how to create a business succession plan

Buying and Selling a Business | Templates

Succession Planning Template & 5 Steps to Write a Succession Plan

Published October 14, 2019

Published Oct 14, 2019

WRITTEN BY: Robert Newcomer-Dyer

A business succession plan includes step-by-step instructions that establish procedures in the event a business owner or key employee leaves the business. Our succession planning template helps business owners as they answer questions like who will take over the business, how long will it take, and what standard operating procedures need to be passed on.

There are five common steps involved in succession planning:

• Timeline of succession
• Determining your successor
• Formalize your standard operating procedures (SOPs)
• Value your business
• Fund your succession plan

Download Succession Planning Template

Click below to download our succession plan template as a DOCX or PDF:

• Download as PDF
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How Succession Planning Works

Succession planning is the set of events, timelines, and standard operating procedures that are established ahead of a change of ownership in a business. Business owners can create a succession plan in a number of ways, including by following this succession planning template, as well as by engaging a professional who’s well-versed in the process.

Who Should Create a Succession Plan?

Any business owner with a successful, thriving business should consider creating a succession plan. Often thought about in the context of retirement or sale of a business, a succession plan is also a critical tool in the event of untimely death or illness. A properly constructed succession plan acts like a will for your business, ensuring the best interests of the business are carried out.

When to Create a Succession Plan

Business owners wondering when to use this succession planning template to create a plan might wonder when they should get started. Much like a personal will, the answer depends on a variety of factors, but generally comes down to as soon as possible.

Creating a succession plan takes time and effort, and answering the questions accurately is not easy. For this reason, many business owners start planning for succession at least five to six years before a transition. Creating a succession plan should be considered as a contingency in case of death, illness, or other circumstance that creates an unexpected need for transition.

Succession Planning Resources

Finding help with succession planning may mean working with your current accounting firm (provided they have experience with helping to develop succession plans). The amount of help you need will likely scale up with the urgency of your succession planning needs, as well as the size and complexity of the business. Consider whether to bring in a temporary accounting and finance professional, or hire an accounting firm to assist you.

Some resources you can tap to help you with succession planning are:

As one of the accounting industry’s “Big Four,” PricewaterhouseCoopers (now doing business as PwC) is a firm with extensive experience in succession planning. The company’s self-described focus on small, privately held businesses minimizes the risk of becoming just another number and means it commonly deals with the sort of obstacles that you’ll encounter.

SCORE , the nation’s largest network providing small business mentoring, has developed a quick guide to succession planning. The real value is that small business owners can apply to be matched with mentors who offer their assistance on a volunteer basis. For business owners in need of simple succession planning help, this option is worth consideration.

Local Accountant

Small business owners may wish to consider working with a local accountant (provided that accountant is well versed in succession planning). Entrepreneurs who choose this route can ask around in their personal network, tap in to their local Chamber of Commerce or other local business support groups, or search for a certified public accountant in the directory provided by the American Institute of Certified Public Accountants.

The Five Steps to Writing a Succession Plan

Writing a succession plan can be a daunting task. Indeed, many business owners put it off because they’re not ready to tackle the complexities. We’ve narrowed the process down to five simple steps to direct you along the way, including choosing your successor and determining whether to sell your business using life insurance, an acquisition loan, or other methods.

The five common steps to preparing a business succession plan template are:

1. Timeline of Succession

There are two key types of succession plans: an exit succession plan and a death-or-accident succession plan. You may wish to write a death-or-accident succession plan well in advance of when you think you’ll need it to protect your business and successors in the event of unanticipated events. An exit succession plan should be written when you have a specific plan to transfer ownership of your small business.

The two most common types of succession plans are:

• Exit succession plan: A plan to transfer ownership on a specific date, e.g., at retirement.
• Death-or-accident succession plan: A plan for one’s business in the event of their death or disability.

While an accident plan should be considered at any age, an exit succession plan should be written when you are within several years of retirement or wish to otherwise exit the business. When writing an exit succession plan, you should have a specific date that you would like to transfer the business, and indicate whether you will remain involved in the business post-succession or prefer a clean separation.

Template Tip

On the succession planning template, answer all the questions in section one. If you’re writing this succession plan to exit your business on a known date, fill out any remaining details, including how long you expect the transition to last.

2. Determining Your Successor

A highly important aspect of writing a succession plan is choosing who will take over the business. Many business owners plan to have a family member, such as a child, take over the business. Other common choices include a business partner or key employee in the business. And of course, an outside buyer is always a possibility.

Common successors business owners choose are:

• Family members
• Key employees
• Outside buyers

Choosing a successor may be difficult, and requires considering what is in everyone’s—including the business’—best interest. While keeping the business in the family may seem like a clear choice, keep in mind that second generation businesses have a high failure rate. For this reason, many business owners choose instead to sell the business and provide a cash inheritance for their family.

Consider filling out profiles for at least three potential candidates. This will give you a good preliminary comparison of everybody’s skill and experience. Even if you’re already set on a candidate, you may wish to have a backup plan in the event the person leaves your business or doesn’t want to become an owner.

3. Formalize Your Standard Operating Procedures (SOPs)

As a small business owner, you should understand the importance of recording and formalizing day-to-day functions. Standard operating procedures should be documented for your managers and employees to reference, as well as any future owners of the business. Important items to document may include a daily checklist of opening and closing procedures, training for new employees, and a performance management system .

SOPs vary from business to business, but often include the following items:

Common Standard Operating Procedures

In our succession plan template, we’ve provided a checklist for these items—feel free to add or remove any, if necessary. Once you have completed an up-to-date document, attach it to your succession plan and check it off the list.

4. Value Your Business

Figuring out the value of your business should happen early—and regularly. It’s an unfortunate fact that many business owners tend to overvalue their enterprise, and these misjudgments can snowball into financial errors when planning for retirement.

There are several ways you can determine the value of your business, from using a simple business valuation calculator to provide a rough estimate, to following more advanced methods for how to value a business , as well as hiring a professional appraiser. You may also consider working with a company that offers business valuation services, such as BizEquity or Guidant Financial .

A good practice is to consider the lowest price the business should sell for. When the business is eventually listed for sale, it may take a long time to find a buyer who is willing to pay your asking price. The succession plan should provide stipulations regarding how long to wait before dropping the price, how much to lower the price, and the lowest acceptable offer.

5. Fund Your Succession Plan

Few buyers out there have enough liquid cash to pay for your business upfront. This is why every succession plan needs a specific plan for how the buyer will make the purchase, whether it’s a loan, installment payments, or other option. The last thing you want is to reach your retirement date, or triggering event, and find that your chosen successor has no way to afford your business.

This is also why your funding plan will often need a buy-sell agreement. This is a legal document in which your buyer agrees to a specific course of action (like taking out a loan or life insurance policy) in order to afford the purchase. Once you’ve settled on a specific method of funding, make sure you meet with a legal professional to draft your buy-sell contract.

Common Succession Plan Funding Options

Life insurance.

Most commonly used when a family member or co-owner is taking over the business, a life insurance policy can help your successor purchase the business from you or your heirs. Contrary to how it sounds, life insurance isn’t only used in the event of one’s untimely death. Permanent life insurance builds cash value that can be taken out at any time, so it can also be used in the event of retirement, disability, or any other triggering event.

Life insurance arrangements are common in family successions, especially when you may have multiple children, but only one is taking over the business. With your chosen successor as the beneficiary, a life insurance payout can enable them to purchase shares from your other children, thus leaving everyone with some compensation and financial security.

Acquisition Loan

An acquisition loan is money borrowed by the buyer in order to purchase the business. This is common when a key employee or outside party is taking over and they need some funding to afford the purchase. Buyers can typically get 70% to 80% of the purchase price financed from a bank or the Small Business Administration (SBA) —which is great news for sellers who want to be paid in full upfront.

Acquisition loans are secured against future profits of the business. While this makes them a generally reliable option, it also means a bit of work for the seller. Prior to the purchase, you’ll need to provide a lot of details about your business for the bank’s due diligence. Even then, however, the loan is not guaranteed. Pre-approval can provide some security, but it would need to be undergone regularly (every six to 12 months) up until the transfer date or triggering event.

Seller Financing

Seller financing is when the buyer pays you back gradually over time. This is one of the easiest and most flexible arrangements, as the business owner and buyer can set whatever terms they like. Most agreements involve a down payment of 10% or higher, followed by monthly or quarterly payments with interest until the purchase is paid for in full. Again, however, the exact terms can vary widely.

The key downside to seller financing is the time it takes to get paid back. Especially if you’re relying on the sale to fund your retirement, a 20-year term may be less than ideal. However, given the flexibility of seller financing, it can be possible to find an arrangement that works for everyone.

Business Succession Planning Tips From the Pros

We asked industry experts in succession planning to provide some tips for business owners thinking about creating a succession plan. Choosing the right successor is a critical step, as is ensuring that you have realistic expectations throughout the process. Many business owners also ask themselves whether they should consider creating a succession plan.

Some tips when creating a business succession plan are:

Groom Your Successor Ahead of Time

Ray mckenzie, founder & managing director at red beach advisors.

“A majority of businesses do not have a formal business succession plan and never anticipate it being needed.

“The most common mistake business owners make is they retain and keep information only for themselves. This can be signatory rights, passwords, access, or key phrases.

“Review your company succession plan every six months and every time a critical employee leaves the business.”

Keep Your Expectations Realistic

Ed alexander, esq., founder at alexander abramson pllc.

“The biggest mistake small business owners make in their succession plans (aside from not having one) is having unrealistic expectations.

“First, business owners regularly have an unrealistic conception of what their business is worth. It’s their baby, and they have an emotional connection to it, but this connection can’t be laid out in a profit and loss statement.

“Second, Family Business Institute data has shown that 88% of small business owners believe that transferring the business to their children is a viable succession option. The reality is that only 30% of small businesses will pass to a second generation, and only 12% to a third generation.”

Consider the Risk of No Succession Planning

Patrick hicks, head of legal for trust & will.

“Having a business succession plan becomes more important if your business has valuable assets or has employees. If you operate your own business with just yourself and no business assets, the downsides of having no plan may be smaller.

“If you have employees, consider who will be able to make payments to those employees and who will carry on operations after your death.

“Machinery, equipment, materials, intellectual property, and customer lists can all be valuable assets—the brand and reputation associated with your business—that can all disappear if you don’t have a plan in place to deal with those assets.”

One of the most common mistakes business owners make in succession planning is failing to review their plan regularly. Time changes many things, and in order for your succession plan to be effective, it needs to be reviewed regularly and updated to reflect any changes. These could be company changes, tax law updates, changes in valuation, or new industry developments, among other things.

For family-owned businesses, you’ll also need to consider aspects such as changing family dynamics—do all members have the same desire regarding what to do in the future, or are all key players still with the business? It’s essential that business owners update and adjust their business plan to reflect changes such as these.

Bottom Line

Often, the most difficult part of succession planning is answering difficult questions. What unexpected events should you prepare for? Who will take over your business? How will you compensate yourself, your spouse, or your children? You can answer these questions with the help of our succession planning template. You may also wish to engage legal or financial experts with experience in succession planning.

About the Author

Find Robert On LinkedIn

Robert Newcomer-Dyer

Robert has over 15 years of experience in sales leadership, finance, and business development. He recently spent six years leading a team of small business financing professionals, facilitating the deployment of critical capital to over 9,000 small businesses across the US.

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How to Create a Business Succession Plan

For many small business owners, maintaining positive cash flow and a stable balance sheet can be an ongoing battle that consumes virtually all of their time. Even retirement often seems like a distant speck on the horizon, let alone plans to hand over the business. However, establishing a sound business succession plan is beneficial for most business owners and can be absolutely necessary for some.

For business owners that are at or near retirement, the issue of succession cannot be ignored. In this article, we will take you through the steps you'll want to take to create a successful succession plan.

Picking a Successor Isn't Easy

Many factors determine whether a succession plan is necessary, and sometimes the logical and easy choice will be to sell the business lock, stock, and barrel simply. However, many owners prefer the thought of their businesses continuing on even after they're gone.

Choosing a successor can be as easy as appointing a family member or assistant to take the owner's place. However, there may be several partners or family members from which the owner will have to choose — each with a number of strengths and weaknesses to be considered. In this case, a lasting resentment by those who were not chosen may happen, regardless of what choice is ultimately made. Partners who do not need or want a successor may simply sell their portion of the business to the other partners of the business in a buy-sell agreement .

How Much Is the Business Worth?

When business owners decide to cash-out (or if death makes the decision for them), a set dollar value for the business needs to be determined, or at least the exiting share of it. This can be done either through an appraisal by a certified public accountant (CPA) or by an arbitrary agreement between all partners involved. If the portion of the company consists solely of shares of publicly-traded stock, then the valuation of the owner's interest will be determined by the stock's current market value.

Life Insurance: The Standard Transfer Vehicle

Once a set dollar value has been determined, life insurance is purchased on all partners in the business. In the event that a partner passes on before ending his relationship with their partners, the death benefit proceeds will then be used to buy out the deceased partner's share of the business and distribute it equally among the remaining partners.

There are two basic arrangements used for this. They are known as "cross-purchase agreements" and "entity-purchase agreements." While both ultimately serve the same purpose, they are used in different situations.

Cross-Purchase Agreements

These agreements are structured so that each partner buys and owns a policy on each of the other partners in the business. Each partner functions as both owner and beneficiary on the same policy, with each other partner being the insured. Therefore, when one partner dies, the face value of each policy on the deceased partner is paid out to the remaining partners, who will then use the policy proceeds to buy the deceased partner's share of the business at a previously agreed-upon price.

