do you know you don’t have a successor? Maybe there’s not a next generation, but your business will continue to someone. Maybe that’s a neighbor, or maybe that’s a buyer,” Peachey explained. “One of the things you could be doing is preparing your business to make it more attractive to sell if there isn’t an inside sale that will occur.”

“What if something happens to you tomorrow? Where do you want your wealth to go? To your kids or a charity? You still need that plan even if you don’t have heirs. It’s never too late to start, but starting early makes it easier,” Hosterman added during the discussion.

Once a succession plan is developed, it must be tailored and adapted over time to match changing laws, evolving interests or new partners.

Why focus on estate planning if I’m going to be dead?

According to Voss and the other advisors on the panel, estate planning is about ensuring harmony and taking responsibility for your assets and estate.

“Estate planning is for the living – whoever is going to be left behind to deal with your estate. We’re talking about trying to leave behind a responsible legacy,” Voss explained.

Estate planning can help prevent future disagreements between family members and keep harmony intact. Voss says it’s about more than avoiding taxes. It involves protecting against other risks and undue financial pressure such as long-term care, divorce or other liabilities. The panel broke down estate planning into the following components:

A trusted advisory team can help you develop goals in these areas and create an integrated plan, between your business and finances, to ensure your estate plan is fair to everyone involved.

“Having a team of people is important, but you need to trust them. You need to have a relationship with them and feel good about what they do. They need to respect you and dig into your goals,” Hosterman added.

What does an advisory team actually do?

A facilitator is one of the key members of an advisory team and can help manage the “emotional balance sheet.” This often involves talking to every family member independently to hear their unfiltered expectations, emotions and goals, so they can then try to bridge those gaps.

“Everyone has expectations. How much alignment or discord is there between everyone’s goals? Are those expectations well communicated? If not, we will get disappointed. The challenge is, how do you fill the gaps with good communication, dialogue, and discussion to work toward reconciliation and solutions, rather than disappointment?”, Peachey shared during the discussion.

Brubaker, Peachey and Waybright reflected on their personal experiences as dairy producers with different areas of advisory teams.

Find a team with similar values.

Brubaker said, "We were very haphazard [with our planning] up until 2013. In 2013, we realized my parents were in their 70s and we needed to finalize some things. Once we worked through our initial plan, we needed to identify an attorney we could grow with. Someone who had similar values to us and could understand where we were coming from."

Understand the importance of financial and retirement planning.

"In 2020, when my nephew bought into the partnership, we realized we should start thinking about retirement. Can the business afford to retire two partners [me and my brother]? We brought in financial planners during that process and added a third leg to the stool," Brubaker said.

Peachey added, "We worked with the Brubakers to help find ways to help build cash flow to be able to fund the expected increase in cost of production to prepare for their expected retirement payments."

Invite the next generation into advisory meetings and financial discussions.

Waybright said, "I was at the table for those financial discussions. There really wasn’t any sort of veil. I didn’t have a vote or a say, which was fair. It was more about learning how the family and business made decisions, both right and wrong. I don’t think there’s any help in holding information back once there’s a level of commitment and dedication to the business. From my experience, I thought it was good and I’m glad I had full access."

"We had a heavy reinvestment strategy in our business for many years. It was just three to four years ago that we started realizing we needed to create some financial autonomy for my brother and I from the business. The business doesn’t have to fund us if we decide we can’t or don’t want to work. In the process, we started my nephew on a similar plan. Why not start each generation with a plan so [future business] decisions don’t have to be dependent on paying for retirement?" Brubaker added.

Working as a team to have candid conversations can help each generation have a clear picture – and take ownership – of what their future could look like.

“If we want to encourage the next generation to come back to the business, we have to show those numbers early. They’re looking for equity growth and they want to see their future. The earlier we can share that, the earlier they can see what the business can do,” Hosterman said.

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Do I Need a Succession Plan for My Business?

What is business succession planning and do you need it.

In business, succession planning refers to planning for and creating processes to support the eventual transition of leadership roles or business ownership from one person or group of people to another. Depending on the situation, business succession planning might be part of someone’s estate planning .

Keep reading to find out more about business succession planning, why you need it, and how Barilari & Williams, LLP, can help.

Corporate or Organizational Succession Planning

Organizational succession planning occurs when corporations or other business entities do the work to identify critical positions and ensure there is a talent pipeline to feed them. This helps to ensure that no critical position sits unfilled, potentially holding up other processes and growth. An example would be cultivating leadership staff so that someone is ready to step seamlessly into the role of CEO if the current CEO retires.

While succession planning is often aimed at leadership positions, companies must also consider other critical roles. At any level of the organization, for instance, it’s important to ensure there are plans to keep any technical roles that require specific skills filled. An app-development business relies heavily on developers and coders, for example. Without those skill sets, the business wouldn’t have new products. So these technical jobs—at all levels—must be considered when creating an organizational succession plan.

Succession Planning for Business Ownership

For business owners, succession planning also includes thinking about who will manage or own the business after them. For example, someone who worked to start a local bakery may want to pass that business on to their children when they die. Or, an individual who built up a regional chain of mechanic shops may want to allow an adult child to manage that business and eventually inherit it. In a third example, someone who owns a controlling interest in a business may want to pass on those shares to their heir in the future.

These are all times when estate planning and succession planning might go hand-in-hand.

