Essential Elements of a Business Succession Plan
Retirement is calling. And then the reality hits: you will not be at the helm of your business forever, and it might be time for you to start finding the perfect employees to take over.
Any type of plan, including a succession plan, requires foresight and consideration. While every succession plan is different, there are some considerations that transcend all types of businesses. Professionals in the succession planning industry generally recommend you start 15 years prior to your last day of work in order to ensure long-term viability.
Since every succession plan is unique, the following are some general guidelines to follow when creating one for the unknown (such as a natural disaster) or when it’s time for retirement. One important thing to consider is whether family members are able to or want to continue running the family business. Are the goals of family members in line with current owners, or do they differ dramatically? What are the individual goals of each retiring family member? What are the current and projected cash-flow requirements of retiring family owners?
Another consideration is what does the business succession plan cover? Does it cover death only? Or does it cover disability, retirement, incapacity, bankruptcy and other factors beyond normal control?
If the business succession plan has a sales clause in it, how does it address valuation and sales procedures? Depending on how many members’ interest is taken into account, how is it valued? Is it appraised by book value, by annual or quarterly earnings, assets only or another type of valuation?
How are the skill sets evaluated of those who will succeed the current owners and management? If one or more family members are interested in owning and running the business in the future, how are their education, experience and skill sets evaluated and appropriated in the business succession plan?
Determining which individual or individuals are competent and will look out for the best interest of the company is no easy task, especially for owners looking to wind down their own involvement in their company. Experts recommend reaching out to the organization’s board of directors or an independent search committee to find the right fit for a successor. Using a neutral, emotionally detached third party removes the innate bias of the selection process, ensuring the individual or individuals are experienced enough to give the business the best chance of sustainability.
Passing the Torch
One critical factor to consider when creating a succession plan is what core functions the successor will assume. Speaking with a board of directors or a third-party consultant can help business owners identify all skills and requisite experience before the takeover. This process can help ensure all bases are covered, especially when it comes to evaluating and ensuring soft skills. This also allows for the successor to make mistakes and learn from the original owner to get a feel for the company culture, instead of having culture shock.
Another way to increase the likelihood the new owner will maintain and grow the company’s success is to transfer ownership over a period of time. The transition can help the soon-to-be owner understand nuances of day-to-day operations and create motivation for learning, increasing the likelihood of a smooth changeover. It is more effective to understand the idiosyncrasies of day-to-day management with executive guidance rather than learn from a customized manual or by interacting with direct reports.
While there is no boiler-plate business succession plan, meeting with your board of directors or reaching out to a third-party consultant can greatly increase your chances of successfully passing control to a family member or third party and sustaining your business’ longevity.