As an example, imagine that there are three partners who each own equal shares of a business worth $3 million, so each partner's share is valued at $1 million. The partners want to ensure that the business is passed on smoothly if one of them dies, so they enter into a cross-purchase agreement. The agreement requires that each partner take out a $500,000 policy on each of the other two partners. This way, when one of the partners dies, the other two partners will each be paid $500,000, which they must use to buy out the deceased partner's share of the business.

Entity-Purchase Agreements

The obvious limitation here is that, for a business with a large number of partners (five to ten partners or more), it becomes impractical for each partner to maintain separate policies on each of the others. There can also be substantial inequity between partners in terms of underwriting and, as a result, the cost of each policy.

There can even be problems when there are only two partners. Let's say one partner is 35 years old, and the other is 60 years old — there will be a huge disparity between the respective costs of the policies. In this instance, an entity-purchase agreement is often used instead.

The entity-purchase arrangement is much less complicated. In this type of agreement, the business itself purchases a single policy on each partner and becomes both the policy owner and beneficiary. Upon the death of any partner or owner, the business will use the policy proceeds to purchase the deceased person's share of the business accordingly. The cost of each policy is generally deductible for the business, and the business also "eats" all costs and underwrites the equity between partners.

3 Reasons to Have a Business Succession Plan

Creating and implementing a sound succession plan will provide several benefits to owners and partners:

• It ensures an agreeable price for a partner's share of the business and eliminates the need for valuation upon death because the insured agreed to the price beforehand.
• The policy benefits will be immediately available to pay for the deceased's share of the business, with no liquidity or time constraints. This effectively prevents the possibility of an external takeover due to cash flow problems or the need to sell the business or other assets to cover the cost of the deceased's interest.
• A succession plan can greatly help in establishing a timely settlement of the deceased's estate .

The Bottom Line

Proper business succession planning requires careful preparation. Business owners seeking a smooth and equitable transition of their interests should seek a competent, experienced advisor to assist them in this business decision.

American Bar Association. " Forms of Stock Purchase Agreements ," Page 1.

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A Beginner's Guide to Business Succession Planning for Small- and Mid-Size Business Owners

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Having a business succession plan in place can minimize fallout if you lose a key employee. While it takes some extra analysis and foresight — and some transparent communication and documentation — it can pay off when a transition to new leadership goes smoothly.

As you run your business, you're likely focused on the day-to-day challenges. But time can go by quickly, and it's crucial to plan the next generation of leaders.

Proper business succession planning — that is, identifying and developing employees to step into future roles — can set you up for success down the road while also improving your employee retention rates and engagement now.

"It's a strategic approach to thinking about scenarios and plans to ensure smooth transitions between current and future incumbents," says Jay Caldwell, chief talent officer at ADP.

Let's explore the basics of business succession planning, including the benefits of doing it, key steps to take to set it up and the challenges you may encounter (and their solutions).

What is business succession planning?

Succession planning primarily focuses on how you'll replace essential leadership roles in your organization, including the owner and CEO. It may also include guidelines for continuity in other positions that are critical for success or difficult to fill. The idea is to start training and nurturing the next round of talent so you aren't left scrambling if a key employee quits, retires, gets sick or passes away.

Your succession plan may also include operational exit planning detailing what you'd like to happen when you or other top stakeholders retire. Documentation can settle decisions ahead of time such as whether you'd like to leave the business to family, sell it to another company or set up a buy-out with your employees.

"Every business owner wants to minimize distractions to their operations and goals," Caldwell notes. "Changes in leaders can be quite disruptive, particularly if there is not a plan in place."

Succession planning keeps your business running smoothly even when key employees leave. This is one just of the reasons to make business succession planning a priority .

Succession planning can help you find candidates and retain them

However, strategic workforce planning is sometimes not on the radar for small and mid-size business owners. Only 35 percent of these businesses have started the process, and of this group, only 8 percent have a complete written plan, according to 2022 research from MassMutual .

"It could be because of the demands of their operations, a lack of development resources or simply overlooking the importance of planning for transitions," Caldwell observes.

One common issue for smaller organizations when it comes to this type of planning is that you usually don't have a broad bench of talent to draw on. However, if you're thinking about the future of your business early on, you're more likely to ensure a viable candidate has been trained, whether internally or outside your organization. It can keep you from having to do a sudden — and possibly costly — hiring search. It also saves you and other leadership from working overtime to handle the role while looking for a replacement.

Your succession plan can prevent the loss of critical knowledge after someone leaves and conflict between employees suddenly vying for the open position. If your family members are part of the business, your succession plan can even guide the next generation of owners.

Finally, a succession plan has the potential to improve your employees' performance today. That's because your top contenders will stay committed to your organization if they know they're lined up for a role and help future-proof your management team .

"Seeing a clear future with the company is a top driver of retention," says Caldwell. "Establishing and following through on development action plans make succession candidates feel challenged and engaged, which can help ensure they are emotionally committed to doing their best work." He adds, "These are your best people and would be very valuable to your competitors, so succession plans can help protect your most important asset!"

Key aspects to have in a business succession plan

Because every business needs a unique plan, there aren't pre-made blueprints. But you can take several common steps to ensure your business succession covers the major points:

• Identify priority roles. "In a world of finite time and resources, it's unlikely you can have a plan for all roles," says Caldwell. "Pick the ones that have the most significant impact on your business."
• Define what is needed for each role. Consider the required experiences, knowledge, skills and behaviors to succeed in the short and long term. Clarity is a key part of the succession planning process .
• Find possible succession candidates for each role. Look for up-and-coming leaders in your organization, external candidates and family members. Consider where they stand right now versus the position's ideal requirements and what training or skills they will need.
• Discuss career aspirations with your candidates. Ask about their future career goals and if they see themselves in these higher positions. Also, ask what they might need to grow into these roles.
• Set an action plan for developing future candidates. Think of the training, exposure, relationships or experiences that you can offer for these roles in the near term. For example, you could have the successor candidate fill the role temporarily while the current employee is out for a limited time.
• Estimate when transitions may occur. Consider when you or other leaders want to start stepping down. Your plan could include a gradual phase-out, where existing leaders adjust their roles to focus more on mentorship/coaching their successors.

Overcoming road bumps with business succession planning

While succession planning may sound straightforward enough as you line up your wants and wishes for your organization, some common challenges can get in your way.

Vague goals and requirements

You must be clear about each role's requirements and the steps needed to develop your employees. You also should be transparent with potential candidates about how you view their future and gauge their interests rather than making assumptions about what they want.

Missing leadership buy-in

"Many leaders don't like thinking about a future where they are no longer with the company," says Caldwell. "It can feel morbid or counterintuitive, and so they'll need to be sold on the value of doing so."

Lack of available talent

Developing future talent is a must because it cannot happen overnight. You and your HR team should also network with external candidates to build the pipeline of those who could be brought into the company. You can cut down on the time an open position goes unfilled. On top of skills, focus on the diversity of future talent pools and develop a broad spectrum of leaders from different backgrounds and experiences.

Conflict between future candidates

Improper or unclear plans can create unhealthy competition between your employees, leading to distrust and a lack of collaboration. That's why fostering open, honest dialogue about your plans is essential rather than leaving everyone guessing what's coming next.

Emergency loss of employees

Unfortunately, life can get in the way of your succession plan with the sudden departure, illness or death of a leader. Your succession plan should consider how your business would react to an emergency departure. You could also cross-train employees across several roles. You develop more people who can step up in a pinch, and you may uncover unknown employee talents and passions for a new position.

Tricky family relationships

Succession planning can have extra challenges for family business owners to navigate. In some cases, making decisions you think are good for the company can lead to hurt feelings.

"This situation can have heightened emotional dynamics given the personal relationships inside and especially outside of the workplace," Caldwell warns.

You may want to try to make sure your personal relationships don't hinder your objectivity in considering successor candidates. Also, it's a good idea to recognize communication breakdowns that create a lack of transparency in how you're making decisions. If you want to hand over your business to the next generation one day, a well-designed and clearly communicated succession plan is critical.

Where to get help with your business succession plan

Building a succession plan is not easy, especially if it's beyond the experience of anyone in your organization. Even if you feel comfortable with your plan, it still could help to reach out to a professional.

"Getting a third party's opinion can help mitigate the challenges, increase perceptions of fairness and lead to a smoother transition when the time comes," Caldwell says.

You can turn to HR professionals with a long history of experience in helping other small and mid-sized businesses. They can guide you about the essential questions to ask yourself and other stakeholders to shape your plans and the documents necessary to lock it down.

Consider the ADP Talent Management and Succession Management programs from an outside perspective. They can guide you through this important process.

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Business Succession Planning: A Step-by-Step Guide

Business succession planning is a valuable tool for both small businesses and growing enterprises. In small businesses, succession planning means effectively managing changes in ownership or leadership. In larger organizations, it that can help to avoid potential talent gaps that have a detrimental effect on the company. The right strategy can help you plan ahead so that you can transfer knowledge and retain employees in key roles. And this is a top priority in these uncertain, post-pandemic times.

With that in mind, we have created a step-by-step guide to help you design and implement a plan that sets your business up for long-term success . We will take a look at the benefits of succession planning in HR and break down the succession planning process to help you understand everything that’s involved.

What Is a Succession Plan?

Why is business succession planning important, what is succession planning in hr, the business succession planning process in 5 steps, business succession planning best practices, succession planning template, succession planning tools.

• Create a succession plan with performance management software 🚀

So, what is the definition of succession planning? How can you apply it to your business?

Business succession planning is a process that helps you prepare your company for the future. Essentially, it’s about creating a strategy and process for identifying potential future leaders and developing their skills so that they are ready to take on a new role when one of your key employees leaves the company.

Through careful planning, communication, training, and feedback, you can create a successful change management strategy that prepares you for potential transitions in your business. This helps you avoid key player talent gaps. It also helps you proactively develop your inclusive leaders of the future.

Despite its valuable role in business planning, according to a survey conducted by SHRM last year, only 44% of HR professionals claim that their organization has a succession plan in place. What’s more, only 21% of those that do have a plan in place have created a formal succession management plan.

Do you have a detailed succession plan in place? If not, then you’ve come to the right place.

According to the 2021 Global Leadership Forecast , companies around the world are facing a leadership crisis. In fact, only 11% of surveyed organizations reported that they have a “strong” or “very strong” leadership bench, the lowest rating in the past 10 years (it has been in decline since 2011’s reported 18%). This drop has been attributed to a decline in leadership development and transition training in organizations.

Understandable given the distractions the world has had over the past couple of years.

Nonetheless, this figure shows just how important it is for organizations to work on their succession management strategies. This is the most effective way to ensure that the leaders of the future have the right skills and experience to guide them to success . And this is what business succession planning is all about.

By preparing strong leaders for the future, you can help your organization reach its long-term goals, reduce employee turnover , and build a stronger and more resilient business that’s ready to thrive.

Benefits of Business Succession Planning

In case you’re still not convinced, let’s take a look at some of the specific benefits of business succession planning in a bit more detail.

• Identifying and developing your existing employees for future leadership roles helps you to promote from within . Aside from reducing turnover and hiring expenses , this also helps you ensure your future leaders have the right organizational knowledge and internal relationships , something which external recruits will lack.
• Promoting the development of your existing employees shows them that you are willing to invest in their future . This can be a great morale boost that motivates employees to stay at your company. This helps you stay competitive and attract top talent to your business.
• A well-designed succession plan helps you formalize training for both present and future leaders. It keeps your business moving forward and helps you retain your top performers .
• Business succession planning is also an effective tool for mitigating the risks of organizational change . This helps you avoid any potential talent gaps when someone leaves your company. It also helps you pass on valuable institutional knowledge to future leaders before it’s too late.

Succession planning in HR consists is a vital part of talent management. It’s all about your role as an HR professional in identifying key roles and positions that may need filling in the future and finding and developing internal candidates who may have the right skills and experience to fill them. The right strategy can help you retain staff, cut recruitment costs and better manage your internal recruitment processes .

HR succession planning is the process of identifying, selecting and developing employees who could potentially become key players with the right development. This helps you prepare for potential organizational changes so that you have skilled and engaged employees waiting to fill key leadership roles when the time comes.

As an HR professional, you play a significant role in preparing and facilitating your organization’s succession management strategy. However, for your succession planning in HR strategy to succeed, it’s equally important to get the support of senior management so that your plan is as effective as possible and aligned with your organizational goals .

Talent Management and Succession Planning: Employee Buy-in

Business succession planning is also about managing your existing talent so that you are able to retain as much institutional knowledge and experience as possible. This means that, aside from working with senior management, you also need to rely on the feedback of your employees.

What do we mean by this?

Essentially, it’s all good and well managing and developing your existing talent, but they need to be on board with your succession plan and have a genuine interest in remaining at your company and developing their skills. Otherwise, the time and money you invest in preparing them for future leadership positions will be wasted.

Make sure the potential succession candidates you select are:

• Interested in learning new skills
• Comfortable with change
• Motivated and engaged
• Able to adapt to uncertainty and new working environments
• Willing to take on more responsibilities
• Up for a challenge

Now that we’ve discussed what business succession planning is, let’s take a look at what you need to include in your succession planning process.

Make sure your succession planning framework includes the following 5 key stages.

