Succession Planning - 101

Reasons for a succession plan 

Preparing for the next generation to take over the business? Looking to step away from the business but retain ownership? How can a business create steps for a smooth transitional leadership role? Succession planning is the answer to these as well as contributing to organizations value. A company may see qualities in an individual that they would like to prepare for an executive opportunity.

People leave organizations every day and a well thought out succession plan can aide in efficiently filling in any gaps during transition. A company would and should never intentionally set up a person, team, or department for failure. Identifying key positions that are critical to the organization’s ability to function or highly skilled roles that may take time to train or recruit replacements.

Below is a list of elements to consider during the planning phase.

1. Critical Positions

2. Current Occupant

3. Candidates

4. Capability Rating

5. Timeline

Critical Positions are roles that are needed for the organization to operate. Leadership positions and highly skilled roles should be included as a priority because a gap in transition could cause critical issues in the business.

The Current Occupant who currently holds the position can aide in selecting and training the prospective replacement. A proactive approach would be to establish a successor and a second well before a replacement is needed.

Candidates can be comprised of current employees who are qualified and desire to take on the additional responsibility. Plans should have two to three candidates for each role as a precautionary measure which will allow the organization to moved down the list to the next candidate.

Capability Ratings are a way to understand how prepared a candidate is able to step into the role.

A Timeline is critical to the preparedness of the plan. The three main reasons for succession planning are accident/death, quitting and retirement. Retirement usually provides more time to prepare for a transitional plan. It is difficult to predict when an accident/death or an employee suddenly quitting is why it is important to establish succession planning for the unforeseen circumstances that could arise which would put the organization at risk.

Where do I start? Below are suggestions that can aide in establishing a successful succession plan.

1. Collaborate with Leadership Team - The executive leadership in any organization should have enough business acumen to not only identify roles within the organization including their own that need to be a part of the succession plan.

2. Source Multiple Qualified Candidates - Business owners will have to make decisions on how to transfer the business. The options could include selling to a business partner, transferring ownership to children or even employees. Any of these options will still require a plan that involves preparation, training, and transition

3. Select a comprehensive format - Determining the correct format is as simple as what works best for your organization. The most important factor is it needs to be easily understood by anyone who can read it. Researching multiple options will allow you to see what works best for the company's need.

4. Business Valuation - Understanding the organizations economic value will aide in the succession process. Knowing the company's worth will allow an understanding of not only the ownership net worth based on ownership percentage but also provide insight about how much the business could be sold for to a prospective buyer.

5. Examine Financial Acumen - Businesses require sufficient monetary resources to function properly. Whether the business is being sold or the owner is stepping away from the daily activities, the financial capability or lack thereof, could result in loss of profits or even insolvency.

Conclusion

Creating a succession plan is not only a resourceful tool to ensure the continuity of the business but also establishes a level of professionalism that can be attractive to a prospective buyer or investor. Succession plans are primarily used to reduce negative consequences of unexpected events which is a good reason to write one sooner rather than later.