Why Your Business Needs a Succession Plan

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SuccessionIn business, everybody moves on at some point in time. Whether it’s due to retirement, new opportunity, or someone passing away, leaders can change in a hurry. If there’s no strategy in place to account for when this inevitable change happens — things can get messy.

This is where succession planning comes into play. The leader of a company develops a plan to have a person (or people) replace them once they’re gone. This process usually begins years ahead of time with the leader identifying internal people who possess the potential to carry the torch. Generally speaking, these are people who understand the business or industry on a deep level and will ensure a smooth transition from the previous leader.

It doesn’t matter how big or small your business is, every leader needs a succession plan. Without one, there’s a very real possibility the business will suffer. People won’t adjust to the new leadership style, problems will arise, and they might leave as a result. These transitions need to be as seamless as possible to ensure the success of the business in a long-term capacity.

Putting a Succession Plan Together

There’s no “right way” of putting a succession plan together. However, the most important thing to keep in mind from a leadership perspective is that it should always be based on what’s best for the business. This isn’t an emotional decision, so consulting a business advisor, financial advisor, and lawyer are good places to start.

The biggest component of a succession plan is who is going to succeed you as a leader. The decision might be easier if you have a business partner or family member in place who you’ve already been grooming to lead your business one day. If not, you need to take some time to identify a person to replace you. That person will generally come from your business or be someone who understands your industry well enough that they won’t cause an aftershock following your exit.

Another big piece you have to account for is the succession type. The most common one leaders generally have is a designated replacement, someone who’s trained and chosen ahead of time. A target date replacement is very similar in that the business has chosen a person to take over, and the current leader has an exit date set, but the replacement may not be trained yet. A situational replacement only takes over when there’s a sudden departure or the company situation is uncertain.

For larger companies, it’s also important to include something known as a buy and sell agreement. This determines who’s able to buy the departing owner’s shares, the circumstances that allow those shares to be sold, and the price for those shares.

What Happens With No Succession Plan?

If company leadership doesn’t put a succession plan in place, there a number of problems that can arise, such as legal disputes over who should run the business, internal battles overshares, and no continuity from a leadership perspective. To avoid these, it’s crucial to have a succession plan in place.

Another negative of having no succession plan is its impact on employee morale. Career development is an important part of employee satisfaction. It gives everyone something to strive for. If people know they have no chance of getting a senior leadership role, it can result in star employees leaving the company altogether.

With that in mind, there are a few other options for leaders. They can consider selling the business or closing it altogether. There’s also the option of hiring an outside company to run the business or potentially merge with them. These are usually things done when the current leadership already lacks a succession plan or has no desire to put one in place for their own reasons.

If you’re considering a succession plan for your business, sit down with one of our trusted advisors to discuss your company’s financial future. We’re here to help guide you through the next step, whatever it may be. Contact us today!

Ocean Wealth