Define & Align Your Goals

The first step is creating a succession leadership plan. This means you need to define your goals and align them with your business. You may need to meet with senior leaders for this phase to ensure your goals are aligned with your overall strategy.

You also need to have a clear idea of who you are as a business before creating your succession leadership plan. Once you understand “who” you are, you will be better equipped to identify your potential new leaders.

Finally, to complete your plan, you need to:

• Define the roles, skills, and experience that each successor will require (your succession profiles). Make sure you gather as much feedback on this as possible from your team to help you get a full picture of what you need to include in your succession plan.
• Create a forecast of your company’s needs . Where do you need to be as a company within the next 5 years? How will your organizational structure change over this time? Think about your turnover trends, compensation strategies, who may be due to retire, and training and development plans for the future.
• Update your job descriptions to reflect the information you’ve gathered. Make sure you are clear about your expectations . This will help you define the right candidate profiles for your succession plan.

Create Your Succession Strategy

Defining your goals is one part of your plan, but you also need to create a comprehensive succession planning strategy to make sure you are on the right track – you need a business strategy game plan !

So, what does this mean, exactly?

Put simply, you need to define a series of actions and strategic moves that help you align your succession goals and objectives with your overall HR strategy .

Consider the following:

• Where do you want to be as a business? What roles, positions, skills and experience will you need to succeed?
• Which senior/leadership roles do you need to create a succession plan for?
• Will you take business succession planning into account during performance appraisals in order to identify potential candidates throughout the year?
• Does your business have any specific vulnerabilities that may affect your succession plan? (For example, a high percentage of employees that are due to retire soon)
• Have you considered adjusting your hiring strategy to account for successor roles?

The key here is to be as proactive as possible with your strategy. Anticipate potential gaps in your workforce before they occur.

Identify Potential Candidates

The next step is to evaluate your current workforce in order to identify key positions that may need filling in the future, and key employees that may be suitable replacements. This is where you will implement the succession profiles and job descriptions that you created in the previous step. The more information you include in your profiles and descriptions, the easier it will be to identify the right match within your existing workforce.

Generally speaking, the best candidates will be supportive, proactive, engaged with learning and development, great problem-solvers, adaptable and able to take on more responsibility.

It’s important to be as objective as possible in this stage. You also need to consider that potential candidates may not currently be in leadership roles. It’s all about finding potential. The most effective way to do this is by using succession planning tools and metrics, rather than relying on personal opinions. More on this shortly.

Establish Professional Development Opportunities

As soon as you have your list of potential candidates and you know what skills they need to work on in order to eventually fill the role you have matched them to, it’s time to create a professional development plan to help them get where they need to be.

Which skills does each candidate need to develop? What learning opportunities would help them get the right experience and expand their current skillset? Are there any knowledge gaps that you need to address?

Create a list of the skills each candidate currently has vs. the skills they need to acquire, then work out the best way to offer them suitable opportunities for learning and development. Create individual development plans, offer formal training, consider creating a mentoring or coaching program to support them, and encourage continuous feedback and communication.

Implement Your Plan

The final stage is implementing your business succession plan. This will usually be a gradual transition with multiple short and long-term layers.

The first layer involves officially announcing your succession plan and notifying potential candidates. You then need to roll out your individual development plans and arrange training. Introduce candidates to their mentors, if you are using them, and encourage them to meet regularly. This will show your employees that you support their professional development, and you can see that they have potential.

Most importantly, make sure you collect regular feedback to see how your individual development plans are progressing, and if potential candidates are on track to reach their succession objectives.

Here are a few business succession planning best practices to help you create a plan that sets you up for success:

• Formalize your plan . The sooner you create and formalize a detailed succession management plan, the better. Make sure your succession planning process focuses on all key stages. That means not just identifying the roles and skills you need for your future leaders, but also implementing individual development plans to get your workforce where they need to be.
• Make sure your succession planning in HR plan is dynamic . Succession planning is all about change management. Be prepared to adapt to change by constantly updating your plan.
• Collect regular 360-degree feedback . This will help you keep track of your employees’ interests, skills, performance, strengths, weaknesses, and opportunities.
• Promote open communication . This will help you build trust and set clear expectations.
• Consider your entire workforce . Don’t just focus on your managers. Your leaders of the future might be hiding in lower-level positions. Look for potential, not existing skills.

One of the most valuable tools you can use for this strategy is a succession planning template. The right template will help you define key roles within your company and identify suitable replacements. Make sure you include a template in your HR audit checklist (check out this HR audit checklist template if you don’t already have one!)

Here are a few examples of the information you can collect with a succession plan template:

• Current key employees and potential replacements
• Key skills and experience that each position requires
• Candidate training and/or experience level
• The time it would take to onboard a candidate for an existing position
• An overview of upcoming vacancies (for example, key employees that are due to retire)

In order to create and manage an effective business succession planning strategy, you need to use the right succession planning tools. These are the tools that will help you identify which candidates could potentially be future leaders at your organization. They also help you identify potential succession gaps and map the right candidates to the right positions.

Ideally, you should be using a range of tools to help you get a full picture. Here are a few examples of succession planning assessment tools that will help you with this:

• Personality assessment tools : to help you get a comprehensive picture of your existing culture (e.g. tools for tracking motivation levels)
• Behavioral assessment tools : to help you identify and analyze employee leadership skills and assess how they behave at work (e.g. situational judgment tests)
• Cognitive assessment tools : to evaluate critical thinking and reasoning skills related to performance (e.g. a cognitive aptitude test)
• 360-degree feedback : to gather valuable input from employees and their peers in order to understand their readiness to take on future roles (included in most performance management software solutions)

Succession Planning Software

Finally, once you have designed and implemented your business succession plan, you need to regularly monitor progress. This will help you determine if your plan is working and if potential candidates are on track to reach their succession goals.

And this is where succession planning software can help.

Succession planning software isn’t as daunting as it sounds. In fact, most HRIS systems can provide you with the data you need.

The first thing you need is access to key metrics and KPIs . This includes turnover rates, retention rates, cost-per-hire, time-per-hire, and the rate of planned positions being filled. You also need to evaluate performance metrics to determine if business succession planning candidates that have taken on their new role were ready for it.

Did they achieve the training and experience they needed during the development phase in order to take on their new leadership role? If not, what could you have done better?

By analyzing the right data, you can determine what areas of your business succession planning strategy you need to work on in order to continuously improve the quality of your succession candidates. And by using the right HR software and performance management software you can easily identify talent gaps, make comparisons between employees, and simplify the succession management process.

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This article is going to explain what succession planning is and how it can be applied to your business.

After reading this guide, you will have a strong idea of creating or improving your succession planning process and the best practices involved.

What is succession planning?

Business succession planning, benefits of succession planning, succession planning process, succession planning best practices, faq about succession planning.

• Succession planning template

Succession planning is the process whereby you identify new leaders and develop them to take over the role of the incumbent.

For businesses to thrive, it needs to avoid moments of crisis and lack of leadership.

At some point, succession planning will help with such a situation by preparing a candidate for a planned or emergency replacement. This could be because of retirement, a new opportunity, or in the event of death.

Succession planning is your safety net to ensure that business operations can remain smooth. A robust process will help you identify key individuals who could fill leadership positions.

In the best-case scenario, you will be given advance notice when someone is going to leave. A succession plan prepares you for the worst-case scenario and no notice.

At the same time, an effective succession planning strategy will avoid any questions of succession where leadership positions are concerned.

In the monarchy, this is often resolved through the order of succession. A well-understood model that passes the office to the nearest descendant. This model is also common with family-run businesses that intend to leave the business to their children or next of kin.

In business, succession planning plays a vital role in identifying candidates to take on more challenging roles. When an important postholder departs they leave behind a void that can disrupt the company.

No matter the size of your business, a succession plan is a key to having a smooth transition.

Large companies such as Pepsi , Microsoft , and General Electric have well-known succession plans for executive talent.

For large corporations, it will typically fall to the CEO and the board of directors to oversee the succession plans. They will evaluate employees to identify leadership qualities and provide training for those in consideration.

Often the succession plan will look internally for candidates to take over positions. However, some companies may look to external candidates and may even employ the use of headhunters.

Smaller-scale companies may not need a comprehensive succession plan compared to large businesses. However, there will still be a need to identify someone to take over in the event of an emergency.

Therefore it is wise to train potential successors so they are prepared to step up if the need arises.

Types of succession plans

There are two types of succession plans that should be considered. This will give your business something to fall back on in the case of an emergency.

1. Long-term succession plan

The first type of succession plan you should consider is your long-term succession plan. This is the plan that you will more or less stick to as a standard for key positions.

A succession plan of this nature can be reevaluated and changed as the company grows. For large companies, this would be the plan that outlines the details of succession for all key positions.

2. Emergency succession plan

A secondary emergency succession plan can also be created, where appropriate, to be deployed in the event of an emergency.

This type of plan may involve more temporary measures but is intended to keep operations running smoothly.

This could see other senior members of staff take on extra responsibilities while a replacement is sought.

Many small and medium businesses do not have a succession plan. Of those that do, some of them have only informal plans.

This can be a risk for your business as there could be unforeseen incidents that could occur such as death. It is worth creating a formal, written succession plan that is developed and easily accessible.

Here are some of the benefits for businesses of any size to create a succession plan:

1. Candidates ready to start

When an upcoming promotion, retirement, or departure is approaching you will have the next generation of leaders ready to go.

Thanks to your succession plan the replacement will already have the skills required to take over the role.

2. Encourages managers to develop junior employees

Your succession plan can help your managers to start developing lower-level employees.

The plan helps to define clear progression routes through the company so managers can share appropriate training and information with junior staff.

Managers will also be able to start training their replacement when promotions are approaching.

3. It leads to higher job satisfaction

Employees report higher job satisfaction when there is a succession plan at their company. This is because it helps to define routes to progressions and lowers job insecurity.

A succession plan can help employees understand what they need to do to achieve a promotion. It can help with goal-setting and giving employees a sense of direction at work.

4. Helps to track progress

Succession planning can help your managers to track employee progress through performance reviews.

Internal opportunities can also be quickly filled with knowledgeable employees who have been upskilled and crossed trained.

5. Keeps shareholders confident

Whenever a high-ranking postholder leaves the organization it can leave shareholders feeling uneasy.

In some cases, they may look to sell their shares. A good succession plan can help keep investors on board.

For positions like CEO or CFO, the board may have had some input into the choice of successor. This will give the shareholders confidence in the company and the new postholder.

6. Cultivate and maintain company loyalty

Having a strong culture of promoting from within can lead to increased company loyalty.

You can attract talented employees who will stay with you for a long time. This helps them to have a strong understanding of the businesses, morals, and expectations.

Employees are more likely to stick around for the long term if there are defined advancement opportunities.

Instead of an informal plan, it’s a good idea to make a comprehensive document that outlines how succession should work.

Small and family businesses may only need a limited plan that outlines succession for a single person.

Larger corporations may need a comprehensive document that starts with the hiring process and works its way through the ranks and details different leadership positions.

The fundamentals of your succession plan will remain the same which is what we’re going to look at now.

It’s also worth pointing out that this document can be revised and amended whenever it is necessary.

1. Determine the scope

You will need to figure out how comprehensive you want your succession planning to be.

A small business might only need to find a replacement for ownership. Medium and large businesses may only want to consider the succession plan for their C-suite of employees.

It may also be the case you want a succession plan that covers every eventuality from store manager to distribution to CEO.

Ask yourself the following questions to decide what is best for your business:

• Do you only need a plan that covers senior management?
• Do you want a succession plan that covers the entire organization?
• Are there any vulnerabilities in your business? Such as having a division with a higher amount of employees nearing retirement. Are you prepared for that?
• Should performance reviews be used to help identify potential candidates?
• Should the talent acquisition process be a part of your succession plan?

It’s important to understand what your specific needs are as well as the needs of the business.

The size and type of your business can help to inform some of your decisions but ultimately every business will be different.

2. Identify key positions and skills

First, you have to identify the key roles in your organization that will be good to secure.

It could be the CEO, CFO, CCO, CHRO, and different heads of departments.

Second, you might have some specific specialists that are unique to the industry or your business, e.g. it might be some highly skilled engineer, programmer, scientist, etc.

Consider the following questions to identify key positions and the skills needed for that post:

• How does this position impact the company?
• If this position became vacant, how would that affect the company?
• Are there some big risks if this position became vacant?
• What skills (both hard and soft) are needed for this specific role?

The objective is to figure out how crucial the position is. If the company would be severely affected by a vacated position then this is one that should be considered within your succession plan.

You will also need to understand what specific attributes are needed for the role. That way you can build your training and development around nurturing those key skills.

3. Identify potential candidates

Perhaps the most crucial stage is finding the employees that might be suited to a tougher challenge .

You could ask the current postholder for help determining who could step up in their absence.

It’s also worth considering that the right person for the job isn’t necessarily the next in line. Candidates could be sidestepped in the role or there could be other promising candidates in the business.

You may wish to make hiring a part of the plan and therefore can use interviews to vet potential recruits for career prospects.

Try to answer the next questions:

• Who are the strongest candidates to step into this role?
• What skills do they possess that could benefit their new office?
• What skills are the candidates lacking?
• Does this person have the appetite for more responsibility?
• What training will they need to succeed?

It’s important to identify people who want more responsibility. Your top choice maybe someone who is happy in their current role and not looking to change.

This is something that can be gauged during annual reviews or in meetings about their professional goals.

