When I was in college, a business professor said something that really stuck with me: “As a business owner, you always want to have options.” I firmly believe my old professor was right, but I’ll add one additional caveat: Flexibility requires planning.
A key to success for any business owner is to give yourself options and avoid painting yourself into a corner. Options allow for flexibility to take advantage of opportunities or meet challenges that your business will inevitably face. Being flexible in your business includes avoiding customer or supplier concentration; using debt strategically to help you grow your business without burdening your balance sheet with the wrong kind of debt; managing operating expenses; and looking for opportunities to invest in growth. Those are the easy ones. But ask your fellow business owners (or your business partners) about their own succession plans and you’ll probably get a shrug of the shoulders.
We all know we need one, but the fact is that most businesses don’t have one in place, even though it is critical to the ongoing success of the business in the event that you “exit.” And, like it or not, you will exit the business someday (voluntarily or otherwise), so preparing now will allow for flexibility when that eventuality comes.
Succession Plan Components
Most people think a succession plan just identifies who will run the business if the owner leaves. It’s much more than that. Essentially, succession planning is creating a roadmap for the future of the business. It’s the process of identifying the critical positions within your organization and developing action plans for individuals to assume those positions when vacancies occur.
There are four basic parts of a succession plan, and it starts with being proactive by working with your key employees and advisors (CPA, lawyer, etc.) on your plan.
A succession plan should include:
- Creating a current organization chart with key skills;
- Identifying ongoing training and development;
- Building redundancies and allowing for access to important business information;
- Establishing a sound plan for when you exit the business under different scenarios.
Let’s focus on No. 4: It’s not fun to think about dying or being incapacitated, but it happens. When it happens to a business owner, the shock to the business can be substantial. Just last year, the owner of a large parts warehouse died suddenly (without a succession plan in place), leaving the business rudderless. The business was quickly sold, a move the deceased owner might not have wanted. Without a succession plan, the family did the best they could without the benefit of the owner’s guidance or understanding his wishes. Had a succession plan been in place, the outcome might have been very different.
Let’s look at each of these components:
Creating a Current Organizational Chart
Map out your current organization. This map should identify:
- Top performers, critical roles and the skills required for each position;
- The positions most difficult to replace;
- Anyone on your team who has told you about long-term plans to retire as well as a plan for replacing them;
- A plan for how you will recruit new talent. If you have cars on the lift, do you have qualified personnel to get the job done?
We recommend a monthly review of your team: What will be the impact on the business if any of your key employees leave? Where will you recruit new talent?
Ongoing Training and Development
What skills are critical to running the business? Determine what opportunities exist to help your staff with ongoing training and development to help fill knowledge gaps when they occur. Various trade associations and private companies offer continuing education in these areas, which could be technical or business-related. Ongoing training could also foster loyalty from key staff members.
Build Redundancies & Access to Key Business Information
Make sure you are not the only person at your business with access to important information, starting with bank accounts and contracts. Make sure you designate key employees as secondary resources for your lawyer or CPA to talk to in case you are not available. Make sure all of your records are up to date and accessible to whomever you designate. Don’t let your business operate in the dark if you are not available – either in the short term or permanently.
Work on Your Succession Plan
We are often asked to comment on exit planning for business owners. Although that’s not the topic for this article, it is worth underscoring that all business owners will exit at some point. The question is will you exit your business on your terms or not?
Exiting your business on your terms can mean several things:
- The successful sale of the business;
- Merging with another company that gives you an opportunity to eventually step down;
- Retiring from the business.
Of course, there are some options that are not desirable and can lead to an unplanned departure from the business. Regardless of what happens, you will eventually exit your business. So, what is your succession plan? Who will replace you? What happens to the business assets, IP, customer lists, employees, etc.? Who is your successor?
The members of your workforce aren’t fixed assets — and changes in your team’s lineup are inevitable. You may not always be able to predict a valued employee’s (or your own) departure from the firm. However, through effective succession planning, you can pave the way for the continuity so critical to your business’s future.