There comes a time that every business leader must ask themselves a question: "Before leaving my business, how do I go about planning for a successor?" With factors such as generational wealth, future goals, and executive strategies all tied up in your leadership role, you need to know how to prepare for succession. But what is succession planning? And why is it important to know how to prepare for succession? Let's go over the basics.
What Is Succession Planning?
Now, to address the question at hand: "What is succession planning?" By definition, succession planning is the act of strategically pinpointing important roles in your company and creating plans of action for those next in line to fill those positions when the time comes. Consider it your way of laying out a path to the next generation of leadership. Depending on when you're planning, you may not be making any hiring decisions or big moves today, but it's important to lay out a strategic plan of action to be implemented in your wake to ensure continued success for all stakeholders, including your personal financial needs.
Understanding Succession Planning
Of course, knowing the answer to "What is succession planning?" is not the same as truly understanding it. In many ways, succession planning is synonymous with long-term business planning, and business leaders of all kinds will often seek professional guidance on doing this well. It's about more than just your future; it's about crafting a contingency plan for your business's future, as well. Immediate goals, future goals, pressing concerns, and everything that may or may not arise down the line...thinking about these scenarios will help you better understand truly effective succession planning.
Succession planning is often associated with the concept of an exit strategy, and it has two main drivers: planned events (retirement, sale, merger, etc.) and unplanned events (injury, death, departure). Regardless of the need, a plan will require you to take a comprehensive look at both the present-day and future goals for your business to ensure you're leaving things in the right hands. The sign of great succession planning is when you can answer any "what if" question about how your company would respond to in a transition to the next generation of leadership or ownership.
You also need to understand that succession planning is not something to be fixed in place like concrete. Great succession plans are routinely evaluated and consistently updated with each new year and major change. A succession plan is about more than just knowing your personal replacement; it's a path to leave a legacy. It takes stock of leadership, keeps track of rising talent inside and outside the business, and even accounts for necessary training for new and internal hires.
Importance of Succession Planning
A great succession plan protects executives, investors, employees, customers, and yourself, all under one master plan. Without a succession plan to fall back on, you run the risk of one person's departure negatively impacting the entire company.
Failing to plan for succession puts business continuity at risk when one or more leaders depart without a series of next steps in place. No succession plan means no idea about the vision for the company's future, and a rushed succession plan assembled after a departure announcement is not good, either.
Waiting too long to plan a succession will impact your business's value — and, in turn, your own financial freedom. Without a succession plan, a business' struggle after a key departure could result in an outright closure. If your personal financial plan relies on continued dividends or a large sale value, then succession planning is absolutely critical.
How Does Succession Planning Work?
As you've likely gathered, "leaving my business" is not the same as "planning for a successor in my business." If you're still reading, you understand the meaning and importance of having a plan and now want to know: How does succession planning work? The basics of identifying and maintaining your personnel succession plan can be found in the steps listed below. Still, a professional can help you dig into the strategic financial aspects, like assessing and maximizing your business's value through the transition and understanding how your business's sale may impact your personal financial plan.
Here's how to prepare for succession:
- Determine the most crucial roles in the company. Consider the positions playing a vital part in the business's future success. Who holds the most responsibility in the day-to-day? In a world where folks may be wearing multiple hats, it can be helpful to consider the role and not specific individuals to start.
- Develop a description of these roles and create a list of expectations for the position. What does the job fully entail? What is everything required of the person in the role?
- Identify the candidates who could best succeed in the role (or roles) based on the description and expectations you determined. Who could seamlessly transition into the position? Who might need a helping hand to get where they need to be to succeed?
- Create a plan to help those candidates get the training and development they need to remain strong candidates. Can a mentor or two take them under their wing? Are there additional responsibilities they can take on to prove their worth?
- Re-examine this succession plan annually and repeat steps 1–4 as necessary. What has changed since the last time the plan was examined? What remains accurate?
The Bottom Line: Succession Planning
It's impossible to overstate the importance of succession planning (especially when thinking about crafting an effective exit strategy). Thankfully, you don't have to go at it alone. Getting in touch with Plancorp and our dedicated succession planning and exit strategy consultants will help with succession plan basics, allowing you to identify all the key areas you should focus on.
For more questions about succession planning, business planning, generational wealth, an exit strategy, how to leave a legacy, or otherwise, contact Plancorp today. Our elite team of financial advisors and wealth managers can help with succession plan strategy, institutional asset management, corporate retirement plans, and more.