4. Speak to the candidates

It would be wise to speak with the people you are considering.

This will give you a clear answer if they would be interested in the role.

Don’t make any promises but explain that they are being considered for leadership.

Explain that nothing is guaranteed as there are plenty of moving factors to consider. This includes the current postholder, the company, and the candidates.

However, you can gauge their interest and it may help to encourage high-performing individuals to remain loyal to the company.

5. Work on professional development

Leadership development is worth investing in particularly for employees you have identified for succession into key roles.

There are a variety of ways to develop potential successors and help them to develop leadership skills.

You can create a leadership development plan to ensure candidates have the right skills and are a good fit for leading positions. Employees being groomed for leadership roles can be developed in several ways .

You need to test your employees to make sure they can meet the demands of the increased responsibilities.

Some of the ways this can be achieved are through:

Connect the candidates with business leaders in your company. They can help to develop the skills of succession candidates and even share knowledge that might not be immediately obvious.

You can send prospects on courses to help develop their skills. These could be in-house courses or ones run through independent third parties.

Task forces

Task forces and project management is a great way to test your candidates. This will give them the opportunity to lead a team and test how well they cope under pressure.

When you think about development consider the following questions:

• What is the best way to upskill?
• What resources are required and available?
• Are there some additional skills needed?

The focus should be on improving a candidate’s interpersonal abilities and communication skills that are important in a leading position.

You will also want to give them the opportunity to learn and develop the necessary skills required to do the specific job.

6. Trial and error

There should be ample opportunity to give your succession plan a trial run with the candidates you are considering. For example, if the postholder is away on holiday or off sick for an extended period you can use this as an opportunity to try someone in the role.

The benefit here is twofold, the candidate will get a feel for the position and appreciate the opportunity. While you can assess whether they are the right candidate for the position.

Note: Such tests can affect the team so pay close attention to this . This is especially true for external candidates and people from different teams. Not everybody will like it, unless the candidate is a strong leader from the inside of the team.

This is what you need to consider:

• How does the employee interact with others?
• Have they kept the department running smoothly?
• How do they handle issues that arise?
• How do they react to stressful situations and conflicts?
• How much help do they need in the role?

You want to see them step up and take control of the position. This will help identify if there is any specific training they need to take the role full-time.

You can gauge whether someone is wrong for the position. This may come down to their interpersonal skills or ability to deal with new challenges.

7. Refine and redefine

Your succession plan is something that can be developed over time.

It may be that what was working years ago isn’t quite the same now.

You may need to adjust the succession plan to adapt to a changing business landscape. As the business grows you may need to redefine what is included in your succession plan.

It would be prudent to start with the most important roles in the business. After all, you can’t totally predict when a key position will become vacant.

Once you have those key positions locked down you can start to expand the scope of your succession plan.

1. Start from key roles

You should start with the most important roles first.

Which of the positions will have the greatest effect on your business if the postholder doesn’t turn up tomorrow?

Roles at an executive level are going to be the most disruptive ones. From there work out the specific skills and knowledge required for the role. This will help you to create your plan and identify potential successors.

Once the most pressing roles are covered you can look at what other roles are important to include.

2. Talk to your employees

Your succession plan will affect people and may make some people feel nervous.

It’s important to explain the scope of the succession plan and why certain roles are included in it.

You may only look to include executive positions or your plan may include managers and supervisory staff as well.

By giving a clearly defined scope you can avoid members of staff second-guessing their position.

3. Collaboration between management and HR

This is a process that should be driven by the business leaders with support from HR where necessary.

It is not strictly an HR process and therefore senior leadership should be communicated with regarding the succession plan.

Gain insights, input, and information from across the senior positions to help the succession plan run smoothly. Interviewing the post holders about the wants and needs of their job can provide crucial information.

4. Forecast your business needs

You should have an emergency succession plan in place that can deal with the untimely vacancy of a position.

Alongside this, you can create a detailed forecast and a longer-term plan. This is necessary to address things like upcoming retirement and promotions.

You will also need to consider how quickly the business can mobilize to fill this position.

A strong succession plan will understand how it will impact the business in 6 months, 1 year, and 5 years.

5. Create a pipeline of talent

Create a pipeline of talent so you have individuals ready to take up new challenges as they arrive.

A pipeline of this kind is essential for finding a talented successor but it’s also a good idea to help fill newly created positions. New recruits can be included in your pipeline of talent.

You can learn about this in our talent acquisition guide.

Even if you don’t have any open positions currently, you can still start cultivating a pool of talented individuals.

6. Annual talent reviews

Your succession plan is something that should be continually developed.

This includes reviewing the candidates on an annual basis or more. People may have moved on or into new positions within your company. Promising candidates may no longer be performing at the standard you would like.

Take a look at your succession plan every year and adapt and change things where it is necessary.

7. Build the learning culture inside your organization

It will help you nurture and grow potential candidates as well as new talents.

When you have identified the individuals that are being considered for senior positions you will need to develop their skills.

You can work with the candidates and they can lead their own individual development plan.

This ensures that their progress is actively monitored and they can take ownership of the process.

Managers should be on hand to provide guidance, resources, and provide timely reviews.

Why is succession planning important?

Succession plans make your business disaster-proof. They provide a concrete plan for filling key roles and help to avoid times of uncertainty. It can be reassuring for investors to know that there is a carefully considered plan in place.

How to do succession planning?

Succession planning should be conducted by business leaders with support from the HR teams. All affected individuals need to be involved in the process. Start with the end goal to identify what you need to achieve. Each business will have different needs so consider which positions will have the biggest effect on operations.

What is business succession planning?

Business succession planning is the process whereby you identify candidates to be groomed for senior positions. Specifically, when the incumbent leaves the role, this could be for a promotion, retirement, or an untimely death. Your business succession plan is in place to facilitate a transfer of power and keep your business sailing smoothly.

What is the correct order of the succession planning process?

• Identify which positions need to be included
• What specific skills are required for those roles?
• Identify people who could be a good fit
• Start grooming them for succession
• Review your succession plan and candidates annually

Succession Planning template

Avoid moments of crisis and lack of leadership by preparing candidates for a planned or emergency replacement.

Ivan Andreev

Demand Generation & Capture Strategist

Ivan Andreev is a dedicated marketing professional with a proven track record of driving growth and efficiency in various marketing domains, especially SEO. With a career spanning over a decade, Ivan has developed a deep understanding of marketing strategies, project management, data analysis, and team leadership. His strong commitment to knowledge sharing, passion for process optimization, and turning challenges into opportunities have solidified his reputation as a pivotal player in the marketing team.

Original text

Do you think succession planning is just for family businesses or for business owners who are close to retirement? Think again.

Whether retirement is 30 years away, just over the horizon, or not in your game plan at all, a succession plan is vital to ensuring the continued success of your business.

A good succession plan can help:.

• Transfer ownership when the time comes
• Maintain your lifestyle in retirement
• Provide for your heirs financially
• Prepare the business to handle unexpected events

Why is a succession plan so important?

Life happens—and unless you have a plan to deal with the unexpected, the business you worked so hard to build could crumble if you become disabled, die, get divorced, or decide to split with your business partner.

Think of a succession plan as peace of mind for the business you’ve worked so hard to build.

In this guide, learn how to develop a succession plan that works for your business.  

Some items covered include:

1. Decide how to exit your business. Should you:

• Transfer the business to your heirs
• Sell the business to your business partner/s
• Sell the business to a key employee
• Sell the business to an outside buyer

2. Conduct a business valuation

Even if you aren’t planning to sell your business, conducting a business valuation has many benefits. It helps you develop a retirement income strategy, properly value future owners’ shares, and purchase adequate insurance for protection planning. It can even make it easier for your business or potential buyers to get loans or attract investors.

3. Prepare for the transition

The transition period to new ownership is a vulnerable time for a business. Prepare both your successor and your business for a smooth hand-off.

4. Review your plan regularly

Creating a succession plan is a big accomplishment, so give yourself a pat on the back. But don’t just file your plan away and forget about it. Over the years, key employees may leave your business, family members may lose interest in taking the reins, and your own plans for your future may shift. Reviewing your succession plan annually with your team of advisors will help ensure a successful and seamless transition — no matter when or under what circumstances it happens.  

Covering Your Back: The Buy-Sell Agreement Whether you’re launching with one partner or 10, the buy-sell agreement protects stakeholders from sticky situations that could rock the entire boat.

7 Legal and Financial Steps to Closing Your Small Business Exiting a business requires filing paperwork to officially dissolve your business with the state and taking care of other legal and financial formalities.

Copyright © 2024 SCORE Association, SCORE.org

Funded, in part, through a Cooperative Agreement with the U.S. Small Business Administration. All opinions, and/or recommendations expressed herein are those of the author(s) and do not necessarily reflect the views of the SBA.

Your Business Needs a Succession Plan: Here Are the Basics

Succession planning may be the single-most neglected aspect of business ownership. Don’t make the same mistake that so many others do. Instead, get started with your plans today.

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In Part 1 and Part 2 of this series on selling your business, we’ve examined the questions facing owners who entered 2020 ready to make their move, breaking down how the COVID-19 pandemic changes the situation and how to increase a business’s value if you decide to delay bringing it to market. There’s another way forward, though — standing pat and not selling.

Tax Wrinkles for Work-at-Home Employees During COVID-19

If you were a business owner who was considering putting your company on the market but decided not to sell (or at least not anytime soon), what steps should be you taking now? The goals are to ensure preservation of the current business, as well as provide for an orderly and stable future transition when the proper time to sell arrives. Accordingly, the first and most critical step is setting a goal to implement both a business continuity plan and a business succession plan. The sooner, the better.

We have all learned a valuable lesson from the COVID-19 pandemic: A significant business disruption can happen with very little advance notice, and not being prepared can be disastrous.

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Developing a Business Continuity Plan

Armed now with the knowledge of how the pandemic impacted your own business operations, you can now plan. Did the travel restrictions impair your sales efforts? Did the substantial increase in employees working remotely overburden your IT infrastructure? Did your vendors and suppliers make requests that you couldn’t respond to effectively?

The goal of a business continuity plan is to identify that which is essential and that which is not and to place the business in a position where it can continue to operate during a disruption. Ideally, the business continuity plan would include:

• A comprehensive strategy for keeping the business operating day-to-day.
• An assessment of essential and non-essential operations and processes.
• An analysis of key employees/positions and how each would be impacted by a disruption and, specifically, the potential loss or unavailability of key employees.
• A review of facilities and analysis of how the business operates if one or more location becomes unavailable.
• A plan to protect, secure, back up and replicate, if necessary, critical data systems, infrastructure and applications.

These are only a few of the many issues for consideration when developing a business continuity plan. Many of the details are industry-specific, and you need to work with your key employees and advisers to address the challenges likely to face your particular industry. Consider meeting and discussing with your vendors, customers and suppliers the challenges that were presented by the COVID-19 restrictions. Get their views on how things could have been handled more effectively. Information is key to developing a plan that will actually work.

There’s Never Been a Better Time for Business Owners to Make a Move

Once you develop a plan, revisit it regularly and adjust and update it so that it is always ready to go when you need it. If, for example, your CFO retires, you will need to consider how the loss of that person and their particular knowledge will affect the plan. Will their successor have the wealth of historical knowledge necessary to obtain and transfer information in a timely manner? If not, consider how you address the gap. Every organization seems to have those “go-to” people who have been there forever and without whom things run much less smoothly. Consider how the plan is impacted if those individuals are unavailable. The key takeaway is that the plan needs to grow and change with the business in order to work effectively when the disruption happens.

Developing a Business Succession Plan

No matter what your plans are for the future of the business, eventually, you will transition it to someone. Perhaps that someone is a purchaser, or perhaps you will transition to your family, key employees or some combination of the two groups. The point is that transition will eventually be unavoidable. Ideally, you get to control and be part of the process. That, however, is not always the case. Unexpected death of an owner, key executive or employee can cripple a business if no successor has been identified and there is no plan for transitioning management.

Every business succession plan looks different. Not every business owner wants to transition their business in the same way or at the same time. Some owners want to exit completely at a certain date. Others want to stay involved to a lesser degree over time but never exit entirely. These issues, as well as many others, must be considered. The plan should be designed to:

• Address anticipated timing.
• Identify one or more successor.
• Address the value of the business.
• Provide for implementation of the plan.
• Discuss communication with employees, customers and family.
• Include tax planning.
• Provide for contingencies.

In my long career as a business lawyer, I have observed that succession planning is the single-most neglected aspect of business ownership. Maybe it’s human nature to think that we’ll always have time to deal with it later. The truth is, if you don’t get around to it and the unexpected occurs, the impact on your family and employees could be devastating. Also, we see many executive job candidates asking about a company’s transition planning before they are ready to commit to working there. Lack of a transition plan can therefore have a negative impact on attracting and retaining talented employees and executives.

The best way to approach the process, in my experience, is by dedicating a year to the effort. Spend three or four months discussing the process with your family, executive employees, your bank and other key stakeholders. Get your lawyer and accountant or other tax adviser involved from the outset. Develop and refine the plan over the next few months, and implement it over the last three or four months. One year is what you need. Negotiate the fees with your professional advisers in advance and get a budget for each phase. When it’s done, you’ll thank yourself, and your business will be better off for having gone through the process.

Final thoughts

As touched on in this article and the other parts of this series, the COVID-19 pandemic was and remains a major disruption that couldn’t have been foreseen by most business owners at the start of 2020. The confusion of the early days, however, is beginning to clear. For owners who were planning for a transition, there is path forward — be it bringing the business to a changed market, delaying the decision or staying put for a time.

