Succession planning is a business strategy that involves preparation for the future. If done well, succession planning is a way of ensuring that whoever succeeds, or takes over, the executive roles in a company will be well-prepared for the transition.
Succession planning is usually reserved for establishing a smooth transition of key leadership roles with a company. Transitions aren’t as costly, nor do they carry as high of stakes for entry-level or secondary roles. Such roles do not create the potential for ineffective replacement as higher level roles do, and necessitate less formal and less extensive planning.
Succession Planning According to Company Size
If a company is small, the owner alone may be the one who is responsible for any succession planning strategies. Large corporations have a more documented approach to succession planning, often involving the Board of Directors in any decision-making as well as the acknowledged CEO of the company. If two entrepreneurs get together and start up a business partnership, the succession planning method is entirely different. One method of ensuring the continued success of a company based on a partnership in case of a worst case scenario is for each named partner to purchase a life insurance policy that names any other partners as the beneficiary.
Family Business Succession Planning
Businesses operated by families may have a more informal succession plan in place, but may have to face tough questions if something unforeseen happens. Family business succession plans from professional benefits consultants can guarantee that the business continues to thrive, even when faced with the most tragic life events. Questions that many family business owners worry about when it comes to their livelihood include:
What happens if the owner of the business finds themselves in a situation where they are unable to work? Could the business as a whole survive without the direct involvement of this integral person?
Is this a business that we hope will be passed down from generation to generation, or will it simply be sold when the current owner retires or passes on? How does this affect our family legacy, and the future for our offspring?
If the current owner has informal plans in place to pass the torch to one of their children, how can they ensure that the child in question will bear the responsibility effectively? If there is one than more child, and they are all given equal ownership, who will have primary authority in this matter? Moreover, how will the responsibilities of the business be divided equally?
These are just some of the questions facing family-owned businesses. When family is involved, things can get complicated. In order to avoid family disputes over the future of the business, it is recommended to consult professionals who can help through the succession planning process.
Tips for Succession Planning
Business owners and CEOs, particularly at a corporate level, are often very worried that they lack candidates who are ready to seamlessly replace key leadership roles. As a result, it is fundamentally important to have a solid succession planning strategy in place. Here are some tips for efficient succession planning:
In order to carry out an effective succession plan, goals must be established. It is easy to nominate an executive employee as a potential replacement for a central role in the company, but it is much more difficult to actually prepare them for the role. Establishing goals at a regular pace, combined with official record keeping methods, will allow for a much more smooth transition of power than vague allusions about what the employee faces in their future role.
Measure and Support
Succession planning in any company serious about securing the future of its book of business should be both measured and rewarded. If leadership development is truly a high priority for the company, progress of the executives in question will be both measured and rewarded accordingly. Effective succession planning can be measured by assessing the percentage of high-level vacancies that are filled by internal promotions as opposed to external hires. Senior executives should be readily engaged with in order to establish the fundamental aspects of the succession planning process, as this will ensure growing support for the incentive.
There’s much more to succession planning than simply choosing names out of a hat. Effective succession planning involves a great deal of commitment for all parties involved. The owner or CEO should do their utmost to be held accountable by other authority figures within the company in order to ensure that the named successor is meeting their potential as a future leader. Even in a smaller company or family-owned business, talent and dedication should be subject to regular review in an official capacity. Performance reviews, for example, are an excellent way of weeding out mediocre employees and drawing attention to rising stars.
Management, Ownership, and Taxes
It’s important to think of succession planning as divided into three key areas: management, ownership, and taxes. There are already enough complications when it comes to organizing your business, such as employee benefits, or health care plans, so it makes good business sense to think about the future too.
First, management and ownership are not necessarily the same thing. Particularly in family-owned businesses, management may be transferred completely to one person while ownership might be equally shared among many.
Like it or not, taxes are something that we must comply with, and must be considered in any planning for the future. There are ways of minimizing the amount of tax paid when the unforeseen happens. For example, you can freeze the value of your interest in the company while simultaneously transferring ownership in order to reduce your tax contributions.
Start Succession Planning Early
The best way to ensure a smooth transition of leadership in your company, no matter what size it is, is to start early. The earlier you start, the better. Even budding entrepreneurs can include an informal exit strategy into their infant business plan in order to think ahead.