When was the last time you thought about succession planning in your business? If you’re like millions of business owners in the United States, you’ve never thought seriously about the idea. You’re too busy focusing on daily operations, cash flow, and your competitive strategy.
But succession planning is highly beneficial for most business owners, and practically necessary for some. If you’re the victim of an accident or if you find yourself unable to work, you might not be able to continue running the business as usual. And if you want the business to survive, you’ll need to have a succession plan in place.
So what steps do you have to follow to create a succession plan?
Stages of Planning a Succession Plan
Though succession plans can vary, most are best created by paying careful attention to these key areas:
- Pick a successor (or successors). If you want a solid succession plan, you need to have a successor, as you might imagine. If you’re running a family business, that typically means choosing a son or daughter, or other relative to gain control over your share of the business when you’re no longer able or interested in running the business. Otherwise, you’ll probably look to people already in your business who have taken on leadership roles. Who among these has shown the most interest or competence in leading the company? Could you potentially split ownership of the business among multiple people?
- Accurately value the business. Next, you’ll need to accurately estimate a value for the business, especially if you’re only one of several business partners. There are a few different ways to do this, but it’s usually a good idea to get things done by a professional, or at least consult with someone experienced in providing company valuations. That way, you’ll be able to fairly allocate your share of the company, and determine what that share is worth.
- Purchase insurance. The next step is to purchase an insurance policy, usually a life insurance policy with death benefits, which will ensure that your desires are followed in the event of your death. You’ll need to do this with any partners in your business.
- Make an action plan. Assume that you’ve stepped down from the business, or have died unexpectedly. You’ve appointed a successor, but how are they going to handle things in the wake of your absence? It’s a good idea to have a formal action plan in place, dictating next steps for everyone in your company to take—especially at the leadership level. The more specific these steps are, the better for the people who will be stepping in to run things.
- Cross-train. While you’re still with the company, it’s also a good idea to cross-train the people who are going to step into your role. Teach them some of your core responsibilities, and explain your leadership philosophy. That way, when they need to step into the role, they’ll be able to do it more fluidly.
Other Things to Consider
There are a few other things to consider when drafting a succession plan:
- Formality and documentation. Having a loose, informal succession plan isn’t enough. Merely designating a successor and hoping they’ll be able to step into your role opens the door to legal hurdles and other complications in the future. Make sure you have your plan formalized and documented, so there’s no question as to what your intentions are—and what’s supposed to happen next.
- A timeline. You’ll also want to consider a timeline for your departure if you plan on leaving the company in the future. For example, do you plan to retire in 5 years? In 10 years? If so, you’ll have the chance to groom someone to replace you, and you’ll have more control over how the company evolves in the years leading to your departure.
- Regular updates. Just because your succession plan accurately reflects your desires today doesn’t mean it’s going to remain relevant and accurate indefinitely. It’s a good idea to routinely revisit your succession plan, updating it with a new valuation and with new descriptions for what should happen upon your departure or death—at least annually.
The sooner you create your succession plan, the sooner your business will be protected from your departure or demise. If the longevity of your company is important to you, you can’t neglect the importance of this document.