Succession planning in businesses is the process of identifying long-range needs and cultivating a supply of talent to meet those needs. Succession management serves as an interface between the human resource function and the strategic direction of an organization. In this role, it is a vital resource in anticipating the future needs of the organization and helps find, assess, develop, and monitor the human capital required by the organization’s strategy. The succession management function may also reflect the concerns and needs of line executives throughout the business units.
Goals of succession planinng include:
- Development and replacement of key leaders
- Clarification of key positions and criteria needed to fulfill them
- Gereration of a talent pipeline to fill key positions
- Identification of leaders’ strengths and and experience to accelerate leadership growth of individuals and a total talent pool.
A succession plan is a written document that provides for the continued operation of a business in the event that the owner—or a key member of the management team—leaves the company, is terminated, becomes incapacitated, retires, or dies. It details the changes that will take place as leadership is transferred from one generation to the next. In the case of small businesses, succession plans are often known as continuity plans, since without them the businesses may cease to exist. Succession plans can provide a number of important benefits for companies that develop them. For example, a succession plan may help a business retain key employees, reduce its tax burden, and maintain the value of its stock and assets during a management or ownership transition. Succession plans may also prove valuable in allowing a business owner to retire in comfort and continue to provide for family members who may be involved with the company.
Despite the many benefits of having a succession plan in place, many companies neglect to develop one. This oversight may occur because the business owner does not want to confront his or her own mortality, is reluctant to choose a successor, or does not have many interests beyond the business. Although less than one-third of family businesses survive the transition from the first generation to the second—and only 13 percent remain in the family for more than 60 years—fewer than half of business owners establish a formal succession plan. Succession and the planning it entails can be much like planning one’s own funeral. Perhaps in part because of this discomfort of the process, the transfer of power from the first to the second generation seldom happens while the founder is alive and active in the business. Yet it is one that must be prepared for, if the business owner hopes to avoid having hard-earned assets go to unwanted individuals and institutions. “The economic costs are significant,” stated James Bieneman in Business First-Columbus. “[But] the human costs are even greater in terms of spoiled family relationships, missed career opportunities, and the discomfort of living in a state of misalignment.
PREPARING FOR SUCCESSION
Experts claim that the succession planning process should ideally begin when the business owner is between the ages of 45 and 50 if he or she plans to retire at 65. Since succession can be an emotionally charged issue, sometimes the assistance of outside advisors and mediators is required. Developing a succession plan can take more than two years, and implementing it can take up to ten years. The plan must be carefully structured to fit the company’s specific situation and goals. When completed, the plan should be reviewed by the company’s lawyer, accountant, and bank.
One of the main reasons business owners should take the time to create a successful continuity plan is that it is one of the few ways for most to assure themselves a way out of the business with assets enough for retirement. To do this, the business owner has a few basic options: sell the company to employees, family members, or an outsider; retain ownership of the company but hire new management; or liquidate the business. An Employee Stock Ownership Plan, or ESOP, can be a useful tool for the owner of a corporation who is nearing retirement age. The owner can sell his or her stake in the company to the ESOP in order to gain tax advantages and provide for the continuation of the business. If, after the stock purchase, the ESOP holds over 30 percent of the company’s shares, then the owner can defer capital-gains taxes by investing the proceeds in a Qualified Replacement Property (QRP). QRPs can include stocks, bonds, and certain retirement accounts. The income stream generated by the QRP can help provide the business owner with income during retirement.
In Family Business Succession: The Final Test of Greatness, Craig E. Aronoff, Stephen L. McClure, and John L. Ward outline a number of steps companies should follow in preparing for succession. These steps include:
- Establishing a formal policy regarding family participation in the business
- Providing solid work experience for all employees, to ensure that succession is based on performance rather than heredity
- Creating a family mission statement based on the members’ beliefs and goals for the business
- Designing a leadership development plan with specific job requirements for the successor
- Developing a strategic plan for the business
- Making plans for the preceding generation’s financial security
- Identifying a successor or determining the selection process
- Setting up a succession transition team to keep decision-makers informed about their role in the changes
- Completing the transfer of ownership and control.
Succession should be viewed as a process rather than as an event. There are four main stages in the succession process: initiation, selection, education, and transition. In the initiation phase, possible successors learn about the family business. It is important for the business owners to speak openly about the business, in a positive but realistic manner, in order to transmit information about the company’s values, culture, and future direction to the next generation.
The selection phase involves actually designating a successor among the candidates for the job. Because rivalry often develops between possible successors—who, in the case of a family business, are likely to be siblings—this can be the most difficult stage of the process. For this reason, many business owners either avoid the issue outright—or indirectly through the naming of multiple successors—or make the selection on the basis of age, gender, or other factors other than merit. A wiser course would be to develop specific objectives and goals for the next generation of management, including a detailed job description for the successor. Then a candidate can be chosen who best meets the qualifications. This strategy helps reduce the emotional aspect from the selection process and also may help the business owners feel more comfortable with their selection. The decision about when to announce the successor and the schedule for succession depend upon the business, but an early announcement can help reassure employees and customers and enable other key employees to make alternative career plans as needed.
Once a potential successor has been selected, the company then enters the training phase. Ideally, a program is developed through which the successor can meet goals and gradually increase his or her level of responsibility. The owner may want to take a number of planned absences so that the successor has a chance to actually run the business for limited periods of time. The training phase also provides the business owner with an opportunity to evaluate the successor’s decision-making processes, leadership abilities, interpersonal skills, and performance under pressure. It is also important for the successor to be introduced to the business owner’s outside network during this time, including customers, bankers, and business associates.
The final stage in the process occurs when the business owner retires and the successor formally makes the transition to his or her new leadership role. This transition can be made as smooth as possible for the company by publicly committing to the succession plan, having the departing executive leave in a timely manner, and eliminating his or her involvement in the company’s daily activities completely. In order to make the transition as painless as possible for himself or herself, the business owner should also be sure to have a sound financial plan for retirement and to engage in relationships and activities outside of the business.
Business owners who fail to adhere to the above steps may end up cobbling together succession plans that do not reflect the best interests of the company or of its stakeholders (valued staffers, family members, partners, etc.). “Why and how often do succession plans fail?” wrote Bieneman. “Succession plans fail when serious conflict (some call it dysfunctional behavior) cannot be overcome, when family members have and cannot abandon unrealistic expectations, or when the family business has run its course and should be sold but isn’t. Succession plans are an exercise in compromise, tough love, forth-rightness, and making difficult but necessary decisions.”
SEE ALSO Estate Tax; Family-Owned Business
AronofF, Craig E., Stephen L. McClure, and John L. Ward. Family Business Succession: The Final Test of Greatness. Second Edition. Business Owner Resources, 2003.
Bialyj, Mike. “Will Your Business Survive After Your Retirement?” Contract Flooring Journal. May 2006.
Bieneman, James N. “Succession Plans Provide Blueprint for Peace of Mind.” Business First-Columbus. 6 October 2000.
Dammon Loyalka, Michelle. “Family-Biz Circle: The Boomer Handoff.” Business Week. 14 February 2006.
Gangemi, Jeff, and Francesca Di Meglio. “Making an Educated Decision.” Business Week Online. 15 February 2006.
Karofsky, Paul. “Can Business Bring a Family Together?” Business Week. 22 February 2006.
Powell, Larry, and John Venturella. “Succession Planning Two Ways: Business Items and Emotional Items.” Production Machining. May 2006.