No matter the decision, proper preparation and organization will make it easier.

Help! I Can’t Afford to Sell My Business

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA .

Patricia Farrell is a corporate law attorney in Pittsburgh. With a primary practice in business services, she regularly represents privately held businesses in mergers, acquisitions, divestitures and other major transactions, both in the United States and in Europe, Asia and Australia. She also has a broad corporate practice where she assists with corporate governance as well as succession planning for business owners and a variety of other day-to-day business issues.

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Home Small business Small business succession planning: establishing a legacy

Small business succession planning: establishing a legacy

on December 22, 2023 at

This article has been reviewed for accuracy and adheres to our editorial standard

The Teamshares editorial team has fact-checked this article to ensure that sources, statistics, interviews, and claims meet our standard for accurate and unbiased advice. Our goal is to help educate, inform, and inspire an accessible path to employee ownership for small businesses.

Small businesses are an integral part of American life and its economy. There are an estimated 33.2 million small businesses in the U.S., employing 61.7 million people—nearly half of America’s workforce.

Today, however, our country faces a small business succession problem. Each year, more than 200,000 small businesses are listed for sale, but only about 30% of those businesses ever find a buyer . And without a buyer or a clear plan in place for when an owner decides to retire, small businesses often fail. This compounds when you factor in the current economic uncertainty.

Succession planning is crucial for small businesses because it helps owners and employees strategically prepare for what happens when a business owner retires and moves on from the company.

We spoke with Lauren Altschuler , CEPA, CBI, M&A Advisor at Transitions in Business, for her insight on small business succession planning.

With over 30 years of experience in sales, marketing, and management for retail and media companies, one of Lauren’s key focus points is bringing together buyers and sellers of privately held businesses for a sale. Her goal is to help clients increase the value of their biggest asset, their business, and ensure they have the right transition team in place when preparing for a sale.

At Teamshares, our goal is to help a network of 10,000 small businesses become employee-owned while supporting a generation of business owners through confident retirement.

We’ve worked with Lauren on small business acquisitions, and we’re excited to share her insights on the value of small business succession planning, strategies for small business owners, how to create a small business succession plan, and other tips.

What is business succession planning?

Succession planning is a business strategy for passing the leadership role of a company from the current owner to another person. Succession planning typically happens when owners are preparing to retire and need to hand off the reins to a “successor.”

Succession planning is not just a high-level strategy. It’s an in-depth process of preparing and training employees, documenting business processes, compiling financial statements, building an exit timeline, and much more.

Having a small business succession plan in place is critical to ensure processes run smoothly and the transition causes minimal interruption to business operations.

Small business succession planning can be even more important in the case of an unexpected transition caused by the death, illness, or disability of the business owner.

In a worst-case scenario, without a good small business succession plan in place, the family or heirs of a business owner may be forced to sell the company under duress, for less money than it’s worth and with no clear plan for what happens next for the company or its employees.

When to start a small business succession plan

Every business is different, so there’s no single right time or one-size-fits-all answer for when to start succession planning . But there are some general guidelines. “Ideally, a small business owner should begin succession planning at least three to five years before they want to sell their business,” Lauren explains.

Planning three to five years in advance gives business owners the flexibility to make careful and calculated decisions in preparation for a sale.

“On average, it takes a year to sell a business,” Lauren says. “Although some businesses take less time or more time, depending on how many challenges a sale poses to a buyer.”

Selling a business can be a very emotional process, and planning so far in advance gives owners time to work through their emotions and make good decisions for the business and sale.

Lauren encourages owners to have a “post-sale” plan in mind, to help ensure that their emotions don’t hinder a potential sale.

Small business succession planning strategies

Small business owners are experts at running their businesses. But, in many cases, they’re not experts in selling them. This is where brokers come into play.

Brokers can help small business owners avoid common pitfalls, introduce the seller to a larger pool of buyers, offer a wealth of industry knowledge, and act as a buffer between the owner and buyer.

Because selling a business is a very emotional process for owners and employees, a looming sale could cause significant shifts within a company’s dynamics and culture.

Small business succession planning allows business owners to fully consider the impact that selling a business will have on its employees and what the sale will mean for their future.

1. Selling a small business to an outside party

Selling a small business to a third party is a time-consuming process, and many small business owners simply don’t have the bandwidth to do it on their own while running the business.

A third party sale poses significant challenges to small business owners. Marketing the business to potential buyers, navigating due diligence, negotiating a transaction, the complexity of completing legal documentation, and providing the necessary tax documentation, are all difficult for a small business owner to navigate alone.

Even after the sale, small business owners often struggle with transitioning the business to its new ownership. To help mitigate this stress and uncertainty for former owners and employees, Teamshares has a clear, consistent, and proven process for transitioning companies to employee ownership with the goal of the business never selling again.

Are you a broker or business owner that needs an exit plan to keep your company and employees in place?

Ultimately, we believe that the most local and invested buyer—current employees—is the right one. Through the Teamshares model, employees eventually own 80% of the small business they’ve dedicated their time to. This leads to a better outcomes for the business and long-term wealth for employees.

At Teamshares, we look for small businesses to meet a specific set of criteria across geography, industry, real estate, earnings, and number of owners. These strict criteria allow us to close on 90% of the businesses on which we submit Letters of Intent (LOI)’s. The criteria are:

• Geography : Only U.S.-based businesses
• Retirement sale : The owner is of true retirement age, 50 or older
• Steady owner earnings : Generally, Seller Discretionary Earnings (SDE), EBITDA plus owner compensation, of $400K to $2M in two of the last three years, tax return provable. We consider restaurant SDEs as low as $250K
• Ownership : We prefer to work with only one or two retiring owners
• Real estate : Both multi-year leases and real estate purchases on a case-by-case basis

2. Family business succession planning

Family succession planning is when the business stays within the family—typically going to an heir or someone in the next generation. However, statistically, many small businesses don’t stay within a family for generations.

According to the U.S. Small Business Administration (SBA), only 30% of family-owned businesses survive into the second generation, 12% into the third, and 3% into the fourth and beyond. Given this, it’s wise for owners to consider alternative succession planning strategies.

3. Selling the business to an employee

Directly selling a business to an employee may seem like a logical next step for some business owners, but there are significant barriers to entry. For an employee to purchase a business outright, the cost is often the biggest hurdle.

Many employees may not have access to the finances or the credit needed to make a large-scale purchase, especially in today’s lending landscape. This means that either an owner can’t successfully make the sale to an employee happen or they would have to accept a lower price than they hoped for.

In these instances, selling to a third party who shares the same vision for the business’s success and who has the liquidity to purchase the company may be a better option.

4. Liquidating the business

Liquidation is when an owner sells off the company’s assets. While commonly associated with insolvent businesses that need to pay off creditors and shareholders, this can also be a last resort option for owners who can’t find a buyer.

However, liquidating a business has negative impacts because it leaves employees without a job and a community without a small business.

How to create a succession plan

There is no one-size-fits-all succession planning process . Each plan should be specific to the business and determined by the needs of its employees, management, and operations.

But, according to Lauren, there are some baseline things that all buyers are looking for:

• Steady increase in profits and revenue for three straight years
• Established customer base
• Low customer concentration
• Residual income stream
• Good, established reputation
• Documented processes and procedures
• Positive cash flow
• Minimal reliance on the owner to train new leader
• Growth market segment
• Employee longevity and skills

If your business shares these qualities and you are ready to begin small business succession planning, the first step is building a timeline for when you plan to exit the company.

Build a timeline for exiting the business

For most owners, setting a timeline means deciding when it makes the most sense for them to retire.

“The best time to sell a business is when an owner least wants to. In other words, owners should sell their business when it’s running like a well-oiled engine, humming along without much effort. This is when the business will be most attractive to buyers,” Lauren says.

She also recommends that owners engage a broker to help with the process and to ask them the right questions to find a good match. Lauren suggests asking potential brokers the following questions:

• Do you co-broker?
• Do you charge anything upfront?
• What is your process?
• What is your average time on the market for a sale?
• Of the businesses you’ve listed, how many have sold?
• Do you have any testimonials?
• How many businesses with similar EBITDA have you sold?

Owners should talk to at least three brokers to get different points of view.

“Find at least one broker who is local, so you can meet with them in person. Additionally, it’s important to get referrals from your Advisor Team (CPAs, attorneys, financial advisors, etc.),” Lauren explains.

Determine the value of the business

Once you have a timeline and a broker, the next step is to determine the value of your small business. This is one area where brokers can help.

“As your business broker, the first thing in our strategy is to analyze your operations, finances, market potential, and industry trends,” says Lauren.

“We take that information and advise you on steps to prepare your business for sale, and generate a business profile that represents your company in the most attractive way possible.”

Lauren suggests talking to an M&A advisor who understands the current market climate and regularly works with both buyers and sellers. This ensures they have a holistic view of the market, and can help you assess the value of the business and any associated property or capital equipment.

“M&A advisors have a pretty good idea about how much buyers would be willing to pay for a business based on a set of evaluation criteria. These typically include multiples of cash flow to cover debt, their salary, and a decent return on their investment,” Lauren continues.

“The numbers have to make sense, or buyers will walk away,” Lauren says. ”So it’s important for owners to have a good grasp of the market value of their business. It serves as a benchmark for improvement and helps you decide if it’s the right time to go to market.”

Lastly, Lauren emphasizes the importance of maximizing your seller discretionary earnings (SDE). Your seller’s discretionary earnings are a measure of your financial performance in the lead-up to the sale. Sellers should be strategic about when the business is put on the market to show the highest earnings possible.

When timed right, every dollar of SDE could net $2 to $3.50 more in selling price. If you grow your sales by just $30,000 in this period, your business could reap an extra $100,000 in sale price. Because growing businesses sell for a premium, every effort should be made to show financial growth during this time period.

Compile financial statements

Putting your financial affairs in order is a crucial aspect of business succession planning. “If you don’t already have them, hire a bookkeeper, controller, or fractional CFO consultant to help you clean up the balance sheet, generate a profit and loss statement, and remove personal expenses from the income statement,” Lauren suggests.

According to Lauren, “most buyers will want to look at the last three to five years of a company’s cash flow.

This is also the perfect time to have a CPA conduct an audit of your business.

“During an audit, a CPA will review your company’s management and provide independent verification of your financial information,” Lauren says. “Doing so signals due diligence to prospective buyers and shows that they can trust the thoroughness and accuracy of your company’s financial statements.”

Document processes and operations

When you sell your business to an outside party, the buyers aren’t initially going to be up to speed with the key operations and processes. This can create bottlenecks for your team when a successor takes over.

For this reason, it’s important to compile a number of documents to ease the transition, including:

• A list of things the owner does for day-to-day operations. These should be broken up into essential versus non-essential tasks.
• A list of key employees and positions along with their duties and responsibilities.
• A list of all assets and facilities.
• A compilation of related documents, employee handbooks, and training documentation.

Next, you’ll want to consider who will be your successor.

Choose a successor

Choosing a successor is probably the most important decision in small business succession planning. Ultimately, this transition affects the company’s future, its viability, and the state of the workplace for employees.

Typically, owners have a number of different options to choose from: a family member, a business partner, an employee, or a third-party successor.

At Teamshares, we believe in hiring generalist leaders to accelerate the growth and to complement what was previously successful at the business.

Announce the succession plan

Selling a small business is a delicate matter. Honesty and transparency are important for the customers and community, but especially for employees who’ve dedicated so much time to the business.

There are a few approaches to take when it comes to announcing the sale of a business: telling everyone when you list your business, after an LOI has been submitted, or immediately after the sale. Telling employees upfront, even in small numbers, tends to be risky for several reasons:

• Not being able to answer questions about who the buyer will be
• Not being able to answer questions about when the business will be sold
• Not knowing what changes will be made

Regardless of when you choose to announce the sale of your business, it’s important to consider how the news will be delivered, as this can be very emotional for both employees and the owner.

If possible, we recommend telling key employees about the decision first. This can be a good opportunity to take leaders or managers to lunch or coffee and let them know why you’re selling the business. At these meetings, it’s important to show appreciation and reassure employees that they still have a job.

It’s also important to stress how the small business succession plan will be gradual and explain how it will help preserve the legacy of the business and guarantee its continued success.

If you’re selling a business to Teamshares, this is a great opportunity to explain the value of employee ownership and how, as the current owner, you will remain in the business for 45 days after the sale.

Succession planning tips from a small business broker

As a small business broker, Lauren suggests a number of succession planning tips that owners should employ:

• Prepare for a sale by building out your team of advisors.
• Solidify a relationship with a financial advisor, an M&A attorney, a business broker or M&A advisor, and a CPA.
• Get a broker’s opinion about the business’s value and share it with a lender to find out if they would finance it. If not, be sure to have them explain why.
• Make sure your financial processes and records are in order.
• Get a list of due diligence items from your broker ahead of time so you can start to compile the documents you’ll need for a potential buyer. These take time, so it’s better to start early.

“Ultimately, the more prepared you are for your business sale, the smoother the process will be. The better prepared your exit strategy is, the more likely it will sell and the higher the selling price it will command,” says Lauren. “Even a few minor enhancements can dramatically increase the marketability of your business.”

Selling a small business is an incredibly emotional decision for both the owner and its employees. It’s essential to start planning early on, to have the time to work through those emotions and make good decisions for the business.

