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The Roy family of “Succession,” the critically acclaimed series about which of the Roy family offspring would take the reins of the family-owned media conglomerate Waystar RoyCo., should serve as a cautionary tale for any business owner considering retirement. Business succession planning cannot be left to underlings to duke it out for control.
Succession planning is important for any business — family-owned or not. It’s critical for business continuity, preserving the legacy, and a smooth transition.
When it’s time to step away from the helm and choose a successor, there are three options available:
- Internal succession planning: Not solely the purview of family-owned businesses, this approach involves identifying and developing internal employees who have the potential to take on leadership roles in the future. This can be a good option for business owners who want to promote from within and create a sense of loyalty and ownership among their employees.
- External succession planning: This involves hiring outside candidates to fill leadership roles. It can be a good option for businesses that need to bring in new skills and experience, or that don’t have any internal candidates who are ready to step up.
- A combination of internal and external succession planning: This is a good option for business owners who want to take advantage of the benefits of both internal and external succession planning. For example, you might identify an internal candidate who has the potential to be a future leader, but you might also bring in an interim executive to help develop that person’s skills.
No matter which option you choose, it’s important to start succession planning early. This will give you plenty of time to identify potential candidates, develop their skills, and prepare for a smooth transition.
Here’s how to create a successful business succession plan.
1. Know What You Want in Retirement
Would you like to stay involved in the business? Or retire to a tropical island, never to make another business decision? Do you hope to sell the company completely? Or retain an ownership stake for future income purposes? Are you emotionally prepared to turn over your legacy to new leaders and whatever choices they make?
What you want now and what you want in retirement will inform the rest of the business succession planning process and the succession plan you write.
2. Identify Key Employees
This can be particularly fraught in family-owned businesses when the choice is which family member will take the helm. Just ask the Roy family.
Successors aren’t always family members. The key employees might be members of the next generation working in the family business. Or the potential successors might be employees who started at the bottom and worked their way up, learning the business from the ground floor.
You’re looking for someone who has demonstrated strong leadership skills, such as the ability to motivate and inspire others, make decisions, and solve problems.
We take a deeper dive into this topic in Part 2 of our series.
3. Develop Those Key Employees
You may find that you don’t have someone ready to step into the leadership role. Rather, you have someone ready to be mentored into the role.
That’s why starting this process early is so important. You will have the time to mentor key employees and assess their skill development so you’ll know they are ready when the time comes.
Allowing potential successors to work side by side with you as you assess business needs, make business decisions, and develop the business plan means they will become intimately familiar with all of the company’s ins and outs, a critical component of a successful transition.
In this quick 7-minute video, InterimExecs CEO Robert Jordan offers a “pep talk” for owners and board members worried the next generation leaders — whether are family members or trusted managers — aren’t ready to lead:
4. Communicate the Plan
The next step is to let everyone in the company know about the plan.
Be clear, concise, and open to answering questions. Let workers know that the succession plan is an opportunity for the company to grow, improve, and achieve its goals.
Sending a message of stability despite change and ensuring everyone understands their place in the new company is critical for worker retention, which, in turn, is critical for the future of your business.
In the last year of the transition, it’s also important to communicate the succession plan to key partnerships outside the company, such as vendors and customers, and, in the case of public companies, shareholders.
5. Update the Business Succession Plan Annually
Your succession plan should be a living document. Things change. The business valuation grows. Your chosen successor leaves for a new job. A pandemic hits your balance sheet hard.
Whatever the challenge, it will inform the next iteration of your business exit strategy.
In addition to updating any plan regarding your chosen successor, you’ll want to revisit and update all of the business transfer plans. If you’re a small business owner planning to sell the company to your successor, you’ll need a purchase agreement based on current market value. Then you’ll need to understand how the agreement affects your personal net worth for estate planning and tax planning purposes.
You may even choose to create two business succession plans: the long-term plan you’ll update each year and a short-term emergency plan that would be invoked in the event of an unexpected executive vacancy.
If that happens, opting for an experienced interim leader can be the best approach. That experienced executive can keep the company on track while a search for a new full-time executive takes place.
6. Execute the Succession Plan
Congratulations! You’ve worked hard to get here. It’s time for a smooth transition from your leadership to new leadership.
Do you need help with this critical transition of the business you have built? Contact InterimExecs for a confidential consultation about your plans for the future and what the company you have built needs to smoothly transition to new leadership. InterimExecs RED Team of top executives work with owners to develop and execute a strategic plan for exiting your business. That means providing operational expertise to increase the value of your business and putting structure in place so you can successfully change roles or transition out.
Read Our Full Series:
Part 1: Choosing the Exit Strategy that is Right for You
Part 2: The Critical Importance of Business Succession Planning
Part 3: Identifying the Right Successor
Part 4: Family Business Transition to the Next Generation