As a business owner, succession planning is the key to ensuring that your business will prosper well beyond your years and that your family will enjoy the fruits of your labor. Unfortunately, far too many privately held business owners do not start planning for succession until they are on the verge of exiting their business. Planning early and strategically will lead to a successful transition of the business.
Here are ten steps every business owner should consider to ensure that your business and livelihood endures after you formally leave your company.
The first step in developing a successful succession plan is to begin early, long before the need arises. Business owners face daily challenges that continually rise to the top of their to-do lists. As these immediate issues take priority over longer-term strategic matters, succession planning often falls much further down the list and is generally not addressed until there is an urgent need. It is never too early to develop, and continue to update annually, the succession plan of the company.
One of the keys to a sound succession plan is also the key to maintaining a viable and profitable company that will withstand the peaks and valleys that every business encounters from time to time. Developing and maintaining an internal framework that defines the values of the company is imperative to the health of every successful business. This framework guides the company’s employees in living the values that it sets forth. While succession is rarely easy within any business, having a strong framework in place will make your transition plan far more likely to succeed.
While each company is unique, the challenges involved in establishing a successful succession plan remain the same. Formulating a plan, long before it is needed, is a positive first step in the right direction. Here are ten steps every business owner should consider to ensure that your business and livelihood endures after you formally leave your company.
Much like creating a strong internal framework, defining the roles for key employees is a characteristic of both a strong company and a smooth succession plan. When key employees clearly understand their responsibilities and roles, there is less probability of internal conflict and discord. Creating a symbiotic workplace, where employees benefit and learn from one another, leads to a strong foundation for a company during times of change.
As a business owner, you may only navigate through a succession plan once. However, your CPAs, attorneys, wealth managers, and other trusted business advisors have years of experience wrestling with the various challenges that come with succession planning. Seeking their advice early in the process will save you valuable time, which can then be used to run the day-to-day operations of your company. An experienced advisor will steer you away from the pitfalls commonly encountered in forming the plan.
The most difficult part for any business owner during the succession planning process is envisioning someone else leading your company for the next generation. Identifying a qualified internal successor requires time and a strategic approach. Unfortunately, many business owners are not fortunate enough to have a qualified internal candidate ready to take the reins. If this is the case, you must choose one of two paths: You can begin to train and groom an internal candidate, or you can initiate a search for an external option. No matter the path you decide to follow, finding the next qualified successor is the paramount hurdle of the plan.
Many business owners divest of their ownership as the company transitions to the new leadership. Gaining a clear understanding of the value of the business will enable you to properly determine when the time is right to begin that transition. Establishing the value of the company with the new successor will also ensure that the plan will work for both parties.
Many closely held, private companies are owned by unrelated individuals, who would not want their respective partners’ spouses or other family members involved in the business if they were to fall ill or pass away. By creating buy/sell agreements between the owners, an internal succession plan can be successful for both the remaining owners as well as the exiting owner and their family. Buy/sell agreements, coupled with life insurance policies on each partner, ensure that the framework is in place in the event of a disability, illness, or death of a partner.
All successful transition plans require the endorsement of the remaining C level employees. These key employees will be the lasting ambassadors of the company upon the exit of the former leader. Without the buy-in by these key employees, the plan will face an uphill battle to find eventual success.
Creating a realistic timeline for an eventual succession and subsequent transition will pave the path for the next era of the company. For example, if you envision completely transitioning out from your company within seven years, and allow for a two-year transition period, it creates a tangible timeline for all parties to work with. On the other hand, if a you have anointed a successor but there is no clear timeline for his or her own transition, there can be confusion and angst for not only the successor, but for the company as a whole.
A final key step, which is often forgotten, is the communication of the succession to all the stakeholders of your company. Developing and delivering a unified message to your company’s employees, customers, vendors and local community is imperative to all parties involved. If the communication is executed and delivered correctly, it can set up the transition for success from day one.
While each company is unique, the challenges involved in establishing a successful succession plan remain the same. Formulating a plan, long before it is needed, is a positive first step in the right direction. Incorporating the remaining steps as the business grows and matures will safeguard your company as well as you and your family for years to come.