At Teamshares, we understand how important your small business is to you, and are focused on preserving your legacy while providing a win-win situation for the employees who have worked so hard to help build the business. If you’re a broker or a selling owner, find out if Teamshares is the right buyer for your small business .

Teamshares writers follow strict principles for sourcing credible information within articles. Any outside information including direct quotes, paraphrased information, and concepts that are derived from external sources adhere to our standards for accuracy and transparency.

• 2022 Small Business Profile United States 33.2 million small businesses Share of employees working at small businesses by state Business dynamics. (n.d.). https://advocacy.sba.gov/wp-content/uploads/2022/08/Small-Business-Economic-Profile-US.pdf
• UNITED STATES. (n.d.). https://www.sba.gov/sites/default/files/advocacy/All_States.pdf
• Altschuler, Lauren. Interview. Conducted by Jessie Baker, 7 Mar. 2023.

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Frequently Asked Questions (FAQs)

Jean Murray, MBA, Ph.D., is an experienced business writer and teacher. She has taught at business and professional schools for over 35 years.

Are you thinking about retiring from business? Or maybe your business is finally going well and you want to make sure it continues the way you want it to. Business succession planning can help you establish the next line of leadership, maintain continuity, and preserve your wishes for your business into the future.

This article looks at how to create a business succession plan, what documents and policies can play a part, and ways to ensure a smooth transition process.

Key Takeaways

• A succession plan is a general plan for continuity of a business in a change of ownership in planned or unexpected situations.
• The goal of a succession plan is to keep the business running smoothly during and after a transition.
• A major part of a succession plan is legal documents with language that guides transitions.
• The best time to create a business succession plan is immediately and then update it often.

Why You Need a Business Succession Plan

A business succession plan isn’t a separate document that the owner puts together. It should be primarily part of your business’s legal structure and be included in the governing documents of your business from the get-go. Think of a succession plan not as just determining who will succeed you, but as a continuity plan, to be used in case of both planned transitions and unexpected disruption, like a public health or economic crisis.

The key pieces of your succession plan are:

• Identify possible successors
• Consider the value of your business and how to improve it
• Include tax and estate planning
• Anticipate uncertainty
• Decide how to transfer ownership

Preparing for Your Succession Plan 

Begin your business succession planning by looking at the governing documents of your business and making changes to include your specific wishes for what happens if you no longer run the business.

If your business has several owners, like a partnership or limited liability company (LLC), you'll need to make sure the governing documents take into account changes in the business structure if an owner leaves, dies, or is divorced.

The specific governing documents for each type of business include:

• A partnership agreement for partnerships
• An operating agreement and articles of organization for an LLC (similar to a partnership agreement)
• Articles of incorporation, bylaws, and a shareholders agreement for a corporation

A sole proprietorship has no governing document, which means you need to create a written record of your wishes for your business with the help of an attorney, as part of your overall personal estate planning. These documents might include a will or revocable trust.

A succession plan and an exit strategy are slightly different. Both are plans to deal with planning for business changes, but an exit stegy focuses more on the decision to close or sell the business.

Choosing Your Successors  

The key to a business succession plan is to consider how you want the management and control of your business to look in the future.

In an email interview with The Balance, attorney Haley Ayure said that a complicated part of business succession planning is figuring out who should make the decisions in the future, and how to control that after you’re no longer involved with the business. This is tied to ownership and the governing documents because the owners typically vote to appoint directors, managers, and officers if they are not going to make business decisions themselves.

In a family business, for example, the ownership interests of a parent might pass to a child upon the parent’s death. Unless the governing documents say otherwise, the child might then have the ability to appoint themselves as the manager or officer.

What To Include in Your Plan 

The language in a partnership agreement delegates specific instructions on what to do in the event of a dispute, a termination, a death, or other life-changing scenarios. This language ensures that your wishes will be carried out regardless of circumstance.

In an email interview with The Balance, attorney Nance Schick explained that, when changes occur, a partnership agreement can be a great guiding document. A few examples may include: 

• A dispute resolution clause that could provide the steps necessary to resolve conflicts among partners
• A termination clause that can provide the steps necessary for resignation or removal 
• Additional provisions that detail limitations on ownership by heirs or other outside parties, and what to do if a partner becomes disabled or dies

Without a clear, written agreement on such terms, business ownership can pass to multiple beneficiaries who may have no experience or interest in the business.

If you aren’t sure you need a business succession plan, consider that the cost of hiring a lawyer to draft good documents may be much less expensive than a legal battle with family or business partners in court.

How To Ensure a Strong Succession Plan 

Here are some other tips for creating a succession plan that will keep your business successful after you leave.

Decide Who Will Run the Business

Decide what role you want to play in your business during the transition and afterward. Do you want to remain in a position of authority, and if so, how long? Or maybe you want to leave a legacy by serving as a consultant or board member after you leave active management.

Run a Financial Checkup

One quick way to spot financial weaknesses is to run some financial ratios for your business and to analyze them in comparison to industry standards. Look especially at long-term indicators like solvency ratios that measure the ability of a company to pay its debts and liquidity.

Get a Business Valuation

A business valuation will help you spot weaknesses and fix them. You will need to find an accredited business valuation appraiser for this task, to be sure they are following standards. Check the website of the American Society of Appraisers to search for an appraiser.

Review Company Policies

According to Ayure, reviewing company policies is important in making sure your succession plan does what you want it to. Prepare by setting your policies in place now. These may include setting criteria for positions and having job descriptions for key positions, up to and including CEO, board members, and managers, and setting policies for reviews and promotions.

Review and Update Your Plan

Creating a succession plan isn't just a "one and done" proposition. Set up regular reviews of the plan to see what's changed, both inside and outside your company. Tax laws change frequently, so you'll need to consult a licensed tax professional and an attorney to make changes in documents.

What is business succession insurance?

Business succession insurance isn't available, but you can use life insurance to provide benefits to co-owners of a business. For example, a partnership or the partners can buy a life insurance policy on other partners (not themselves). If a partner dies, the policy pays death benefits to the business or the other partners. The proceeds then go to the insured's family members or heirs, while the living partners continue to own the business.

A business can also get a key person insurance policy on a business owner or key executive. This insurance protects the business if the insured dies unexpectedly. This type of insurance is very helpful in a small business that might have trouble surviving the death of a founder or owner.

When does business succession planning need to be done?

Small business owners should do business succession all through the life of their business. A succession plan isn't just for retirement, but for unexpected emergencies or just a general review of the business.

Create a succession plan as soon as possible and review it at least once a year. Consider changes in the economy, employment, taxes, and the legal landscape. Get a new business valuation every few years to make sure the value is up to date. Consider the changes in the structure of the business, and in the plans of the owner.

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Succession Planning: Ultimate Guide for Business Growth

You found our guide to  succession planning.

Succession planning is a strategic process that helps teams transition between leaders seamlessly. For example, this process could involve teaching a family member, preparing an employee, or identifying external candidates for key positions. The purpose of these strategies is to maintain business continuity and foster sustainable growth. These strategies are also known as “business continuity strategy” and “corporate leadership succession.”

These techniques are an important professional development best practice and similar to leadership skills , leadership tips , and leadership styles . The concept is also related to employee attrition and employee retention .

This article covers:

• business continuity strategy
• business leadership transition
• business succession planning
• company succession
• continuity planning
• corporate leadership succession

Let’s get to it!

Meaning of succession planning

Succession planning is crucial for organizations, as it involves finding and nurturing future leaders. This process ensures a smooth handover of key roles when current leaders leave. Current leaders can prepare talent from within to keep the business running smoothly. This practice also helps handle unexpected departures of key personnel, ensuring the organization can thrive even during leadership changes.

In essence, succession planning aims to prepare workers to step into leadership roles seamlessly. Companies should identify and develop high-potential employees early on. That way, firms can minimize disruptions and maintain efficiency during leadership transitions. Understanding succession planning principles helps businesses invest in their future leaders.

Importance of succession planning

Business succession planning is vital for organizations’ long-term success. This process involves preparing internal talent to fill key roles when current employees leave. With a solid plan, companies can minimize disruptions, maintain continuity, and keep institutional knowledge. Succession planning also helps prepare future leaders and ensure smooth organizational transitions.

Succession planning guards against unexpected departures and encourages employee growth. This process gives clear career paths, motivating employees to improve their skills. Moreover, planning can boost morale and engagement by showing that the organization values employee development. By investing in succession planning, companies can create a pool of skilled professionals ready for leadership roles.

Steps in succession planning

Here are basic steps in a succession plan.

1. Succession Plan Foundation

A strong foundation for succession planning is vital to ensure smooth leadership transitions in an organization. This foundation identifies and nurtures future leaders who can step into key roles when needed. By establishing this base, companies can minimize disruptions during leadership changes and keep operations running smoothly. The process involves evaluating current talent, offering training and development opportunities, and creating clear paths for leadership growth.

A succession plan prepares individuals for advancement and fosters a culture of growth and development within the firm. This plan boosts employee engagement and loyalty by demonstrating a commitment to internal talent development. Additionally, succession planning can attract top candidates looking for career advancement in a forward-thinking environment. Thus, a well-established foundation for a succession plan is essential for any organization’s long-term success.

2. Establishing Goals

Setting goals is a key part of continuity planning. Clear objectives help individuals and organizations focus their efforts toward a common goal. These goals are checkpoints to track progress and keep the succession plan on course. Whether the aim is to develop internal talent or find external candidates, having well-defined goals provides clarity and guidance. Ultimately, goal-setting creates a roadmap for effective succession planning, leading to long-term organizational success.

In succession planning, using specific, measurable, achievable, relevant, and time-bound, or SMART, goals is crucial. SMART criteria ensure that leaders set realistic goals they can accomplish within a timeframe. By breaking down larger objectives into smaller, actionable steps, individuals can contribute to the overall success of the plan. SMART goals also clarify what individuals need to do and make it easier to track progress.

Moreover, setting clear goals in succession planning encourages accountability and motivation among all involved. When each employee understands their role and how it fits into the bigger picture, it fosters a sense of shared responsibility. This shared vision promotes collaboration and teamwork, driving progress toward desired outcomes.

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3. Involvement Level

Involvement level refers to how much individuals engage in succession planning. It is crucial for employees of all levels to actively take part in these activities to ensure a smooth transition when important positions open up.

When organizations encourage high involvement, they can better spot and nurture future leaders. This process lowers the risks associated with unexpected departures or retirements. Additionally, this approach encourages sharing knowledge, offering mentorship, and enhancing skills among employees. These techniques build a strong talent pool for the organization.

Employees who actively join in succession planning feel valued and motivated to contribute to their career growth and the company’s success.

4. Successor Identification

Identifying a successor is a key part of succession planning. Organizations find and prepare potential candidates for future important roles. This process involves assessing current employees based on their skills, performance, and potential for growth within the company.

By spotting successors in advance, businesses can ensure smooth transitions when key positions open up. Finding successors also helps retain top talent by providing clear career paths within the organization.

Effective successor identification lets companies match talent development with business goals. Firms can also set up a reliable system for leadership continuity.

5. Successor Development

Developing successors is essential for a business continuity strategy. This process involves identifying and coaching individuals within a company who can take on important roles in the future. By following this step, leaders can create a skilled group ready to step into leadership positions when needed.

When companies invest in successor development, they can build a strong leadership team prepared to tackle future challenges effectively.

Successor development helps prepare employees for higher roles, promoting internal growth and advancement. Employees can learn new skills, gain experience, and gradually take on more responsibilities.

This process is ongoing, focusing on recognizing talent, providing growth opportunities, and grooming future leaders. Prioritizing successor development helps organizations build a talented pool. These employees are capable of driving innovation, overcoming challenges, and leading the company.

6. Transition Timing

Timing transitions help determine the best moment to change leadership within a company. This process involves deciding when a current leader should step down and when the successor should take over.

The timing greatly affects the organization’s stability and success. When planning this timing, consider factors like the leader’s performance, successor readiness, and external market conditions.

Thoughtful consideration of transition timing can help ensure a smooth handover process. Companies can minimize disruptions and maintain operations.

Well-prepared organizations can navigate challenges and seize opportunities during leadership changes. By managing transition timing, companies can improve their resilience and long-term prosperity.

7. Likely Obstacles

Organizations may encounter several obstacles in company succession planning. One common challenge is resistance from current leaders. These individuals may hesitate to prepare their successors out of fear of being replaced or losing control. Additionally, finding suitable candidates with the required skills and growth potential can be challenging. Further, poor communication within the organization about succession planning and its long-term benefits can hinder the process.

To overcome these obstacles, focus on open communication between current leaders and potential successors. These conversations are essential for addressing fears and concerns. Setting clear criteria for finding and developing talent helps locate suitable candidates for future leadership roles. Educating employees at all levels about the importance of succession planning helps firms implement this process.

Organizations can successfully manage succession planning by recognizing potential obstacles and proactively addressing them. This planning ensures smooth leadership transitions when needed.

8. Succession Team

A succession team is a vital part of succession planning. This group consists of individuals who are in line to take over important roles within an organization when current leaders move on. These team members receive training and development to guarantee a seamless transition in the future.

With a well-prepared succession team in place, companies can reduce risks related to sudden departures or retirements of key personnel.

Succession teams have a significant role in minimizing disruptions during leadership changes. These groups create a talent pool ready to fill crucial roles, reducing the impact of unexpected vacancies.

Investing in succession teams also boosts employee morale and engagement. Employees will see opportunities for growth within the organization.

