It’s often the single most neglected element of business ownership. No one wants to think about it. But failing to choose a successor for your company’s leadership can result in devastating consequences for your family and employees.
With a Succession Plan, Your Business Can Last When You are Gone
Yet far too many small and family business owners neglect this step. A Small Business Survey conducted in 2017 by Nationwide showed that fully 60 percent of all small businesses lacked any kind of succession plan.
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Failing to plan may literally be planning to fail in this case. A strategic succession plan helps you prepare your company’s future leaders so that the business can reach its goals. It helps you retain loyal employees and grow to become a more stable, resilient organization that’s prepared to meet the challenges of tomorrow.
To help your company survive and thrive after your departure, start to create your own succession plan today. Here’s how.
Start Succession Planning Early
It pays to plan early—literally. For example, you’ll want to adjust your tax strategy in particular if you want to sell the company to an outsider. You’ll want to maximize profits to make the company more valuable and attractive to qualified potential buyers. The earlier you start your planning, the sooner you can implement the adjusted tax strategy to maximize your sales price.
The Essential Components of a Succession Plan
- A timeline with specific dates, if possible, and a description of what events might trigger the transition.
- Your chosen successor and any alternates, as your top choice, may not be able to step up as planned for any one of a number of reasons
- A formal document outlining all of your company’s operational and administrative policies, procedures, documents, employee manuals or handbooks, and all training documentation
- A formal valuation report from a professional appraiser, preferably one familiar with your niche or industry, with plans for the valuation report to be updated regularly
- A description of how your succession will be funded—i.e., life insurance proceeds, a note, other funds, seller financing, etc.
Choose Your Succession Method
Decide how you plan to proceed. Whether you sell or otherwise transfer control of your company to your successor, and whether the transition is triggered by retirement or unanticipated events, there are five key methods of appointing and transferring your ownership.
Sell to a Co-Owner or Partner
If you have partners or co-owners, consult your partnership or operating agreement to understand your mutual rights and obligations when you leave the company. Requirements may dictate that you offer your interest to the remaining partners for their purchase first. This arrangement can often make things far simpler and easier on your heirs and surviving spouse, if any.
It also helps your spouse and heirs realize the fair market value of the interest without the burden of running the company themselves.
Theoretically, the partner must keep adequate funds on hand to buy out your shares at any time, as an unplanned departure can occur at any time. Alternatively, life insurance or key person insurance can be used to fund this transition.
Sell to a Key Employee
Selling your interest and control to a key employee ensures you’ve got an interested, experienced party ready to take over for you while also avoiding the complex challenges of selecting a family successor out of multiple heirs.
This plan also allows you plenty of time to train and coach your intended successor in all aspects of leading your company.
Most of your employees won’t have ready access to cash or liquid assets sufficient to cover the cost involved.
To alleviate that problem, you can offer seller financing, where the employee will pay you or your heirs some amount as a down payment and then periodic payments over time. You’ll need to work out these details with your chosen successor in negotiations prior to your departure.
Sell to an Outside Party
If you don’t have a suitable heir or key employee who’s willing and able to take over, selling to an outside party is a viable option to consider. Look at other entrepreneurs or even competitors in your field and area for potential buyers.
The key challenge here is to make sure you have a proper and accurate business valuation on hand, and that it’s updated regularly.
Some challenges to an outside party sale
Drawbacks include the difficulty involved in selling some types of businesses over others. If your company is service-based and built around your name or personal brand, it might be challenging to demonstrate the company’s true value.
It’s also a complex undertaking for you or your heirs to manage. However, that challenge can be relieved by outsourcing the sale to a professional broker or another professional who can handle the intricacies of an outside party sale.
Bequeath or Otherwise Transfer to an Heir
This is one of the most popular options (and the basis for a successful HBO TV show to boot). If you have a child or children, or other heirs, who have the interest, aptitude, and inclination to run the company themselves — this can be the simplest and easiest method to pass on control of your business to the next generation.
Emotions often run hot in family transitions, especially when the succession is occasioned by death. If you have an heir who presents the requisite skills, experience, potential, and innate interest in running the company, it may be worth the risks.
Just be very careful in the documentation you leave behind and the way in which your choices are communicated to all your heirs.
Establish Your Company’s Core Values
Define your company’s core values and make sure all of your employees understand them. This is crucial because it directly impacts the success or failure of your eventual succession plan and the transition to new leadership. If your successor doesn’t align well with your company’s values, the disconnect could negatively impact your company’s operations, employee engagement, and ongoing viability.
