The Importance of Succession Planning
Selling your business might not be on your radar yet, but that doesn’t mean you shouldn’t begin preparing for the future. Succession planning can entail laying out the process for when you step down as the day to day operating head of your company, or when you are considering selling the business and want to leave the buyer with a strong management team.
Business owners often don’t feel like they need a succession plan yet, if at all. You may not be able to envision a time when you aren’t leading the charge every day, and it probably seems like you have all the time in the world to make business continuity decisions. But these mental obstacles to succession planning don’t account for how quickly things can change.
Being prepared for the future is a key part of being a good employer and leader. Having a plan in place ensures job security for your employees, financial security for your family, and a successful transition into the next phase as a company.
You may be planning to continue working for another decade, but sometimes life has other plans. As we’ve learned from the Covid pandemic, rising inflation, and the war in Ukraine, the world and the economy can change in the blink of an eye. It’s best to get your ducks in a row now, instead of scrambling to react to an unexpected emergency, be it a geopolitical event, an unforeseen supply chain issue or a personal health-related event.
Make Key Decisions
It may be tough to think about this now, but to effectively make succession plans, you will need to picture the day you step down from your business. What does the company’s future look like?
You have a few options when it comes to business continuity. You may identify a leader within your organization, promote them, and have that successor continue to run your business as is while you take a step back from the business. However, many business owners choose to sell their business and retire or move on to other business ventures. If you plan to sell and transition out, having identified a potential successor and succession plan will make the business more attractive to strategic or private equity buyers who may be worried that you’re leaving a void in management.
Choosing a Successor
Business owners often put off succession planning because they assume that their children or other family members will simply take over the business. However, this isn’t always a safe bet – in fact, your go-to family member may not want to take on a leadership role or may not be the best suited for stepping into your shoes. It’s best to have these discussions in advance and factor the realities of the situation into your succession plan, family member or not.
Company owners and leaders may be multidisciplined to a degree, but usually have come “up through the ranks” in operations, sales and marketing or accounting/finance.
While you may have personally spent much of your time in a customer-facing and sales role, your best leadership candidate might be your head of operations. In that case you’ll need to determine if your successor can continue to wear an operations hat while running the entire company, and then hire or promote someone to take your spot with customers. In any event, you should sit down with your internal candidates to discuss their personal career goals and ensure that they’re willing to take on this responsibility.
Succession planning will also come in handy in the case of a sudden illness or death. Having someone who can answer important financial, managerial, and operational questions will ensure the company keeps running on an interim basis and put employees and customers at ease.
To better prepare your successor for their future role, you can do “trial runs” where they go through the motions of taking over the company. For example, you can leave them in charge while you take a vacation. Not only will they gain valuable experience, but your successor will also help you identify holes in your succession plan that could leave the company vulnerable.
After your successor agrees to the role, you should train them as if they were going to take over tomorrow. To be an effective leader during the eventual transition period, your successor should know all of your roles, responsibilities, and every nook and cranny of the business.
With the future leadership settled, you should start compiling information that will be vital for business continuity. Create lists of key vendors, accounts, debts, assets, and business processes with which they may not be familiar. In any transition, these lists will make it easier for team members to step into new roles.
This information will also be key if you choose to sell your business. The preparation for the market requires a massive amount of introspection and data collection regarding your business that buyers will insist on seeing. Having this information at the ready will alleviate one of the stressors associated with selling your business.
Your succession plan should be dynamic. With revenue, personnel, and overall industry changes that happen over time, your succession plan may need a few edits to ensure it’s still useful by the time of your transition. Each year, sit down and evaluate your succession plan to make sure the information is up-to-date, valuable, and easily understood.
Planning for what seems like the distant future is hard, but you don’t have to do it alone. At FourBridges, our strategic advisory services can help you make important decisions about succession planning and help you decide when it could be time to sell your business.