Many people start a business and are thrilled to see it as it evolves and grows. Planning for the succession of the business, however, is almost never considered or planned. Business owners, typically, don’t plan for a time when their relationship with the business might end. People don’t often consider the possibility that they might fall ill, become disabled, or even plan for a sudden demise. Any one of these scenarios, however, can lead to the failure of the business. So, what is business succession planning?
SELLING OR TRANSFERRING A BUSINESS
Selling a business at the last minute can be difficult and almost never will you be compensated for its true worth. Without concrete plans, transferring a business to a family member can also result in chaos and a complete financial loss. There are many hard luck stories about unprepared owners transferring their business to family members and then being totally cut off from the business and even shortchanged on the money they were to be paid. What is the full business succession planning definition? A succession plan can provide a guide or road map to help with the smooth transfer of a business, and, at the same time, ensure that both any heirs and the past owner will be financially compensated as appropriate.
What is business succession planning? Succession planning is a critical component of all businesses as it helps prevent interruption in the operation of the business whenever there is a change in the leadership. Changes may occur as a result of leaders leaving because they may be retiring, switching careers, changing companies, or have suffered a serious illness/disability, or perhaps even death.
NOT A ONE-AND-DONE PLAN
What is business succession planning? Succession planning offers some type of preparedness or contingency plan to prepare for the future. It is not a one-shot deal but rather needs to be reassessed and re-updated every year or as changes in the business dictate. At each evaluation, the following should be assessed:
- Worthiness of potential replacement candidates from within and outside the company
- Skills of the potential replacement candidates
- Some businesses prefer to keep leadership within the company and may train mid-level employees so they can take charge one day
- If the replacement is an external candidate, what type of additional training does he or she need to be able to take full control of the business?
In most large corporations, the process of succession planning is overseen by the board of directors, the chief executive officer, and/or sometimes the shareholders.
HOW DOES SUCCESSION PLANNING WORK?
Every business succession plan is different because not all owners want to leave their business at the same time. Some might wait until they are ready to retire; others might wait until they no longer wish to carry on the business, and yet others may be faced with a sudden illness or become disabled. Some of the major issues that all business succession plans should address include the following:
- The timing of departure
- Who will be your successor or successors? Will it be a member of your family, an employee, or someone external?
- What is the value of your business?
- Sit down and discuss the venture with your accountant, tax advisor, and lawyer.
- Have you discussed the business succession plan with your family, employees, or stakeholders?
- What will the tax implications of the business succession plan be?
- What aren’t you anticipating right now? How can you?
- Get an idea about the costs with your professional advisers and make a budget for each step.
- Recruitment: In many cases, candidates that can make good leaders are recruited from either within or outside the company. In some cases, mid-level employees from another corporation may be groomed for a higher position.
- Offer training: In all cases, the potential candidate is provided training that may include the development of leadership skills, certification, and insight into the company. The training may also include shadowing the current CEO and/or cross-training in other departments. This process helps the individual understand the business better and become well-rounded about the company at the grassroots level. More importantly, the cross-training may also identify features about the candidate that may require improvement.
- It is highly recommended that businesses not just rely on one succession plan but maybe several. Sometimes one may require an emergency succession plan when the CEO may need to be unexpectedly replaced. On the other hand, for a long-term succession plan, the company should take time to carefully select future leadership.
While succession planning is not necessarily always a complex process, the key is to be able to organize and plan far ahead of time. The whole process may take anywhere from one to three years. However, with a small or family-owned business, the owner alone may be responsible for the succession planning, and this can take a much shorter timeframe as there is less administrative work required.
COMMON MISTAKES MADE DURING SUCCESSION PLANNING
Succession planning should be done with careful organization. Common mistakes made by both small and large businesses include the following:
- Leadership is unable to convey the mission and vision to the employees.
- There is no formal list of potential candidates selected as successors.
- There is no committee set up to assess the potential candidates.
- The diversity pool is ignored and, consequently, talent may be lost.
- Placing too much emphasis on family members to take over the business. If the family dynamics are volatile or easily changeable, it may prove to be a disaster for the business.
ADVANTAGES OF SUCCESSION PLANNING
There are numerous benefits for both employees and employers in having a well-constructed succession plan. The benefits of a good business succession planning definition include addressing the following:
- Employees appreciate that there is a good chance of advancement and possible leadership roles available in the company, which can improve empowerment, offer more income, and lead to higher job satisfaction.
- The company’s commitment to the creation of a succession plan indicates that it will continue to train and mentor employees so that they will be ready for the job change when the time comes.
- Filling a job with an internal employee allows management to properly track their skill sets and value.
- Employees and leadership are better able to share the company’s vision and values.
- There will always be a new generation of prepared leaders available in case there is an exodus or retirement of employees from the workforce.
- In general, preparing a future candidate for the job of a successor can calm fears among the shareholders and other staff, leading to more stability.
What is business succession planning? At the end of the day, a business succession planning definition includes the ability to help create a new generation of leaders, thus allowing business owners an opportunity to sell their stake in the company and exit the business knowing that the company is now in good hands. Solid advice and counsel from a knowledgeable attorney cannot be over-valued. To contact such an experienced individual, call Elder Law, P.A. at 1-561-933-4728 today. It’s never too early to start planning!