Succession has been a buzzword for quite some time now. But what exactly does it mean and how is it applicable to running the day-to-day operations of your business? We find that many business owners think they don’t need to worry about succession planning because they have no intention of leaving their business any time soon. The sobering fact is this though – every business will transition at some point; it’s as unavoidable as death and taxes. A lack of planning for it, however, jeopardizes the sustainability, viability, stability, and value of your business today.
Succession planning is defined as the “process” (not the event) of deciding when and how you would like the business to be managed or transitioned in order to protect the firm, its employees, its clients, and its value. It prepares for unforeseen events such as premature death or permanent disability and indicates to whom you would ultimately want to leave or sell the business, and how to fund the transfer or sale.
Simply put, succession planning helps identify and develop new leaders who can replace old leaders when they leave, retire, or die. The succession planning decisions that you make now (or elect not to make) will be a major factor in the future of your business.
Succession Planning Benefits
While a daunting and emotional task, the benefits to succession planning are numerous – survival and growth of the firm, preservation of culture, and maximization of value, to name a few. The planning process also provides an opportunity to integrate many business planning elements (that should be working well independently) into a single endeavor, including:
- Strategic direction
- Development/recruitment of talent
- Entity structure
- Equity transfer techniques
- Compensation planning
- Disability planning
- Financing alternatives
Though it may feel overwhelming to blend all of these aspects into a single vision, really wrapping your arms around the “big picture” will better position your firm not just for succession, but for every business objective you hope to achieve.
As evidenced by the numerous variables that arise out of owner’s departure, a successful succession plan cannot be singularly faceted. When these variables are aggregated with different personalities within a business and a lack of communication, trouble almost always ensues. What may appear to be the simplest of tasks can become more complex due to the interweaving of personal objectives and interests with business concerns.
Goals of Succession Planning
The ultimate goal of succession planning should be to understand the value of the business, to preserve that value and its future growth potential, and to pass it forward intact. Perpetuating the legacy of the business (and that of the founder) is often one of the overriding goals of owners when developing a succession plan.
In most cases though, succession planning is undertaken due to events and changes in an owner’s outlook on life. People generally become more risk averse as they approach retirement, and this is reflected in their business strategies, as well as in their retirement portfolios. When succession planning initially begins, it unfortunately is usually because of emotional issues – rather than over-arching business or strategic goals.
Regardless of the precipitating factor, this shift in attitude can have unintended consequences. Without adequate succession planning, growth can stagnate, management may become disillusioned, and value disintegration could follow at an alarming speed. Recognizing that shift is one thing; taking the steps to consider the consequences and structure an appropriate succession plan is another matter altogether.
Succession Keys to Remember
Remember, succession planning is a process, not an event. And while the process generally remains the same for every business, each situation is unique – a cookie cutter approach will not work. Additionally, a “fly by the seat of your pants” approach only successfully works by chance.
Instead, acknowledge that patience is a virtue and that your succession plan will take time. In fact, a good plan takes roughly seven to ten years to successfully design and implement! As such, recognize the need to plan, educate yourself, and treat succession planning as an everyday business activity.