Some business owners do not consider the fact that their largest and most important asset is their business. Of course they are generally aware of the time, energy and dedications they have invested in building the company. However, it’s difficult for most to envision a day when the company will exist without their involvement. The difficult reality is that this will happen and it’s important to begin planning for such an outcome long before the actual need arises. The process prepares the business, the owner and owner’s family for what will happen when the need for transition occurs (both financially and emotionally). Beyond this, it provides important reassurance to key employees, bankers, vendors and others that the future of the company has been considered and there is a plan in place. To help those who have not started or are considering succession planning, we have provided a summary of the key considerations to address during planning. These include:
- Consider the various components. Part of creating an effective succession plan is to examine the abilities of present management and whether a potential future leader is already in place. In many cases, future leaders are already working in the company, but they require additional training and development to prepare them for a leadership role.
- What are the main characteristics a successor should possess? It’s not possible to clone the business owner and have an exact replica run the company. The skills and talents needed to start the company may not be the same ones needed to manage it into the future. It’s important to understand the challenges the business will likely face in the coming years and what characteristics the next leader may need.
- Employ a comprehensive selection process. Often owners want a particular family member to take over the business and while this is respectable, it’s not always in the company’s best interests. It’s critical to the company’s success to conduct a rigorous examination that assesses the strengths and weaknesses of several potential candidates. Key employees and others with intelligence about the business must be brought into the process, and included in the universe of potential candidates.
- The importance of making a decision. Once the above steps have been thoroughly examined and assessed a decision needs to be made. We have seen many companies go through the process of succession planning only to falter when it comes to making a decision on the successor. The process does not work if the owner is not committed to implementing change. For this reason, it’s essential that a decision on the next leader is made within a reasonable time period.
- Communicate the decision. It’s important to communicate key elements of the plan to the company. This ensures everyone is aware of the vision for the future and allows the necessary cultural changes to unfold. It’s possible that those individuals not selected as a future leader may use this time to leave, but it’s important to be transparent with everyone so they understand the future direction of the company.
- Ensure periodic review of the plan. Simply establishing and announcing a successor does not end the succession process. Because businesses can change and evolve, the succession plan and its effectiveness must be reassessed periodically. Reassessment is not an opportunity for owners to simply change their minds, but rather, is a chance to refresh the plan’s vitality and confirm the decisions made. The successor may change if there is a significant modification in performance or business circumstances.
Succession planning is a comprehensive and complex process. For this reason, it’s essential to work with an advisor that can help guide the process, avoid common pitfalls and keep the process on track. If you are contemplating a succession plan, Sikich wants to help! For additional information please contact Ray Lampner, CPA. We look forward to speaking with you soon.