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Why Do Succession Planning?

March 3, 2020

1. Who is going to run the business after the CEO is gone?

  • Family members with the right skills and behaviors
  • Partners/Shareholders
  • Internal managers or key employees
  • Recruit an outside successor
  • Some combination of all of the above

As you can imagine, choosing a successor is a very personal and often gut-wrenching decision, especially in single-owner family businesses. Having partners or other shareholders simplifies the decision because they usually represent the most likely candidates. Or, you may want to reward a few key employees who have helped you grow the business over the years. Many times, however, it comes down to whether or not the children have what it takes to run the business and whether they want to. Often and most times in fact, it is necessary to look outside the company for the right person to lead the organization into the future.

2. Plan for every contingency.

The next step involves planning for any and all events — such as retirement, death or disability — that can trigger the succession plan. Be sure to identify the appropriate successor in each case because they may not be the same. For example, suppose you plan to turn the business over to a family member upon retirement in the future. But what happens if you get hit by a bus tomorrow and become permanently disabled? This family member might not have enough experience yet to take over the firm, in which case you would want to leave the business in more capable hands until they can grow into the position.

3. Document the plan.

The third step formalizes the succession plan by putting everything in writing and creating the necessary legal documents, such as buy-sell agreements, partner agreements and living wills. These documents also specify where the money will come from to facilitate the transition of the business. Because of the complexity of the issues involved, memorializing the plan requires expert help from attorneys, CPAs and tax and estate planners at every step of the way.

In the majority of cases, succession planning leads to a smooth, orderly transition of the business upon retirement or promotion of a key leader. However, any of us can suffer immediate health problems or be involved in a tragic accident of some sort. In those situations, succession planning can provide direction for the company’s management team and save the company from disaster both internally with the company’s employees as well as with the customers and press.

Avoiding Killer Mistakes

Over the years, we have been involved with a number of successor searches that were driven by a lack of a succession plan. In almost every case, there was extreme pressure to immediately identify a leader who can take the reins without delay and steer the company towards the future. This is almost always problematic because identifying the exact right fit involves casting an extremely wide net and assessing individuals in a conscientious manner against organizational needs and culture. Most of these crisis searches could have been avoided with a little more forethought and attention to certain parts of the process. Three of the common areas that can sabotage even the best-laid succession plans are:

Failure to plan. Sadly, this represents the biggest and most common mistake of all. CEOs typically spend a great deal of time planning for their companies. But when it comes to succession planning, many choose to bury their heads in the sand and ignore the issue altogether. Often, even the most basic of planning can forestall major disasters for the business and the family.

Choosing a weak successor. Many entrepreneurial CEOs do a poor job of hiring their eventual successor. As a result, the time comes to exit the business and they suddenly realize the heir apparent does not have what it takes. This throws off the succession timetable which can have severe financial implications for the CEO and the business. The CEO must take his/her time hiring a second-in-command. Avoid the ‘ready, fire, aim’ approach.

Lack of flexibility. Even the best-planned business transfers can get waylaid by a downswing in economic cycles. To avoid this pitfall anticipate changes in economic cycles, build in a cushion on the downside and provide enough flexibility to meet the needs of both parties.

It is the job of the Talent Management function of each company to ensure that succession plans are in place for all levels of the organization.