9. Consultant Role

A succession planning consultant gives expert guidance on managing leadership transitions effectively. These individuals help identify and develop internal talent, create succession plans, and ensure smooth handovers of responsibilities. Consultants assess current leadership abilities, predict future needs, and design strategies to fill skill gaps. By using their expertise, these individuals help companies build a strong pool of future leaders and minimize disruptions during change.

Hiring a consultant is a proactive step toward ensuring long-term organizational success. Consultants bring fresh insights that internal teams might miss. With experience across industries, consultants can customize succession plans to fit specific business needs. These workers’ specialized skills and impartial viewpoints ensure realistic plans that align with strategic goals.

Moreover, consultants facilitate tough conversations about succession planning. These talks guide stakeholders through sensitive issues professionally. By involving a consultant early on, companies can avoid common pitfalls in leadership transitions.

10. Implementing Strategy

Executing a strategy is vital in corporate leadership succession and integral to outlining a plan. This step includes assigning tasks, establishing deadlines, and closely monitoring progress to tackle any arising issues. Putting a strategy into place requires communication, cooperation, and adaptability from all parties involved.

Understanding a strategy lays the groundwork for a thriving succession plan. Firms should prioritize transparent communication, responsibility, and flexibility. With these tactics, organizations can smoothly manage leadership changes and maintain operations.

Learn more team building strategies .

11. Plan Monitoring

Monitoring the succession plan is critical for its success. By monitoring the plan, companies can identify and address potential issues before they become significant challenges. This process also tracks progress toward successful leadership transitions.

Effective monitoring includes setting clear performance indicators, reviewing key milestones, and gathering stakeholder feedback. This approach helps organizations adapt to changing circumstances and build accountability within their leadership teams.

12. Role of Mentorship

Mentorship means providing guidance and support to individuals preparing for new roles. Experienced mentors help successors navigate challenges, develop skills, and gain confidence.

In succession planning, mentorship transfers institutional knowledge and expertise to new leaders. This knowledge helps successors make informed decisions that fit the company’s vision.

Regular interactions and feedback from mentors help successors identify areas for growth and plan their development.

Strong relationships between mentors and successors nurture internal talent. Investing in mentorship programs helps future leaders assume their roles confidently and competently.

Here is a list of books about mentoring .

13. Training Programs

Training programs prepare employees for a business leadership transition. These programs develop skills, offer leadership training, and transfer knowledge. Such lessons ensure smooth transitions when key personnel leave. By investing in training programs, companies can create a pool of qualified individuals ready for leadership roles when needed.

Succession planning relies on training programs that give employees the skills for future leadership roles. These programs help individual career growth. Further, lessons strengthen the organization by developing a skilled workforce capable of leading the company. Investing in employee development promotes continuous learning and growth within the organization.

14. Board’s Responsibility

In succession planning, the board is critical in selecting future leaders within the organization. These groups identify potential candidates, assess their skills and experience, and ensure smooth leadership transitions when necessary. Active participation in succession planning helps the board maintain continuity and stability during times of change.

Succession planning goes beyond filling vacant positions. This process requires strategic thinking to ensure strong leadership in the long term. Board involvement shows commitment to keeping the company competitive and resilient in a changing business landscape. Ultimately, boards can develop a talent pipeline that fosters innovation, growth, and long-term success.

15. Plan Updates

In succession planning, keeping plans updated maintains their effectiveness and relevance. Regularly reviewing and refreshing these plans helps teams adjust to changes in the business environment, leadership team, or organizational goals.

Consistently updating these plans helps companies spot emerging talent. Firms can also address skill gaps and handle unexpected circumstances affecting leadership transitions. Staying vigilant with updates also ensures that succession strategies align with industry trends and best practices. These plans set the company up for long-term success in a competitive market. By adding regular reviews and adjustments to their processes, companies can minimize risks related to key personnel changes.

16. Exit Strategy

An exit plan outlines the steps for a smooth transition of ownership or leadership in a business. This plan involves identifying potential successors, developing their skills, and ensuring a seamless transfer of responsibilities.

With a well-prepared exit plan, businesses can minimize risks associated with sudden departure. This plan also provides clarity and guidance for current leaders.

Having an exit strategy safeguards the future of the business and boosts confidence among stakeholders, employees, and customers. This strategy shows proactive leadership, indicating readiness for any situation.

Furthermore, a well-executed exit strategy can enhance the business’s value. Strong plans can attract investors or buyers who value stability and foresight in leadership transitions.

In essence, a thoughtfully crafted exit strategy serves as a roadmap for long-term success. The company will be able to thrive even after key leaders step down.

Final Thoughts

Succession planning is crucial for any organization aiming for long-term success. The practice ensures that capable individuals are ready to fill key roles when needed. This talent pool minimizes disruption and maintains business continuity. Moreover, succession fosters employee development and engagement. Clear plans provide transparent career paths and opportunities for advancement. Investing time and resources in effective succession planning can boost your organization’s resilience and growth.

Next, check out our posts on executive skills , collaborative leadership , and leadership books .

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FAQ: succession planning

Here are frequently asked questions about succession planning.

What is succession planning in a business context?

Succession planning refers to the process of identifying and developing potential future leaders. This plan ensures qualified individuals are ready to take over when current leaders leave or retire.

What role does a successor play in succession planning?

A successor will eventually assume the responsibilities of key positions within the organization. Thus, this individual’s development, training, mentoring, and readiness are vital to successful succession planning.

How significant is timing in a succession plan?

Timing determines when leaders should identify, develop, mentor, train, or promote potential successors. Effective timing helps ensure smooth transitions while avoiding gaps in leadership.

How can leaders deal with obstacles in succession planning?

Leaders can deal with obstacles in succession planning through proactive planning, open communication, and continuous monitoring. It is also beneficial to involve a diverse team in the planning process to gain different perspectives and solutions.

How can succession planning benefit my business?

Succession planning can benefit your business in various ways. This process minimizes disruption during leadership transitions and fosters employee development and engagement. Ultimately, this plan contributes to sustainable business growth.

Author: Michael Alexis

CEO at teambuilding.com. I write about my experience working with and leading remote teams since 2010.

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How to create a succession plan for business continuity and growth

November 9, 2018

What is succession planning, and why is it so important?

Succession planning is vital to organisational development and extends beyond the C-suite and upper management roles. It's essential for all levels of an organisation, ensuring a seamless transition of talent and skills.  

Following are the topics we will cover in this article:

• Succession planning definition
• Key elements of an effective succession plan  
• Risk mitigation and adaptation strategies
• Implementing succession plans for mission-critical roles

How to create a succession plan

Succession planning case studies: implementing in various business contexts.

• Common succession planning challenges and how to overcome them
• Key takeaways
• Invest in your business' future with Airswift

Let's start with a clear succession planning definition

Succession planning is the process of identifying and preparing promising executives for greater future responsibilities and is significant in modern business environments because it ensures leadership continuity and success. 

According to Neil Manfred, Group IT Director at Airswift, "Succession planning is about making sure the whole organisation continues to run smoothly by identifying reliable individuals."  

The two main components of succession planning encompass staff retention and talent development. 

Staff retention 

Staff retention is critical for maintaining business continuity and growth. It involves strategies and practices to retain talented employees and reduce turnover rates.

Says Charles Pfauwadel, Senior Vice President of ASPAC at Airswift, succession planning is "by far the best way to retain people because the longer someone is with the organisation, the more they contribute because they know the company, the clients, and have fostered strong relationships."  

• Boosts morale and motivation: Recognition of potential through succession planning increases employee commitment and drive. 
• Demonstrates investment: Training, mentorship, and leadership development programs show the company values employee growth. 
• Reduces turnover costs: Investing in existing employees reduces recruitment and training costs associated with high turnover. 

Career path clarity: Defined career paths within succession planning keeps employees engaged and motivated.

Career progression is very much linked to succession planning. We want to make sure leaders elevate the team and promote team members, which often leads to replacing managers and opening up new roles."   – Charles Pfauwadel  

Talent development 

Talent development within the context of succession planning is integral to a robust and adaptable workforce. "Empowering individuals based on their strengths and interests can contribute significantly to the organisation. Tailoring projects based on what individuals enjoy doing can lead to remarkable achievements, such as leading ISO certification efforts." says Manfred.

• Identifies and nurtures potential: Programs assess skills and potential to develop future leaders from within.  
• Enhances skills and competencies: Training focuses on leadership, communication, and decision-making to prepare employees for future challenges. 
• Adapts to changing needs: Programs evolve alongside the business landscape to ensure employees have the latest skills needed for success. 
• Improves succession readiness: Investing in development creates a pipeline of prepared leaders to mitigate risks from staff departures. Pfauwadel emphasises that succession planning helps businesses anticipate sudden changes. "It ensures tasks and knowledge are not lost overnight and allows for preparation and training in advance." he says.
• Fosters continuous learning: A culture of ongoing growth is encouraged through employee development opportunities.

Key elements of an effective succession plan 

Succession planning is a theoretical exercise and a dynamic process crucial for organisational resilience. A robust succession plan comprises several essential components that ensure its effectiveness in identifying, nurturing, and transitioning talent. 

Proactive training and skills documentation

Effective succession plans begin with identifying and documenting critical skills and competencies for various roles. Training programs are then implemented to develop these skills among employees, ensuring they are well-prepared to step into leadership positions.  

Leadership pipeline creation 

Establishing a leadership pipeline involves identifying high-potential employees and providing them with opportunities for advancement and development. This includes rotational assignments, stretch assignments , and targeted development programs designed to groom future leaders from within the organisation. 

Mentorship and coaching programs 

These play a crucial role in succession planning by providing guidance and support to emerging leaders . Experienced executives can mentor younger employees, sharing their knowledge, insights, and experiences to help them develop leadership skills. According to Pfauwadel, "it's all about identifying high-potential people as early as possible and then working with them to support their development and growth.”

Succession readiness assessments 

Regular assessments are conducted to evaluate the readiness of potential successors to step into key roles. These assessments may include performance reviews, competency assessments, and leadership potential evaluations to identify gaps and development areas. 

Contingency planning 

"Being ready for unexpected situations is crucial. If someone resigns, and you don't have succession planning in place, especially if this person is a salesperson, for example, you may lose the business because you don't have a backup plan."     - Charles Pfauwadel

Effective succession planning includes contingency planning for unexpected events such as sudden departures, retirements, or incapacitation of key personnel. Contingency plans outline alternative strategies for filling critical roles on short notice, minimising disruption to business operations. 

The role of open communication and collaborative goal-setting 

I'm a massive believer in one-to-ones with my direct reports, speaking at least once a week. I want everybody to feel like they can come to me and say, ‘Hey, I'm struggling with this area’, without worrying about retribution or retaliation. -Neil Manfred

Open communication and collaborative goal-setting are critical to a transparent and aligned organisation. Employees who feel empowered to share ideas bring diverse perspectives to inform decisions and spark innovation.

Collaborative goal setting ensures everyone understands the company's vision and their role in achieving it, fostering a sense of ownership, boosting motivation and productivity. This combination creates a high-performing workforce. 

Risk mitigation and adaptation strategies 

Succession planning involves identifying and mitigating risks associated with leadership transitions. The steps highlighted below ensure business continuity in the face of unforeseen challenges. 

Diversifying the leadership pipeline 

Succession planning involves diversifying the leadership pipeline. This includes identifying and developing a pool of talented individuals across different departments and levels of the organisation who have the potential to step into leadership roles. By broadening the talent pool, organisations can reduce dependency on specific individuals and increase resilience to unexpected departures or changes in leadership. 

Cross-training employees 

Cross-training employees is an effective strategy for building versatility and flexibility within the workforce. Organisations can ensure that multiple individuals can perform critical tasks and responsibilities by providing opportunities for employees to gain experience and skills outside their primary roles.  

Succession planning is about finding individuals who have the inclination to move into another area. It's about giving them a well-rounded ability across each department.   – Neil Manfred

Implementing succession plans for mission-critical roles 

Specific roles within an organisation are essential for maintaining business operations and continuity. Succession planning involves identifying these mission-critical roles and developing specific succession plans to ensure qualified individuals are ready to step in when needed.  

With good succession planning, you can smoothly transition someone new into a vacant role. It's all about ensuring the company can plan and think long-term. - Charles Pfauwadel

Scenario planning and contingency plans 

Organisations engage in scenario planning to anticipate and prepare for various potential outcomes and challenges associated with leadership transitions. This involves identifying potential scenarios, assessing their likelihood and impact, and developing contingency plans to address them.  

Regular review and updates 

Risk mitigation and adaptation strategies should be regularly reviewed and updated to reflect changes in the organisational landscape and evolving business priorities. Succession plans should be dynamic and responsive to emerging risks and opportunities, with regular assessments to ensure effectiveness.  

Effective succession planning involves deliberate strategies to identify, nurture, and prepare talent to seamlessly transition into key roles. This ensures organisational resilience and long-term success.

Here are eight ways to ensure effective succession planning strategies:

Start early : Begin succession planning well in advance. Preparing multiple candidates for key positions to address sudden changes and aligning this process with your company's growth objectives for a steady stream of leadership talent is vital.

Be open-minded : Cultivate high-potential employees at all levels. Overlooking seniority, focus on the skills and attitudes needed for leadership roles. Promote a culture where growth and learning are supported through training and mentorship.

Document skills : Keep detailed records of employees' skills, roles, and job requirements. Update these regularly to mirror any shifts in responsibilities, laying the groundwork for promotions and identifying areas for improvement.