Define your goals in writing
It’s also important to identify your goals. What do you want for your company, both short and long term? What are your personal goals, both practically and financially? Define those personal goals and make sure they align with your business values and objectives.
Have a senior team member or manager give you input
Consider getting input from senior team members and managers at this phase to make sure you’re considering a wider perspective during the process. With their input, project your company’s future needs. Work on a five-year basis and think about what meeting the company’s objectives will mean for its changing structure.
Finally, create updated job descriptions that align with the data you’ve identified and analyzed thus far. Clarify and manage your own expectations so that your next decisions will be based on logic, reason, and current and future anticipated conditions.
Identify and Train Your Successors
To identify potential succession candidates for the position, evaluate each candidate against the list of skills and experience metrics that you created for the role in the prior step.
For top positions, you’ll want to make sure you’re choosing candidates with significant problem-solving skills and adaptability. If the pandemic proved anything, it’s that small businesses must be able to pivot quickly when the unexpected occurs.
Remember that you’re looking for potential. People can develop experience as well as key skills over time. Look deeper than the resume and keep personal biases and preferences out of the equation to the extent possible.
If you can verify interest in the succession, it will help you
After you’ve identified your successor and verified their interest in transitioning to leading your company, create and implement a plan to give them the tools they need to succeed.
Your goal is to empower your successor with appropriate training opportunities so they can gain the necessary experience and expand the skills they’ll need to perform up to their potential in the new position when the time comes.
Explore formal training courses and offer a mentoring or coaching program for ongoing support. Establish open communication and an ongoing feedback policy so that you can continue to refine the training and development program.
Give them the opportunity to learn about every aspect of the business and to ask you and your leadership team/team members questions.
Document Everything
It’s important to create a formal plan and reduce it to writing in as much detail as possible, and to do this well; you’ll need feedback from all stakeholders throughout your planning process.
Your plan documentation should include employee manuals, training plans, operating and administrative procedures, contact information (both internal and key external vendors), decision trees, and emergency operations planning.
What happens when a hurricane or the next pandemic hits? How can you keep things going? How have you pivoted in the past, or how can you do so in the future?
Periodically review and update your plan document. After all, things change all the time. Key workers might retire or take different jobs.
Your family members involved in the succession plan might lose interest or take other employment. Industry realities may evolve and change. Every year, take some time with your key group of advisors and professionals to review the plan and see if there are any places that need adjustment.
Let It Go
Once you’ve chosen your successor and implemented a training plan for that person, you may choose to begin the transition while you’re still around to help. If you’re deliberately transitioning out of your leadership position, this is the right time to ease off the gas and let go of control gradually.
Begin allowing your successor to make their own executive decisions.
Let go of the reins gracefully. Proving to the company and to your successor that you have complete faith in them now by letting them take over the helm will help bestow legitimacy and loyalty on your successor. In the long run, that will only help your company stay strong and profitable into the future.
Stay in Touch
Maintain communication with your successors after you’ve stepped down, in order to offer guidance when needed. Keep those lines of communication open but don’t abuse this or set any expectations. Let them come to you.
You can also ask if they’d like to schedule a regular, recurring lunch date to discuss their concerns and get your input. However, it’s important to make sure this is their choice. They know what they need and how they operate best.
Don’t take it personally if they don’t come to you often or at all. Recognize that they need to chart their own path in order to reassure others that they’re in control. You would not have put this individual in place if you didn’t think they could do this job. But they won’t do it your way — allow that freedom.
Celebrate Your Success
Now that you’re transitioning out of actively running your company, it’s the ideal time to take a moment to appreciate your accomplishments. Take time to look back on your journey and be proud of what you’ve built. It’s also a good time to recognize you didn’t build this alone. Being humble means appreciating that a team effort led to your business’s longevity.
Part of your success is choosing the right successor. It’s a bit like being a parent. If they’re flying high on their own, you did your job well. Take pride in their success, as well.
Article by John Boitnott, Due
About the Author
John Boitnott graduated from UC Santa Barbara with a Masters Degree in Education. He worked for 14 years as a broadcast news writer for ABC, NBC, and CBS News where he covered finance, business and real estate. He covered financial news for SAP for four years. Boitnott is now working as a columnist for The Motley Fool where he covers personal financial and investing strategies.