As Leaders Age and the Unexpected Strikes, Developing a Succession Plan is Mission Critical

Nearly Half of All Businesses Lack a Formal Succession Plan — Does Yours?

As the great wealth transfer looms, so does a great transfer in leadership among businesses large and small, public and private. The 40-year-old S&P 500 CEO is a rarity. In fact, at age 58, the average CEO is not far from retirement. With few junior representatives to step in, the importance of succession planning couldn’t be higher.

So, how are businesses preparing and developing an effective succession plan? Many businesses may not have an effective succession plan at all. In fact, research from the Association for Talent Development (ATD) finds that only 35% of organizations have a formal succession planning process.

The Importance of Succession Planning

For many business owners, the transition of a business is a once-in-a-lifetime event that brings once-in-a-lifetime questions:

• What is going to happen when you finally relinquish day-to-day control of your business?
• Are you going to sell it and live off the proceeds? Or will you retain ownership but cede operational responsibility to a successor?
• How will your legacy be preserved or even expanded?

Only you can know the answers to these questions, but whatever you have in mind, it pays to have a formal and well-thought-out succession plan in order to avoid major risks.

The Risks of Not Having a Succession Plan

Without a formal plan, the risks are many. You may end up:

• Walking away from your business with much less than was possible.
• Holding onto the business much longer than you had planned if the company isn’t marketed properly or streamlined for another owner.
• With no choice but to shut down the business and walk away with nothing.
• Forcing the need to shut the business down onto your estate after you pass, with nothing to show for your decades of hard work.

With effective succession planning, however, you can increase the value of the business, thereby boosting the proceeds you receive from the transition, all while setting up your successor for future growth, and helping to maintain employee harmony. A win-win situation for all!

Challenges in Succession Planning

While most business owners acknowledge the importance of succession planning and express interest in creating a formal plan, many lack a structured approach to make it a reality. In fact, according to Deloitte, 86% of leaders believe succession planning is an “urgent” priority,  but only 14% think they do it well.

So, what can cause a succession plan to fail?

The absence of a clear vision is a common obstacle in the succession planning process. If your company suffers from any of the following signs and symptoms, it may be an indication that changes need to be made:

• Lack of a named successor.
• Lack of a data-based approach.
• Lack of organization-wide buy-in.

Though each of these is an important ingredient to the health of a business and its succession planning, incorporating buy-in beyond the C-suite is vital.

The Importance of Organization-Wide Buy-In

In a global study of senior executives, nearly 70% of respondents stated that a “poor grasp on how the organization works” and a “misfit with the organizational culture” were the top reasons for successor failure. Many succession plans only incorporate those at the top rather than involving the company as a whole.

To ensure the success of new leadership, all stakeholders should be involved, including:

• Predecessor or CEO
• Executive level peers
• Board of Directors
• Head of Human Resources
• Head of Marketing and Communications
• Successor’s team members

Business consultant and entrepreneur Emily Rogers states, “Enabling the successor to understand the historical context for past decisions and the anticipated challenges that lie ahead are critical parts of the knowledge transfer.” She goes on to stress the importance of institutional knowledge in helping the candidate identify the situations and challenges that will require fresh thinking and new approaches. Buy-in from all levels will give the successor all of the insight needed to integrate seamlessly into the company.

In a family business, this type of holistic approach can also mean bringing in a professional for an outside perspective. With relationships, egos, and past conflicts posing potential challenges, it’s important to have an objective voice as part of the process.

Business Exit Strategy: Selling to a Third-Party

Baby Boomers are trying to exit businesses they’ve created at an increasing rate, while fewer members of the succeeding generations are interested in or able to purchase these businesses. This imbalance has led to a glut of business assets on the market.

Know Your Market

You need to make sure you’re prepared to thrive in that market. This is especially true if your business is still small enough that your efforts as the owner comprise a significant portion of the central workflow. In such cases, you aren’t selling an enterprise so much as a high-upside job opportunity. These sales require significant transition planning before a marketable business asset can be presented to prospective buyers.

Timing and Tax Implications

You’ll also want to consider timing and taxes to maximize a sale. Abby Parsonnet, regional president for the New York metropolitan area at Webster Bank, tells Crain’s New York, “Taxes tend to be a key driver in deciding exactly when to sell or transfer a business. So, choose a time when tax rates or changing tax laws make it most advantageous to do so.”

Business Valuation

Parsonnet and Anthony Tomaro, CPA, advise business owners looking to sell to a third party to work with a certified valuation specialist and an investment banker with industry expertise to help determine the company’s value and market standing. This can give the company a clearer idea of strengths and weaknesses when developing a succession plan.

On the other hand,  you may not need to pursue a third-party sale because you’ve already identified the next owner, whether it be an existing business partner, family member, or employee.

Alternative Exits

If you are interested in pursuing another option for exiting the business entirely, two popular options for such alternative exits are asset and termination transactions. Asset transactions involve selling just some portion of the business’s assets, while termination transactions can involve outright liquidation.

Is Your Business Just Hitting the Peak of Its Success? Now’s the Time to Create a Plan

If you don’t structure the transaction and transition properly, you risk reducing the value of the business or jeopardizing the entire process. This is one of the major reasons why the answer to the question “When should I start succession planning?” is “Now.” Start creating a formal process while your business is successful; don’t wait until you need one.

Any planning you begin today will certainly pay dividends down the road and help you answer critical questions. Perhaps most importantly, early planning will help you and the business cope with unexpected events in the market and in life, such as a recession, death, disability, divorce, or legal trouble.

Assemble Your Succession Planning Team

Things will go a lot easier if you have the right transaction team around you. Chances are rare that you’re already an expert in such transitions, so it’s best to approach this process with an integrated team of legal, tax, accounting, and financial experts. It’s also crucial that you consider key employees and involve successor owners and your family in these decisions.

Know the Objectives of Your Succession Plan

When initially approaching the planning process, consider your personal objectives: What do you want to accomplish down the road? Are those objectives best met through continued ownership or a successful transition? Should you consider training a successor or plan for divestment? What are you most concerned about?

Every Business Owner Needs a Succession Plan

There are no good reasons to ignore succession planning and exit strategies. A well-prepared business owner can use this process to set himself or herself up for a future of continued success and personal satisfaction.

We think you’ll also like:

1. Business Transition and Exit Planning Series
2. It’s Never Too Early to Start Leadership Succession Planning
3. How to Plan for Management Succession

[Editors’ Note: To learn more about this and related topics, you may want to attend the following on-demand webinars (which you can view at your leisure, and each includes a comprehensive customer PowerPoint about the topic):

1. What’s it Worth? Valuing a Business for Sale
2. Selecting the Right Valuation Expert
3. M&A Boot Camp

This is an updated version of an article originally published on July 27, 2016, and recently republished on November 25, 2020.]

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