Preserving a Legacy
Tips on succession planning for small-to-midsize business owners when considering an exit strategy
Succession planning is more than a box to check in preparation for a future sale. In small to mid-sized businesses (SMBs), succession planning helps maintain the company’s legacy and keeps employees motivated. However, this important piece in a business’ evolution is often overlooked.
More than one third of businesses lack a clearly outlined or communicated plan, according to Investment News. This article dives into the importance of succession planning and what it entails to prepare an SMB for a seamless transition. For the purpose of this article, we are defining SMBs as companies with less than 1,000 employees with revenues below $1 billion.
Understanding Succession Planning
Succession planning and replacement hiring are often used interchangeably, but there are two very different motives behind them.
- Succession planning is a strategic process that aids in empowering and developing current employees to easily fill vacancies within leadership roles. Typically, this process is triggered by retirement or the sale of the business (although Premiere recommends thinking about this step well before one of these events). It creates a pool of candidates qualified to transition into decision-maker roles to aid in the transition. This process is time intensive for current leaders but creates high return, retention, and loyalty.
- Replacement hiring acts under the assumption that the structure of the organization will not change, and the company is identifying an individual, who could step into their boss’ role should that person get promoted or leave the company. It’s usually a more direct one-to-one transition where an employee is specifically trained and groomed for a particular role.
Both are necessary in organizations, but the latter focuses on a short-term goal while the first supports long-term vision, which is the emphasis of this article.
Challenges and Risks of Succession Planning
The informal structure of SMBs can complicate the process, and with limited resources and smaller talent pools, additional challenges are inevitable. However, the absence of a plan can lead to significant risks, including loss of business value, disruption of operations, and lagging employee morale (which can quickly lead to performance issues).
The Role of Succession Planning
A well-executed succession plan ensures that a business can maintain its value post sale. It provides a clearly defined pathway for leaders within the organization, reducing the risk of instability.
During an acquisition, a succession plan can simplify the due diligence process by assuring potential buyers that the current leadership team is ready to guide the business into the future.
Employee retention is key. When employees clearly understand their individual path to success and how that plays a part in larger company growth, employees are more likely to commit their loyalty.
Steps for Effective Succession Planning
1. Defining Success: This step sounds obvious, but is often overlooked. In order to define success, the company should identify key qualities and skill sets that align with the organization’s values and goals.
2. Identifying Potential Successors: Thoroughly evaluate employees within the organization, who have potential to move into leadership roles. Or, explore outside hires if bringing in a fresh perspective and alternative experience aligns with company goals. Assess the current structure of the organization and how that might change when different people are shifted around. Premiere recommends utilizing a resource, such as the DISC profile, to aid in making these decisions and ensuring teams stay balanced with staff changes.
3. Training and Development Plan: Document a program for potential successors and action steps to get them to the next level of leadership. Consider elements like mentorship, job rotations, professional development, etc.
4. Communication: It’s important for both stakeholders and employees to receive clear communication surrounding the succession plan. This ensures the plan continues post-acquisition, as well as allows employees to feel empowered and informed.
5. Documentation: Especially when there are multiple parties involved, it’s critical that the process, expectations, and timelines are well documented, keeping everyone on the same page and consistency from one party to another.
Strategies for Integration
Timing is a paramount piece to the effective execution of a succession plan. Allowing enough time is crucial for thoughtful planning and to prepare employees and stakeholders for a potential transition. Other pieces to consider include business cycles, seasonal fluctuations, and large projects that may hinder the success of the transition.
Strategic goals should be at the center of all planning. If a succession plan goes against a company’s strategic goals, the misalignment can cause disruption and confusion among employees and potential buyers. Involving employees in the planning process, or at the very least keeping them aware through regular communication, can reduce uncertainty in the process.
If there is an acquisition involved, it’s important to continue to follow through the plan and provide support to newly appointed leaders. Monitoring progress and making adjustments on sometimes unforeseen situations contribute to the overall success of the transition.
Additional Considerations
Examining both legal and financial aspects involved in succession planning are crucial to its effectiveness. This is sometimes less obvious when an acquisition isn’t taking place and the owner of a company transitions to a less hands-on role.
Consider seeking legal counsel on which corporate documents need updating, staying compliant on regulations, etc.
Financial planning is a key part of succession planning. It includes assessing the company’s financial health, preparing for potential tax implications, and securing financing options if needed.
Be proactive. Planning ahead ensures continuity and enhances the attractiveness of the business to current and future buyers.
The Premiere Group’s team of experts help ensure that each consideration of the succession plan is carefully addressed prior to a transition and all details are fine-tuned post-acquisition.
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