Succession planning is a contingency plan. It is not a one-time event. Rather, it should be reevaluated and updated each year or as changes dictate within the company. As such, it evaluates each leader’s skills, identifying potential replacements within and outside the company and, in the case of internal replacements, training those employees so they’re prepared to assume control.
In large companies, the board of directors typically oversees succession planning in addition to the chief executive officer (CEO), and it affects owners, employees, as well as shareholders. A larger business may train mid-level employees to one day take over higher-level positions. For small businesses and family-owned companies, succession planning often means training the next generation to take over the business.
The process takes a lot of time and effort. As such, it requires:
Recruitment or Proper Hiring: The goal is to choose candidates who are capable of rising through the ranks in the future. For example, an experienced person from another company might be courted and groomed for a higher position.
Training: This includes the development of skills, company knowledge, and certifications. The training might include having employees cross-train and shadow various positions or jobs in all the major departments. This process can help the person become well-rounded and understand the business on a granular level. Also, the cross-training process can help identify the employees that are not up to the task of developing multiple skill sets needed to run the company.
Businesses may want to create more than one type of succession plan. An emergency succession plan is put in place when a key leader needs to be replaced unexpectedly. A long-term succession plan, on the other hand, helps the company account for anticipated changes in leadership.
There are five common ways to transfer ownership of your business:
- Co-owner: Selling your shares or ownership interests to a co-owner.
- Heir: Passing ownership interests to a family member.
- Key employee: Selling your business to a key employee.
- Outside party: Selling your business to an entrepreneur outside your organization.
- Company: For a business with multiple owners, you can sell your ownership interests back to the company, then distribute them to the remaining owners.
A sixth way to sell your business involves an ESOP and ESOP’s carry significant tax advantages as well as employee retention powers. They are complicated to do, however an ESOP can be a tool to enable the owners of a family business to cash out and remove themselves from the business, in whole or in part, while rewarding their employees with full or partial ownership of the business—and keep the company independent.
Below is a typical checklist that can be found in books, and on-line. We agree with the steps because it helps you see an end to end set of activities necessary to move forward towards sale and perhaps retirement.