Though many business owners who are looking to step down from their position would prefer to simply select an eligible employee to take over and move on from there, for others this is simply not an option. Sometimes there just isn’t someone available who has the skills and the knowledge to lead the company. Other times the owner isn’t ready to step down and just wants to make sure there is someone can fill their shoes when the time does come. In situations like this, the best option is train someone as a successor, establishing the “next in line” to take over the company.
However, choosing a successor can be a complicated process, and unless the succession is thoroughly planned out in advance, there is the potential to endanger the stability and profitability of the company.
The Importance of a Succession Plan
The first thing you have to understand when creating a succession plan is that it will be a long-term project that will take years to execute. Finding the right person to take over can be time consuming, and while many will select a family member or a high-ranking manager as their successor, it will still require extensive training to ensure they are ready for the position.
The exact amount of time will vary, but it is common for a successor to need at least five years to prepare. This allows you time to get them acquainted in the role, identify and rectify gaps in knowledge, and figure out financing options. It also provides an opportunity to document important business procedures and position others to succeed in your absence. Even if you teach a successor how to handle certain company procedures, it is vital have it in writing to make sure that when you leave, the knowledge needed to run your company doesn’t leave with you.
Of course, the most important step when preparing a succession plan to choose the right person for the job. What exactly that entails will vary from business to business, but beyond an aptitude for core business concepts, a you need to consider if your successor will be a good fit with the company’s culture and general direction. As Richard J. Bryan puts it, “… the true ‘secret sauce’ of a great leader may have less to do with their scores in any [specific competencies]… than how well they align with the unique needs of your enterprise, and where it might be in five or ten years.” You also need to make sure that they are invested in taking over the business, as while some might be interested in serving a larger role or even being a co-owner, some lack the time or dedication to be a full-time sole business owner. Either way, once you have decided on a successor who you think will fit your company’s needs, you should move forward to with a non-compete agreement, just be sure that they wouldn’t move onto a different company during the grooming process. Also, if during the process you are transitioning your successor from being a co-owner to a sole owner, you will need cash on hand to complete the process.
The Benefits & Potential Challenges of the Succession Plan
The immediate benefits of creating a succession plan are readily apparent: by hand-selecting and training someone to serve as your company’s new owner, you have a clear sense of who they are and who effective they will be in the role. Choosing an employee to buy you out allows for a degree of control as well, but with the succession plan, you have far more direct control over their professional development. Also, by creating a succession plan, you have a process in place that can be iterated on down the line, further extending the longevity of your company.
However, while one might think that hand-picking and training a replacement would eliminate much of the risk of confusion that comes with the transfer of leadership, in practice it opens up new potential conflicts. The double-edged sword of the succession process is that its complexity helps firmly establish how to go about preparing someone to lead, but if the process is not properly planned out, it can lead to internal and external conflicts. Plus, if the successor isn’t fully invested in their role, nothing can stop them from leaving and bringing the skills you taught them to another company. On top of all of this, since many business owners will choose a family member as their successor, this brings its own share of complications, not the least of which that research shows fewer than a third of family-owned businesses survive the transition from 1st to 2nd generation.
Planning Your Company’s Next Steps
Creating a succession plan is a long and complicated process, and there is always going to be a degree of uncertainty when choosing someone to take over your business. However, if it is approached conscientiously and cautiously, it is your opportunity to secure your company’s legacy. So long as you approach the succession process with the diligence and forethought that it requires, then you can one day walk away knowing that the business you helped build is in good hands.
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