What is succession planning and why is it important for every business?
Succession planning is the preparation for giving over control of an organization. It helps answer the “what if” questions and outlines the necessary steps to successfully transition the company from one leader to the next with minimal disruption.
Succession plans are necessary if the CEO retires, can no longer fulfill their duties, or in case of death. For this reason, planning can often be delayed because it is an emotional issue for the business owner, however it is critical to plan for the inevitable. The Canadian Federation of Independent Business believes that over the next 10-15 years, approximately 70% of Canadian businesses will change hands.
Although having a formal plan in place is essential for ensuring a smooth transition, according to the Canadian Federation of Independent Business only 10% of SME owners in Canada have a formal plan. To add to this shocking statistic, over 50% of SME owners in Canada don’t have any plan at all. As the baby boomers age, it is important for companies to have appropriate plans in place to ensure their businesses continue to operate or are sold to suitable buyers. Putting off planning is the worst thing a business owner could do, because they are putting both the future of their business and their retirement savings at risk.
Succession planning is also about leadership development and attracting and retaining top talent to move forward with the organizational goals of the business. If you plan to transition your business onto a successor versus selling the business, selecting internal versus external candidates is an important decision. There are pros to both, including maintaining business continuity and less expensive recruitment costs for internal candidates and fresh perspectives, as well as a potential greater range of experiences for external candidates.
It’s imperative to be realistic about the prospect of a family member taking over the business, and take a hard, objective look at all available options. With that said, It’s critical to involve your family in you plans so that there are no surprises when it comes time to execute the plan.
No matter who your successor will be, ensure you set ample time aside to properly prepare them for the road ahead. This should include your successor working along side you to truly understand their responsibilities once you leave. Provide them with the necessary information and resources to be able to competently move forward with your business vision.
Although succession planning is often thought of as something for older business owners to consider, it is always wise to have a plan in place and be ready for anything. It is estimated that it takes from 3-5 years for an owner to successfully plan their exit, so there is no better time to start than right now.
Smart organizations spin the necessity of business succession planning as a positive opportunity to ensure continuity within the business and strengthen corporate identity. The process brings the corporate decision making team together to improve organizational performance, now and in the future.
What’s involved in succession planning?
If succession planning is so important, why do so many business owners put succession planning on the back burner? It’s not an easy task, especially because it deals with corporate decision makers facing issues like loss of control and their own mortality.
For small business, most succession plans are divided into three main components: ownership, management & taxes. Ownership and management can be transferred to one individual or various individuals. One possible scenario is for the original business founder deciding to impart ownership and management responsibilities onto one single family member. Conversely, ownership could be divided amongst several family members or the business founder could even decide to maintain ownership upon retirement. In terms of taxes, this section focuses on minimizing taxes in the case of death. Accountants and lawyers can provide indispensable information when it comes to organizing these components of your succession plan.
Many business owners suggest leaving succession planning to the professionals. Accountants, lawyers and financial planners can help business owners on the road to stable retirement and successful perpetuation of the owner’s business vision.
In-Action Example – Procter & Gamble
172 years. 12 CEO’s. 1 strong succession plan.
Procter & Gamble’s track record of worldwide success, including their reach to almost four billion consumers worldwide, perpetuates their need for strong footing now and in the future. It’s interesting to note that all 12 of P&G’s CEO’s have been promoted from within. The organization grooms top talent as a means of gaining a competitive advantage. Leadership development and succession planning is at the forefront for P&G, which is not always common for similar-sized businesses.
P&G’s Global Human Resources Officer, Moheet Nagrath, maintains a binder called the ‘Talent Portfolio’. This binder contains evaluations of P&G’s top management using hard and soft metrics, including achieving financial objectives, as well as their ability to lead their subordinates. Former CEO, A.G. Lafley, implemented this succession tool in 2001. This ‘holy grail’ of future leaders houses those who are ready to be promoted and names at least three successors for each major management position (35-40 positions). All General Managers’ performance is evaluated every 6 months, not only by their superiors, but also by their peers. Additionally, prior to Lafley’s departure as CEO, he worked with consultants to devise a list of 10 qualities the new CEO must possess, including character and integrity attributes.
Although SME’s don’t have all of the resources of Fortune 500 companies, there is a lot to be learned from this methodology that is not difficult to implement. The concept of the ‘Talent Portfolio’ with financial and non-financial metrics to measure up-and-coming leaders provides huge insight into the best candidates to transition into key positions. Not only will this provide a better understanding of your key employees, but it can also improve operational performance and accountability if everyone understands their roles and responsibilities within the organization.
Resources
Book – The Business Transition Crisis: Plan Your Succession Now to Beat the Biggest Business Selloff in History By: Wayne Vanwyck
This book resource guides business owners through the tedious but important process of succession planning. Vanwyck argues that there are literally millions of business owners planning to retire in the next 10 years… without a plan! He believes that this will create a huge wave of businesses for sale with few sellers willing to buy. This book is full of practical advice to determine the best course of action to hand over the reigns of a business transition to the next stage.
5 of 5 stars from 3 customers on Amazon.com
Retail Price $30.99 CND
Blog – Business Exchange (http://bx.businessweek.com/succession-planning/blogs/)
The Business Exchange blog is divided into various business subsections, one of which is succession planning. There are articles divulging different aspects of succession planning from why CEO’s need coaching in this area to dealing with transitioning new management into the family business.
