Succession planning: How it works and 5 steps to take

Succession planning is the act of selecting and training employees to replace company leaders upon retirement. For privately held companies, succession planning may include planning for potential ownership transfers if an owner retires, dies, or leaves the company.

Succession planning depends on a company's overall goals and can change over time. For example, family-run businesses may reserve some jobs for relatives, such as television shows. inheritance.

But for most companies, succession planning means finding a great leader to take over when the current leader retires, including planning for other management positions.

Succession planning steps

Succession planning works differently than traditional recruitment processes. This is an ongoing process that serves as a contingency plan in case the situation changes unexpectedly, and businesses should have a plan in place long before the need arises. Here are five important steps.

1. Identify key roles. Identify leadership positions whose departure would have a significant impact on the business.

2. Adjust your requirements. List the characteristics needed for key roles. This list should go beyond job requirements and include soft skills, personality traits, or other metrics you deem essential.

3. Identify potential successors internally. Identify potential leaders within your organization. Note that performance in a functional role does not necessarily predict leadership potential.

4. Provide development opportunities for potential successors. Instead of a traditional interview process, build a team of potential successors and give them projects that are important to the company as a whole or that impact every part of the business.

5. Consider insurance. Many companies are buying key person insurance To cover our most valuable and essential employees. The policy's death benefit can help with business costs and fill gaps during the replacement period.

Common succession planning mistakes

The urge to create a succession plan causes some companies to act too hastily, naming a successor before the position is available.

“If you tap, Heir It obviously can have a significant impact on organizational morale,” says James Vardaman, a business professor at the University of Memphis and a small business succession consultant. “And it's not good for your heirs.” Doing this can lead to resentment, complacency, and retention issues.

Selecting a legal heir may also limit a company's ability to adapt to circumstances that may change between the time a potential successor is named and that person actually assumes the role. .

In the television comedy “The Office,” the character Michael Scott fails in his role as an office manager and exhibits behavior that would make any human resources department shudder.

Vardaman said this illustrates the most common mistake companies make when succession planning: selecting leaders based on performance in a functional role. For Scott, the skills that made him successful in sales didn't translate well when he moved into a leadership role.

“Too often, organizations just say, 'This person is the best at their job, so it's natural for them to join,'” Vardaman says.

Succession planning can be a great way to foster growth. “Good succession planning generally develops talent,” Vardaman says. “It’s not just about finding the next person to take this job or that job.”

If you're a family-run business, you may need a slightly different approach. For example, the role of CEO may be assigned to a child or other relative. This poses unique challenges, such as managing the expectations of non-family members within the company and dealing with issues that may arise within the family. In this case, succession planners should consider whether hiring a family member is consistent with the company's ongoing needs.

Planning for ownership transfer

Succession planning may include the transfer of ownership and associated responsibilities.When the key owner's beneficiary is not suitable own and run a business, the current owner can sell the business. This may include setting up buy-sell agreements with co-owners to buy out each other's shares in the event of disability, bankruptcy, retirement, or death.

Because ownership of your business is an asset, you may need to transfer ownership. Probate. however, irrevocable trust — such as a Grantor Retained Annuity Trust (or GRAT) or an Irrevocable Life Insurance Trust (or ILIT) — can reduce the complexity surrounding situations such as:

• a Grad Possible loss of future reputation for business from owners estate. This minimizes gift and inheritance taxes when transferring assets to heirs.

• ILITs can issue life insurance policies to business owners. When a policyholder creates a trust, the death benefit is separated from the business owner's personal assets, potentially minimizing inheritance taxes. ILITs also provide a business owner's heirs with more immediate liquidity and access to funds to cover business expenses until a suitable buyer can be found that meets the interests of the business.

As a business owner, personal and business matters often intertwine.consultation with estate planning attorney Additionally, upfront tax and financial advisors can help you find the right solution to ensure that your personal and business succession plans are aligned.