Identify skill gaps : Regularly assess employees to spot skill shortages, using this analysis to guide development plans. This keeps your succession plan informed and targeted.

Engage and align : Foster transparent discussions about employees' career goals, aligning their aspirations with the company's needs. This collaboration ensures mutual benefits and satisfaction.

Plan together : Collaborate with managers to tailor succession strategies, offering tools and advice to harness their insight into team dynamics and potential leaders.

Practice and assess : Use temporary leadership roles, like covering for vacations, as trial periods to evaluate candidates' readiness, providing feedback and additional training where necessary.

Hire strategically : Align your hiring strategy with your succession plan, leveraging internal talent evaluations to guide external recruitment, thereby maintaining a consistent approach to talent development and leadership continuity.

Succession planning is dynamic and should be tailored to various businesses' unique characteristics.

This requires a nuanced understanding of organisational structures, resources, and cultures in small, medium, or large enterprises.

Small enterprise: Huntswood

Succession planning for Huntswood is focused on its 226 employees and 4,000 contractors. This highlights the company's commitment to internal development and talent management.

Huntswood's succession planning strategy extends beyond its employees to include contractors, emphasising the importance of building a solid leadership pipeline. The company's approach involves strategic hiring and developing internal successors to ensure continuity in key roles. 

Huntswood's proactive approach to succession planning showcases the company's dedication to regulatory compliance, quality, and customer outcomes. By focusing on internal development and talent management, Huntswood positions itself to navigate challenges and sustain leadership continuity effectively.  

Medium enterprise: GoPro  

Adapting leadership to a rapidly changing market for wearable technology, GoPro faced intense competition and needed leaders who could navigate this dynamic environment. 

GoPro's approach has been more reactive at times. Nick Woodman, the founder and long-time CEO, stepped down in 2020. The company brought outsiders with experience in areas like enterprise software (CEO Lisa Su from AMD) to address their evolving needs.

Flexibility is needed for medium-sized companies in fast-paced industries. They may need to look outside for specific expertise while nurturing internal talent. 

Large enterprise: Samsung  

For Samsung , its main challenge was maintaining stability and growth for a complex multinational corporation with a family-oriented leadership structure. 

The multinational conglomerate utilises a multi-pronged approach. They strongly focus on internal development through programs like the Samsung Leadership Institute, which grooms future leaders from within the company. Additionally, they leverage their global presence by considering qualified candidates from various regions for leadership roles. 

Samsung has seen relatively smooth leadership transitions despite its complex structure. This can be attributed to their focus on internal development and a global talent pool. 

Common succession planning challenges and how to overcome them 

Organisations can maximise succession planning efforts and ensure long-term success by proactively addressing and overcoming common challenges.

Resistance to change 

Prioritise clear communication and transparency throughout the succession planning process to overcome resistance to change.

Engage employees in open dialogue about the rationale behind succession planning and its benefits to individuals and the organisation. Provide support and resources to help employees adapt to new roles, emphasising the opportunities for growth and development. 

Lack of resources 

Prioritise resource allocation for succession planning, recognising it as a strategic investment in long-term sustainability.

This involves investing in training, technology for talent management, and allocating time and personnel for succession planning. Additionally, organisations can explore partnerships with external consultants or educational institutions to supplement internal resources. 

Inadequate leadership buy-in 

Emphasise the strategic importance of succession planning and its alignment with broader organisational goals to cultivate leadership buy-in.

Provide education and training for senior leaders on the benefits of succession planning and their role in its success. Encourage leaders to actively engage in talent development efforts and lead by example in promoting a culture of succession readiness and continuous learning. 

Insufficient talent development  

Prioritise talent development as a core component of succession planning.

Implement structured training programs, mentorship initiatives, and leadership development courses to nurture the skills and capabilities of high-potential employees.

Encourage continuous learning and skill-building at all levels of the organisation, empowering employees to take ownership of their career growth and advancement. 

Lack of talent pool diversity

Prioritise diversity and inclusion in their succession planning efforts, actively seeking and developing talent from diverse backgrounds.

Implement strategies to remove biases from talent identification and selection processes, such as blind screening techniques or structured interview protocols. Foster an inclusive culture where all employees feel valued and empowered to contribute their unique perspectives and talents. 

Succession plan rigidity 

Design flexible succession plans, allowing for adjustments based on changing circumstances and emerging talent trends.

Incorporate regular reviews and updates into the succession planning process to ensure alignment with evolving business strategies and talent priorities. Encourage a culture of agility and adaptability, where employees are encouraged to explore new roles and opportunities for growth within the organisation. 

Key takeaways 

• Succession planning is proactive, not reactive . Don't wait for a crisis to hit. Begin cultivating your future leaders today. 
• It's a continuous process, not a one-time event. Regularly re-evaluate and adapt your plan to align with evolving needs and opportunities. 
• Benefits extend far beyond filling key roles. A well-implemented plan fosters  employee engagement, knowledge transfer, innovation, and organisational resilience.  
• Communication and collaboration are key.  Transparent discussions, collaborative goal-setting, and open career development pathways build trust and motivation. 
• It's an investment in your future .  You secure your organisation's long-term sustainability and success by nurturing talent and preparing for transitions .  
• Succession planning is not just for giant corporations or impending CEO retirements; it's a strategic approach applicable to any organisation . 

Invest in your business' future with Airswift 

Organisations can weather changes and thrive in an ever-evolving landscape by prioritising succession planning as a strategic investment.  

At Airswift, we understand the importance of talent management and succession planning in driving business continuity and growth. Whether you seek strategic workforce solutions or expert guidance in mobilising international talent we can support your journey towards a resilient and sustainable future.  

Reach out to us today to learn how we can partner with you to secure your organisation's long-term success.

This post was written by: Diyaa Mani, Content Marketing Coordinator

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Six keys for succeeding in your succession planning

By Lyndell Grey and Wendy Penman

You’ve worked hard to build your business to where it is today, but having a solid plan for after the working years is equally as important for your prosperity.

The purpose of this type of planning is to create a clear exit path that is simple, yet effective at meeting your personal retirement plans and business goals. Defining your vision for the future and developing your succession goals are strategic ways to ensure your succession plans are achieved.

No two families, or businesses, are the same. An exit plan must address a family’s unique situation. Transferring a business to family members or business partners is one common transition strategy. Preparing to sell the business to a third party is another option.

In either case, advance planning can help preserve family and partnership harmony during what is often an emotional and conflict-triggering process. For business succession to be successful, it needs to balance the needs and goals of all involved.

The framework of the succession plan includes several key assessments. Ideally, the following six assessments would be conducted in advance of your intended retirement:

Aptitude and desire

Assess these qualities within your children or key people who may take over the business. Parents/owners often have difficulty with this process. Independent firms with business facilitators can help with the analysis by eliminating the sensitivity and emotions that go along with it.

Future viability

Having a solid knowledge of the industry, future competition and opportunities is crucial. This identifies the businesses strengths and weaknesses and gives the owner a better understanding of the risks, challenges and merits of keeping or selling the company.

Business valuation

The company’s value needs to be established prior to exit to shed light on the financial viability of your retirement and how much risk can be taken to achieve retirement goals.

Saleability

Have an awareness of factors out of your control that may affect a sale. This assessment will help determine if retaining ownership or selling the business is prudent.

Tax planning

This is often a key focus of the seller, but should not be the sole focus. Succession planning must be done in conjunction with a view of the overall financial picture.

Lifestyle planning

Evaluate what you want your lifestyle to look like after the sale of your business. How will you source income? How will your lifestyle change when you are no longer involved with the business? How will these factors impact your family and loved ones?

• Nearly 75% of entrepreneurs to exit businesses in 10 years
• How to prepare yourself to let go of your business
• For greying entrepreneurs, '50 Hurdles' is a lifeline

It is never too early to start the process and develop the framework for your succession planning. Whether you’re thinking of keeping your business in the family or exploring third-party options, the most important thing to have on your side is a well-thought-out strategy.

Lyndell Grey and Wendy Penman are investment advisers with RBC Dominion Securities.

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Succession planning for transitioning your family business.

Business , Markets | April 1, 2024 | By: Bob Gazich

I began working with business families in the late 1990s with RSM McGladrey in its family business consulting practice. I was working on my doctoral degree and hoped to gain experience working with leadership development in the “real” world. Then, as my journey continued, I worked with business advisor Tom Hubler of Hubler for Business Families. Tom is the godfather when it comes to working with family businesses, and I learned a lot from him as it pertains to life, families and business families. 

Stories of defeat and triumph

I think the biggest surprise to me while working with many entrepreneurs and business owners is the number of times they have failed. Now, please realize that I am not saying these individuals were or are failures. Far from it! But for whatever reason, I had assumed these individuals hit home runs immediately, and I learned this was often not the case. My big takeaway was understanding the grit and determination these individual entrepreneurs possessed that enabled them to get back on the horse and continue with their journeys. The stories they shared with me about their struggles were and still are inspiring. 

I don’t watch reality television shows, but I know they are quite popular. As a college professor, I often tell my students that the stories of entrepreneurs and businesspeople are what the younger generation needs to be exposed to. These are stories of defeats and triumphs that are personal, beautiful and true!  

No silver spoons or platters

Another surprise I had when I began working with business families concerns a belief that I, like many people, had—that adult children of business families usually have a silver spoon handed to them. But over time, as I was exposed to and worked with many business families, I actually began to wonder why a family member would ever want to work for the family business. Why? Because in my experience adult children work long, hard hours to be successful. 

The reality is that many of these dedicated entrepreneurs, who have worked hard to achieve their personal success within the family business, also have to cope with the emotional distress of knowing that many believe they’ve had everything handed to them on a silver platter. I do not want to imply that their fellow coworkers believe this, but I do think the general public holds this view. 

Value of succession planning

Do you think that family-owned and managed businesses are important to the U.S. economy? Are you sitting down? (I’m smiling now as I type this.) Did you know that 54% of the U.S. gross domestic product (GDP) is attributed to family-owned and managed businesses? Additionally, 78% of new jobs created in the U.S. come from family-owned and managed businesses, and 35% of Fortune 500 companies are family owned or controlled. These statistics come from Family Enterprise USA (FamilyEnterpriseUSA.com), and they are significant. While publicly traded companies are obviously important to the economy, family-owned and managed businesses are just as important, and it is something that many people do not recognize.  

The succession side of the business is also worth contemplating. Approximately 30% of family-owned and managed businesses survive to the second generation. Of those, about 12% make it to the third generation. Engaging in a succession plan is not necessarily an easy task for all stakeholders. There is a lot of heavy lifting involved, but naturally it is doable and very rewarding when a successful vision and plan are created.  

In numerous conversations over the years, nearly everyone I’ve spoken with who aspires to have their own business has the dream of retiring in their 40s or 50s and then riding out the rest of their days steeped in luxury and adventure. However, in my experience working with entrepreneurs, it’s actually not until around age 70 that business owners are finally prepared to set the gears in motion and start a conversation about transitioning the business.  

Transitions aren’t easy

You might think that transitioning the business is a simple process. For those of us not in a family business, it’s easy to think that an owner just “moves on.” But in reality, this process can feel like giving up one of your children. If you have raised children during times of significant stress, doubt, fear, anger and uncertainty, you may have momentarily been tempted to give up your child (I said momentarily!). But of course, you’re not serious. Transitioning a family business is, in some ways, similar. The difference is that you really do have to give up your “child.”

Now, I sincerely believe that children are more important than a business, but I am attempting to convey the emotional angst and depth of feeling that owners feel toward their family businesses. For them, a business really does feel like a family member, and the thought of giving such a family member away is unimaginable. On some level, giving up the emotions, time, journey, joys, fears, dreams, aspirations and energy invested in the business just seems overwhelming. This is why an entrepreneur needs to be ready and willing to start this conversation earlier rather than later; this can be a lengthy process. And it’s also why engaging an outside consultant with no emotional ties to the family or business is so important.

Work with a professional

Family business advisors are invited into the family, which is both exciting and intimidating. They are given access to personal and deeply moving stories and experiences. Often, some of these stories are also new to the adult children and their spouses in the family. Generally, the business attorney and accountant know these stories, but often the family members do not. Engaging a consultant is an important part of a successful business transition that acknowledges and respects the interests of all stakeholders.

If you are a business owner, is it time to reflect on the next steps in your own business transition? Is it time to set the gears in motion, consult a professional and start your own succession planning? Successful planning allows you to relax, exhale and understand that you grew your business into a beautiful enterprise, and the opportunities for you going forward will have meaning and purpose as well. 

Bob Gazich is a visiting assistant professor in global business leadership at the College of St. Benedict and St. John’s University in Minnesota. Along with his academic pursuits, he is a partner with Kingshuk Mukherjee at Global Impex USA, a mill-direct supplier of textiles based in St. Cloud, Minn.

SIDEBAR: U.S. family-owned business facts

From “The Family Business—Successes and Obstacles”

• Family-owned businesses employ 60% of the U.S. workforce and create 78% of all new jobs. 
• Family businesses generate 64% of America’s gross domestic product (GDP).
• 1.2 million family-owned small businesses are run by married couples.
• 30% of family businesses survive the transition from first to second-generation ownership.
• 12% survive the transition from second to third generation.
• Only 13% of family businesses remain in the family more than 60 years.
• 47% of family business owners expecting to retire in five years DO NOT have a successor.

Source: score.org

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