What Is Succession Planning?

Succession planning is a structured approach for businesses to identify and retain new leaders who can replace old ones when they retire or die.
United States Corporate/Commercial Law
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Succession planning is a structured approach for businesses to identify and retain new leaders who can replace old ones when they retire or die. The purpose is to help maintain continuity, avoid disruption in operations, and, for small businesses, to preserve the businesses value well after the founder is no longer active. It acts as a safety net, preparing candidates for planned or emergency replacements due to retirement, new opportunities, and unforeseen events such as death.

There are six key steps in succession planning:

  1. Identify Key Positions: The process begins by identifying critical roles with an organization such as top executives, department heads, and/or other key personnel with a consideration to both short-term and long-term needs. For small business, this could also mean identifying a successor owner.
  2. Assess Current Talent: Once key positions are identified, existing employee evaluations should take place to determine their potential for leadership roles, looking beyond technical skills and considering qualities such as adaptability, communication, and strategic thinking. The goal is to create a talent pool of potential successors.
  3. Develop Succession Plans: For each identified position, create a customized plan by outlining the specific steps needed to prepare a potential successor by defining development activities, training programs, and mentoring opportunities.
  4. Provide Training and Development Opportunities: Invest in the growth of your identified successors by offering training and encouraging cross-functional experiences to broaden skill sets.
  5. Monitor Progress and Communicate Transparently: Regularly review the progress of potential successors and adjust as needed, keeping employees informed about succession planning efforts.
  6. Execute Transition: When a leadership vacancy occurs, smoothly transition to the identified successor and provide the necessary support during the transition process.

There are many succession planning tools available to help organizations identify and prepare internal talent for leadership roles. Often, payroll and human resource companies offer performance, compensation, and learning management resources within a Human Capital Management (HCM) system. Such systems help to align talent development with business goals. For small businesses once talent is identified, it may be appropriate to consider transfers of minority equity interests or the development of stock option or phantom stock plans to allow the identified talent to participate in the equity of the company without obtaining meaningful control.

Ideally, succession planning should be an ongoing process and not a last-minute scramble. The negative effects for a small business that does not properly plan are numerous and can be crippling, such as alienation of employees who see no clear path for advancement leading talented individuals seeking opportunities elsewhere, reduced loyalty and commitment, lower performance of ill-prepared successors, and risk to business continuity.

Done properly, succession planning provides a leadership pipeline and increases employee engagement and retention which leads to not only increasing the overall value of a business, but for small businesses in particular, it can lead to allowing that value to be sustained long after the founder exits the business thereby benefitting the founder's estate as well.

If this is something your company needs, it's time to take action. The process might be daunting if you've never spent time working through these aspects before, but there are multiple resources available. Work on this one step at a time, and before you know it your team, your culture, and your future will be better off for it.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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