Planning a business succession: The human side
You’ve done it! Your business is up and running. It’s reached profitability. It’s an established part of the community. Your blood, sweat and tears have made this venture. But you have to prepare for the day when you no longer run the show.
Succession planning is critical to a business lifespan, and it involves preparing for both good and bad scenarios.
Ideally, you leave on your terms: You sell it or you transfer it to a trusted employee, family member or friend. You also have to consider what happens in the circumstance of your untimely death, especially if there is no successor.
But let’s say there is a successor. The following steps, according to small business nonprofit association SCORE, which is supported by the U.S. Small Business Administration, are a good course to follow.
- Choose your successor. Consider employees who have the leadership qualities and skills to become owners. To remove bias, have the company’s board of directors or a search committee consider candidates. But don’t wait. Experts suggest identifying a successor 15 years before you plan to retire so you have time to oversee his or her progress.
- Develop a formal training plan. Have your successor train in every critical function of the company so he or she can become familiar with all aspects of the operation. Step back and let your successor have room to make decisions – and make mistakes – to learn and grow. This gives you a chance to see how your successor’s style fits with your broader business goals.
- Establish a timetable. Training your successor and giving him or her control should be mapped out. And a timeline motivates your successor to finish their training successfully and helps clarify their day-to-day role as you transfer operations. Successful transitions occur when you, your successor, your management team and even your employees know who is in charge of making decisions. You don’t want to derail your successor’s progress, so resist the urge to overrule the person regularly.
- Prepare yourself for retirement. Just as you map out your successor’s transition, do the same for yourself. Identify what you’ll be doing as he or she takes over. In this way you can stay energized about your business while also involving yourself in other non-business-related activities.
- Install your successor. You’re leaving on your terms and you’ve laid the groundwork for your replacement’s success. You’ve left your mark by establishing the company’s culture, now it’s your successor’s turn to achieve or fail on his or her own.
To ensure a successor, make sure you create management depth in the company. As the owner, you don’t want an incapacitation or your unexpected death to sink what you worked hard to build.
But what if your business is a one-person operation or successor potentials are sparse or non-existent? Your financial institution, especially if you have loans tied to the business, might suggest seeking key person life insurance. In event of your death, the policy will pay off the liabilities, and you can even structure the insurance to take care of your family.