For example, did you know that in some cases, you can put businesses or business assets in a trust to help facilitate succession? You can create a living trust and transfer the ownership of the business into that trust . This allows the business to pass to the successor you choose without going through probate. As an added bonus, trusts help keep details about the business’s assets and financials private—that doesn’t happen if the business ends up in probate.

There are other options for passing on ownership of a business. You might consider gifting the business to someone during your lifetime or setting up a partnership to facilitate the transfer. Working with an estate planning attorney who is experienced in helping with business succession planning helps you understand what options might be right for your situation.

Benefits of Succession Planning

Whether you’re thinking ahead about corporate succession planning for scalability, creating plans in light of potential future M&A activity, or working to keep your business in the family, succession planning has a lot of benefits when it’s handled correctly. Some important benefits of succession planning include:

Common goals of succession planning include avoiding disruptions for employees and customers, ensuring seamless operation of the business through any transition, and protecting the interests of those you want to own or run the business after you.

Do You Need a Lawyer for Business Succession Planning?

Depending on your goals for business succession planning, an experienced business or estate lawyer can provide a lot of value to the process. Here are just three ways an attorney can help with business succession planning:

If you want to protect your business or other assets now and during transfer to heirs in the future, contact Barilari & Williams, LLP, to find out more about how we can help.

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How to Create a Business Succession Plan

For many small business owners, maintaining positive cash flow and a stable balance sheet can be an ongoing battle that consumes virtually all of their time. Even retirement often seems like a distant speck on the horizon, let alone plans to hand over the business. However, establishing a sound business succession plan is beneficial for most business owners and can be absolutely necessary for some.

For business owners that are at or near retirement, the issue of succession cannot be ignored. In this article, we will take you through the steps you'll want to take to create a successful succession plan.

Picking a Successor Isn't Easy

Many factors determine whether a succession plan is necessary, and sometimes the logical and easy choice will be to sell the business lock, stock, and barrel simply. However, many owners prefer the thought of their businesses continuing on even after they're gone.

Choosing a successor can be as easy as appointing a family member or assistant to take the owner's place. However, there may be several partners or family members from which the owner will have to choose — each with a number of strengths and weaknesses to be considered. In this case, a lasting resentment by those who were not chosen may happen, regardless of what choice is ultimately made. Partners who do not need or want a successor may simply sell their portion of the business to the other partners of the business in a buy-sell agreement .

How Much Is the Business Worth?

When business owners decide to cash-out (or if death makes the decision for them), a set dollar value for the business needs to be determined, or at least the exiting share of it. This can be done either through an appraisal by a certified public accountant (CPA) or by an arbitrary agreement between all partners involved. If the portion of the company consists solely of shares of publicly-traded stock, then the valuation of the owner's interest will be determined by the stock's current market value.

Life Insurance: The Standard Transfer Vehicle

Once a set dollar value has been determined, life insurance is purchased on all partners in the business. In the event that a partner passes on before ending his relationship with their partners, the death benefit proceeds will then be used to buy out the deceased partner's share of the business and distribute it equally among the remaining partners.

There are two basic arrangements used for this. They are known as "cross-purchase agreements" and "entity-purchase agreements." While both ultimately serve the same purpose, they are used in different situations.

Cross-Purchase Agreements

These agreements are structured so that each partner buys and owns a policy on each of the other partners in the business. Each partner functions as both owner and beneficiary on the same policy, with each other partner being the insured. Therefore, when one partner dies, the face value of each policy on the deceased partner is paid out to the remaining partners, who will then use the policy proceeds to buy the deceased partner's share of the business at a previously agreed-upon price.

As an example, imagine that there are three partners who each own equal shares of a business worth $3 million, so each partner's share is valued at $1 million. The partners want to ensure that the business is passed on smoothly if one of them dies, so they enter into a cross-purchase agreement. The agreement requires that each partner take out a $500,000 policy on each of the other two partners. This way, when one of the partners dies, the other two partners will each be paid $500,000, which they must use to buy out the deceased partner's share of the business.

Entity-Purchase Agreements

The obvious limitation here is that, for a business with a large number of partners (five to ten partners or more), it becomes impractical for each partner to maintain separate policies on each of the others. There can also be substantial inequity between partners in terms of underwriting and, as a result, the cost of each policy.

There can even be problems when there are only two partners. Let's say one partner is 35 years old, and the other is 60 years old — there will be a huge disparity between the respective costs of the policies. In this instance, an entity-purchase agreement is often used instead.

The entity-purchase arrangement is much less complicated. In this type of agreement, the business itself purchases a single policy on each partner and becomes both the policy owner and beneficiary. Upon the death of any partner or owner, the business will use the policy proceeds to purchase the deceased person's share of the business accordingly. The cost of each policy is generally deductible for the business, and the business also "eats" all costs and underwrites the equity between partners.

3 Reasons to Have a Business Succession Plan

Creating and implementing a sound succession plan will provide several benefits to owners and partners:

The Bottom Line

Proper business succession planning requires careful preparation. Business owners seeking a smooth and equitable transition of their interests should seek a competent, experienced advisor to assist them in this business decision.

American Bar Association. " Forms of Stock Purchase Agreements ," Page 1.

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Tech Mahindra reorganising platform business under one brand
"Tech Mahindra has a very strong leadership. CP Gurnani being there or leaving - is a planned departure. We announced it in May 2022 and in due course of time the succession will happen. It is a planned succession and is being done very diligently," he said.
How to Create a Business Succession Plan
A succession plan can greatly help in establishing a timely settlement of the deceased's estate. The Bottom Line Proper business succession planning requires careful preparation. Business...