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Business succession planning: Ensuring a smooth transition for your company

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As a business owner, you invest energy, time and resources into building your company. In order to meet challenges as they arise, you likely focus your planning and decision-making on this month, this week and this morning, rather than looking years down the line.

However, it’s essential for every business owner to consider the future transition of the business to the next generation of leadership. This process, known as business succession planning, is the proven path for ensuring the continuity, growth and long-term success of your enterprise.

In this article, we will share why having a business succession plan is so important and explore the fundamentals of the succession planning process.

The Significance of Business Succession Planning

An outside observer might believe that succession planning for a family-owned or other closely-held enterprise must be simple. In reality, there are few business problems that can be as complex as the need to balance the practical demands of the company and its employees with the deep needs, connections and emotions of the family.

For founders who care about both their company and their family, succession planning helps business owners develop solutions that accommodate all stakeholders. Despite this, in an August 2021 survey conducted by the Society for Human Resource Management, 56 percent of the 580 SHRM members interviewed said their organization did not have a succession plan in place. Twenty-four percent reported having an informal plan, and only 21 percent said their organization had a formal succession plan.

In order to develop business solutions through succession planning, business owners need a clear picture of what they hope to accomplish through the business succession planning process. As with any other aspect of business, succession planning begins with setting strategic goals.

Strategic Objectives of Succession Planning

“Why do I need succession planning? I’m very alert. I have no intention to retire.”

– Billionaire Sheldon Adelson in an interview just before his death in 2021.

An owner who does not care what comes after his or her departure can ignore succession planning. However, most business owners love the families they have raised and the companies they have built, and that translates into wanting the best possible outcomes for the next generation.

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Five Core Objectives

To achieve a smooth transition for loved ones, employees and stakeholders, an effective business succession plan should include five core objectives for succession planning strategy:

  • Ensure Continuity and Stability
  • Preserve Vision and Values
  • Develop Team Talent
  • Provide Liquidity
  • Mitigate Risk

Let’s take a closer look at each of these strategic objectives and explain their importance to the development of an effective plan.

Ensure Continuity and Stability

The most important strategic objective of succession planning is a smooth transition of leadership in order to prevent interrupted business operations. By designating and readying potential successors and clarifying the conditions for their elevation to leadership, the business owner can minimize internal and external disruption and maintain stability during the execution of the succession plan.

Many businesses are built on the unique personal knowledge, charisma and energy of the owner. Even while growing into the broader role of president or CEO, the business owner may remain the company’s most effective researcher, marketer and revenue producer.

When a dynamic founder steps down, it may leave a vacuum that is unsettling to investors, employees and customers. The abrupt departure of a business leader, for whatever reason, may be followed by financial disruption, resignations or the flight of some accounts to competitors.

So, how can a business avoid these disruptive effects through a successful succession plan? The keys are continuity and stability: showing the world that the business is prepared, ready and able to go forward without the original owner.

Preserve Vision and Values

A thoughtful business succession strategy ensures that the core values, culture and vision on which the business was founded are passed on to the next generation of leaders. Vision and values are among the deciding factors for employees, investors and customers when deciding where to work, where to invest and where to spend their money.

In a family-owned business, family members can play a critical role in showing the world that while the torch is being passed, the mission remains the same.

Develop Team Talent

Succession planning must include a long-term process through which the company identifies and nurtures talented individuals within the organization. By providing development programs and leadership paths, the owner not only prepares the next generation of leaders but, at the same time, strengthens employee engagement and retention with opportunities to demonstrate diversity, equity and inclusion.

Key employees and heirs who work in the company should be aware of their role in the succession plan and should actively build skills for their next position. The business owner must be ready to approach this task with both love and practical honesty.

By starting early and taking the time to develop future leaders through a strong succession plan, the business owner has time to evaluate performance and adjust as potential successors progress, acquire experience, earn respect and develop leadership skills.

Provide Liquidity

Many family-owned and closely-held businesses are illiquid, because shares are not traded, or perhaps not even held outside a small family or investor group.

When the principal owner of a business leaves the company, whether through death, disability or retirement, a crisis of liquidity can occur if a plan is not in place to enable the conversion of the owner’s interest into equity that can be sold or otherwise transferred.

Succession planning is the ideal framework for the inclusion of a liquidity event, enabling a founder to transfer ownership to the next generation. In other types of closely-held companies, a liquidity event can make it possible for investors to convert their equity to cash or for key employees to acquire equity.

Mitigate Risk

Unexpected events, such as an accident, critical illness or a sudden resignation, can have severe implications for a family-owned or closely-held business. Succession planning helps mitigate the risks arising from these events by having contingency plans in place and potential successors who can step in swiftly.

Upon the unexpected loss of the owner, a business must know exactly how to proceed. For example, a board member may step in temporarily as chief executive while the family and business execute the succession plan.

While much of the risk can be mitigated through effective operational and financial planning, insurance products such as key person life insurance and disability insurance coverage also have important roles in mitigating risk.

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Tactical Business Succession Planning

Once the strategic objectives of the succession plan are well understood, break the overall objectives into tactical plans. Here are some of the key steps to creating a successful succession plan:

  • Identify Goals and Set Timelines
  • Identify and Develop Potential Successors
  • Identify Suitable Roles for Family Members
  • Involve Professional Advisors
  • Communicate with Stakeholders
  • Prepare for Contingencies
  • Review and Update the Succession Plan

Identify Goals and Set Timelines

Establishing your succession planning goals should begin with defining long-term goals, such as who will lead the company or who will fill key roles such as chief engineer or sales leader. Set timelines for hiring, or at least identifying, these potential successors.

