Introduction to succession planning

Succession planning means supporting people in your business capable of taking on the most senior jobs in your organisation when your senior leadership retire. 

You must start by identifying individuals with the potential to step into these posts as short-term or longer-term successors.  

Proactively developing individuals through job moves or secondments around the business can provide a ready source of future leaders.  

Focusing on the most senior posts means that only a small proportion of the workforce would be part of the process. This makes it more manageable.  

If done correctly, succession planning should provide your business with a plan and some stability when a transition occurs in leadership or other key roles in the business.  

Succession planning takes around 3 to 5 years to complete.

A business owner might typically look to draw up an exit succession plan around five years ahead of retirement. 

But there is a strong argument for always having an emergency succession plan in place. 

Since the circumstances of the business, the business owner and their successors could change at any time, it is important to review the succession plan regularly and make changes accordingly.  

There are two different types of succession that must be carefully thought through by a retiring business owner: ownership succession and management succession. Each needs to be documented in your succession plan. 

Ownership Succession    

The ownership succession plan should clearly outline the goals you are seeking to achieve from an ownership point of view. 

Are you looking to sell the business externally, pass it onto family members, implement an employee share ownership plan (ESOP) or a management buyout (MBO), or bring in external investment from a private equity firm?  

Whatever you decide must be detailed in the plan. 

Also, consider if you could hire someone externally to take ownership of the business.  

While many would consider succession planning as an internal process, this doesn’t necessarily have to be the case.  

In any case, planning for how you would manage the transition if you brought someone in externally is worth doing as it would at least give you the option.  

The ownership succession plan also needs to get into the details of how any ownership transition would occur – at what time or date, and at what price or value.  
  
Management succession  
  
This aspect is often left until too late, and the amount of work and effort required is often underestimated. A five-year process to transition management in a privately held mid-market business is recommended.  

Successors (those looking to take over management of the firm after the founder or owner exits) need to be first identified and then analysis done on any skills, education or experience gaps.  

There is normally a gap of some kind, and this is only a problem if not enough time is allowed to resolve that gap prior to the transition taking place.  

In some cases, successors need to undertake further training or education or perhaps acquire an accreditation or qualification that’s needed to be the licensee for the business.  

Often the gap is an experience gap and so the successor needs to attend any meetings and participate in any planning and strategy sessions they previously were not involved in – all as preparation to ‘take over’ at a future date.  

This will ensure the new manager is well equipped so that the business is successful going forward. 

All the planning in the world cannot prevent something from going wrong, which only serves to re-emphasise the importance of having an emergency succession plan. 

The business and its owners should always have a plan B – a ‘what happens if?’ 

To create an emergency succession plan, you should follow the same process as you would in ordinary circumstances, agreeing any details in advance and setting these out in a shareholder’s agreement so everyone is on the same page.   

In certain unplanned events, a buy-sell agreement (to cover the management of equity) and potentially insurance funding may be required. 

If you are unable to make decisions about your business, you should think about who you’d want to make those decisions and then create a Business Lasting Power of Attorney. You will need to get a lawyer to create this for you as it is a legally binding document.