A Beginner's Guide to Business Succession Planning for Small- and Mid-Size Business Owners
Having a business succession plan in place can minimize fallout if you lose a key employee. While it takes some extra analysis and foresight — and some transparent communication and documentation — it can pay off when a transition to new leadership goes smoothly.
As you run your business, you're likely focused on the day-to-day challenges. But time can go by quickly, and it's crucial to plan the next generation of leaders.
Proper business succession planning — that is, identifying and developing employees to step into future roles — can set you up for success down the road while also improving your employee retention rates and engagement now.
"It's a strategic approach to thinking about scenarios and plans to ensure smooth transitions between current and future incumbents," says Jay Caldwell, chief talent officer at ADP.
Let's explore the basics of business succession planning, including the benefits of doing it, key steps to take to set it up and the challenges you may encounter (and their solutions).
What is business succession planning?
Succession planning primarily focuses on how you'll replace essential leadership roles in your organization, including the owner and CEO. It may also include guidelines for continuity in other positions that are critical for success or difficult to fill. The idea is to start training and nurturing the next round of talent so you aren't left scrambling if a key employee quits, retires, gets sick or passes away.
Your succession plan may also include operational exit planning detailing what you'd like to happen when you or other top stakeholders retire. Documentation can settle decisions ahead of time such as whether you'd like to leave the business to family, sell it to another company or set up a buy-out with your employees.
"Every business owner wants to minimize distractions to their operations and goals," Caldwell notes. "Changes in leaders can be quite disruptive, particularly if there is not a plan in place."
Succession planning keeps your business running smoothly even when key employees leave. This is one just of the reasons to make business succession planning a priority.
Succession planning can help you find candidates and retain them
However, strategic workforce planning is sometimes not on the radar for small and mid-size business owners. Only 35 percent of these businesses have started the process, and of this group, only 8 percent have a complete written plan, according to 2022 research from MassMutual.
"It could be because of the demands of their operations, a lack of development resources or simply overlooking the importance of planning for transitions," Caldwell observes.
One common issue for smaller organizations when it comes to this type of planning is that you usually don't have a broad bench of talent to draw on. However, if you're thinking about the future of your business early on, you're more likely to ensure a viable candidate has been trained, whether internally or outside your organization. It can keep you from having to do a sudden — and possibly costly — hiring search. It also saves you and other leadership from working overtime to handle the role while looking for a replacement.
Your succession plan can prevent the loss of critical knowledge after someone leaves and conflict between employees suddenly vying for the open position. If your family members are part of the business, your succession plan can even guide the next generation of owners.
Finally, a succession plan has the potential to improve your employees' performance today. That's because your top contenders will stay committed to your organization if they know they're lined up for a role and help future-proof your management team.
"Seeing a clear future with the company is a top driver of retention," says Caldwell. "Establishing and following through on development action plans make succession candidates feel challenged and engaged, which can help ensure they are emotionally committed to doing their best work." He adds, "These are your best people and would be very valuable to your competitors, so succession plans can help protect your most important asset!"
Key aspects to have in a business succession plan
Because every business needs a unique plan, there aren't pre-made blueprints. But you can take several common steps to ensure your business succession covers the major points:
- Identify priority roles. "In a world of finite time and resources, it's unlikely you can have a plan for all roles," says Caldwell. "Pick the ones that have the most significant impact on your business."
- Define what is needed for each role. Consider the required experiences, knowledge, skills and behaviors to succeed in the short and long term. Clarity is a key part of the succession planning process.
- Find possible succession candidates for each role. Look for up-and-coming leaders in your organization, external candidates and family members. Consider where they stand right now versus the position's ideal requirements and what training or skills they will need.
- Discuss career aspirations with your candidates. Ask about their future career goals and if they see themselves in these higher positions. Also, ask what they might need to grow into these roles.
- Set an action plan for developing future candidates. Think of the training, exposure, relationships or experiences that you can offer for these roles in the near term. For example, you could have the successor candidate fill the role temporarily while the current employee is out for a limited time.
- Estimate when transitions may occur. Consider when you or other leaders want to start stepping down. Your plan could include a gradual phase-out, where existing leaders adjust their roles to focus more on mentorship/coaching their successors.
Overcoming road bumps with business succession planning
While succession planning may sound straightforward enough as you line up your wants and wishes for your organization, some common challenges can get in your way.
Vague goals and requirements
You must be clear about each role's requirements and the steps needed to develop your employees. You also should be transparent with potential candidates about how you view their future and gauge their interests rather than making assumptions about what they want.
Missing leadership buy-in
"Many leaders don't like thinking about a future where they are no longer with the company," says Caldwell. "It can feel morbid or counterintuitive, and so they'll need to be sold on the value of doing so."
Lack of available talent
Developing future talent is a must because it cannot happen overnight. You and your HR team should also network with external candidates to build the pipeline of those who could be brought into the company. You can cut down on the time an open position goes unfilled. On top of skills, focus on the diversity of future talent pools and develop a broad spectrum of leaders from different backgrounds and experiences.
Conflict between future candidates
Improper or unclear plans can create unhealthy competition between your employees, leading to distrust and a lack of collaboration. That's why fostering open, honest dialogue about your plans is essential rather than leaving everyone guessing what's coming next.
Emergency loss of employees
Unfortunately, life can get in the way of your succession plan with the sudden departure, illness or death of a leader. Your succession plan should consider how your business would react to an emergency departure. You could also cross-train employees across several roles. You develop more people who can step up in a pinch, and you may uncover unknown employee talents and passions for a new position.
Tricky family relationships
Succession planning can have extra challenges for family business owners to navigate. In some cases, making decisions you think are good for the company can lead to hurt feelings.
"This situation can have heightened emotional dynamics given the personal relationships inside and especially outside of the workplace," Caldwell warns.
You may want to try to make sure your personal relationships don't hinder your objectivity in considering successor candidates. Also, it's a good idea to recognize communication breakdowns that create a lack of transparency in how you're making decisions. If you want to hand over your business to the next generation one day, a well-designed and clearly communicated succession plan is critical.
Where to get help with your business succession plan
Building a succession plan is not easy, especially if it's beyond the experience of anyone in your organization. Even if you feel comfortable with your plan, it still could help to reach out to a professional.
"Getting a third party's opinion can help mitigate the challenges, increase perceptions of fairness and lead to a smoother transition when the time comes," Caldwell says.
You can turn to HR professionals with a long history of experience in helping other small and mid-sized businesses. They can guide you about the essential questions to ask yourself and other stakeholders to shape your plans and the documents necessary to lock it down.
Consider the ADP Talent Management and Succession Management programs from an outside perspective. They can guide you through this important process.