Define the timeline for the transition of the founder. Consider personal aspirations, financial objectives and the vision of the legacy the owner wishes to leave behind. Clarity in these decisions will guide the remainder of the succession planning process.

Identify and Develop Potential Successors

Evaluate internal and external candidates to identify individuals with the skills, experience, education and leadership potential to be elevated to senior management.

If this evaluation determines that some roles must be recruited from outside the company, make external recruitment part of the plan. For internal candidates, implement training and mentoring programs to facilitate knowledge transfer and actively coach these individuals, filling any skill gaps identified in the evaluation.

The guiding principle during this process must be that the needs of the company come first. The owner may have fond hopes of handing over the business to a child. A child of the owner may dream of a leadership position in the family business that he or she might someday own. But, hopes and dreams are not a practical foundation for business decisions that may alter the lives and fortunes of many stakeholders.

Identify Suitable Roles for Family Members

According to data maintained by the Service Corps of Retired Executives (SCORE), fewer than one-third of family businesses survive the transition from first to second-generation ownership. In some family-owned businesses, a child of the founder develops into an ideal replacement. In other businesses, the results of this succession may be ill-fated.

The difference is usually in the degree of preparation by the founder, the business and the successor. Of course, the operative question is: Preparation for what?

Is a family member qualified to lead the business, or are his or her talents better suited to a creative, technical or financial role? The circumstances in every family business, and for each family member, are likely to be quite different. The owner must decide what is best for the business and the particular family member, and then develop a path that anticipates what is best for both.

Involve Professional Advisors

Seek the guidance of professional advisors in legal, financial, tax accounting and business consulting specialties. An effective business succession plan must anticipate the legal and financial moves that enable transferring ownership and funding a comfortable retirement of the founder while maintaining enough liquidity to avoid the need to refinance or sell the business.

Professional advisors will provide valuable insights based on their education and real-world experience, guiding the business owner’s succession plan strategy with tactical decisions on corporate structuring, business valuation, inheritance issues, tax consequences, legal compliance, liability and many other aspects of succession planning.

Perhaps the greatest contribution of professional advisors is the fact that they are not members of the owner’s family or employees of the company. No matter how much the owner may wish to elevate a family member or favored employee, a trusted advisor may have a list of practical reasons as to why another role should be found for that individual. Experienced professionals serve many clients, giving them knowledge of what works and what doesn’t when it comes to business succession plans.

Communicate with Stakeholders

Effective succession planning requires transparent communication. Business owners should discuss their intentions and actual plans with all stakeholders, including family, senior executives, key employees and external business interests.

The input, support and involvement of all stakeholders will help avoid conflict and can cushion the impact of an unexpected crisis. If a key employee would not want to serve in a company run by a chosen successor, the time to find out is early in the plan – not when the company might face the double loss of the founder and the employee during leadership transitions.

Likewise, the time to choose employees as future leaders (or to counsel those who may have to accept a lesser role) is earlier rather than later. Leadership training takes time and investment, and while many career path strategies are successful, some will not develop into the role envisioned.

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Prepare for Contingencies

The business owner should take the time to consider all contingencies that would involve succession, including accidental death, disability or early retirement. What happens if the owner must step down before a chosen successor is ready? What if the successor no longer wants to serve?

While many owners may hope that their child will take the reins of the business from their hands, their descendants may or may not be capable or interested in such an influential position. The children of successful business owners are sometimes so talented and well-educated that their interests lead them far away from the home of their family business.

While it is impractical to develop a backup plan for every possible contingency, it is feasible to consider short-term and long-term outcomes such as: (1) Owner retires in 10 years as planned; (2) Owner must retire due to health in five years; or (3) Owner is injured or incapacitated in an accident this year.

In addition to these scenarios for a planned or unplanned transition, the same short-term and long-term thinking should be applied to plans for a potential successor and other leadership roles.

Review and Update the Succession Plan

A successful business is like a gifted child that grows, learns and changes right in front of your eyes. This evolution of the business must remind the business owner to regularly review, update and refine the succession plan.

Remember also that outside the business, industries and markets evolve, as do personal circumstances. An owner who understands change will revisit the succession plan as an element of the business strategy, keeping it relevant and effective over time.

Conclusion: Succession Planning for the Future

Business succession planning is a process that every leader of a family-owned or otherwise closely-held business must undertake to secure the future of the company and its stakeholders.

By actively preparing for an eventual transition of leadership, a business owner can help to ensure the continuity and stability of the business, preserve the vision and values that have guided the enterprise, develop the talent required for an effective transition and protect the employees, business partners and family from the risks of a failed succession plan.

Now that you’ve learned the benefits and guidelines of a business succession plan, we invite you to explore our 20-step checklist for succession planning to help you further develop your plan.

If you’re the owner of a business, having a well-developed succession plan shouldn’t be your only plan of action to help protect your loved ones and their financial future. Our financial consultants and personal and commercial insurance specialists can help you navigate the complexities of life insurance, estate planning and more. Talk to a member of our team today.

Not sure where to start? Talk to someone who wants to listen.

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