You’ve put endless hours into ensuring your business is successful. You’ve carefully cultivated its growth and profitability every step of the way, and it has flourished under your leadership.
What is succession planning?
Investopedia defines succession planning as “a strategy for passing each key leadership role within a company to someone else in such a way that the company continues to operate after the incumbent leader is no longer in control” and “ensures that businesses continue to run smoothly.” At the heart of succession planning is replacement planning:
- Evaluating the skills of current leadership
- Determining the availability of internal or external successors
- Purposefully developing the skills of any internal candidates
Why does planning for succession matter?
Succession planning is sometimes referred to as “continuation planning” for its vital role in ensuring that businesses continue to exist despite a transition in management or ownership. More than just planning for who will inherit key roles, succession plans:
- Provide a medium for businesses to detail how they will minimize potential tax liability
- Maintain the value of company stock and assets
- Ensure lending covenants remain fulfilled during a transition
Succession plans are also a useful vehicle for contemplating how to preserve adequate liquidity and cash flow despite the potential need for “stay bonuses” to retain top employees and, in the case of a CEO who was taking a small draw, substantially higher expenses to replace the principal.
Similar to business plans, a succession plan is a means to an end, not an end in itself. The true strength of a succession plan lies in its implementation.
What can go wrong without a plan?
Short answer: everything. Without a succession plan, the business is put at risk as its stakeholders scramble to hold the pieces together through a series of desperate, rushed decisions. In the oft-quoted words of Sir Winston Churchill, “He who fails to plan is planning to fail.”
Congratulations! You’ve taken the first step in ensuring the longevity of your business’ success. The succession planning process will no doubt vary depending on the size and structure of your business, but key starting blocks are:
- Involving your business’ stakeholders
- Assessing availability of internal and external candidates
- Pulling together a team of professional advisors including your attorney, CPA, and others to assist in planning and implementation
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