BGF explains: The business succession planning process

Succession planning is crucial for entrepreneurs and leadership teams. These are the five stages of the business succession planning process.

8 November 2023

Succession planning is crucial for business owners who may want to retire, sell or take a step back one day, but want to ensure their company is in safe hands. This is especially important for founders who plan to retain a substantial stake in the business after they leave. 

A recent Gartner survey found that 81% of businesses cited ‘lack of readiness’ as a primary reason for succession candidates being unable to progress as future leaders. Meanwhile, according to Deloitte, less than 30% of family businesses survive into the third generation of family ownership. Clearly, succession planning needs to be given the consideration it deserves, as a top priority for small and large businesses alike.

But what does the succession planning process look like? In this piece, we walk you through the business succession planning process for SMEs.

What is a business succession plan?

Succession planning refers to a long-term business strategy to replace senior leaders and other critical employees. Whilst larger companies may have succession plans in place for any number of leadership or specialist technical roles, for small businesses, the focus is often on founders and C-suite. If you’re a family-run business, business succession planning will be about preparing the next generation to take over. In all of these scenarios, effective succession plans can help to ensure a smooth transition if/when there are changes in management or ownership.

What are the benefits of succession planning? Find out more about the importance of an effective succession plan here.

How do you write a business succession plan?

The succession planning process will primarily involve senior management and board members, alongside human resources (HR) teams. For successful succession strategies, however, it’s important to communicate plans and decision making with all relevant stakeholders. This includes your company’s shareholders, especially if your succession plan concerns a potential transfer of ownership.

The five stages of succession planning for small businesses

Succession planning frameworks for leadership roles can be broken down into roughly five stages.

1. Define your objectives

Make sure succession plans are aligned with wider business goals by first defining your objectives. This will help you to create a template for your succession strategy, as you determine what actions need to be taken to meet your objectives. As part of this step, meet with your leadership team and board to discuss any potential operational or strategic changes to the businessnow or in the future.

Some points to consider when first creating a succession plan include:

  • Where do you want to take the business in the next 5-10 years?
  • What roles will you need to get there?
  • Your company’s core value drivers
  • Are there any specific risk factors involved? (e.g. a large proportion of employees nearing retirement age, poor retention rates, a shrinking talent pool etc.)
  • Equality, diversity and inclusion (EDI) objectives and any other talent/people strategies

2. Identify critical roles 

Once you’ve established your strategic objectives, you will need to determine which roles are critical to achieving these. These may stretch beyond business leaders, depending on the size and nature of your company, and the competitive landscape in your industry. 

Some of these roles may be more of a priority in the short term, while others will form the basis of longer-term business succession planning. Be sure to prioritise these based on how important the roles are, not the perceived likelihood of an individual leaving. 

Remember to be proactive and forecast your business needs, thinking about how organisational structures might change as the company grows or diversifies its product offering. What roles might become critical that aren’t already and vice versa? Key employees today may not be as relevant for the future of your business.

Outline the requirements for each role you’ve chosen for a succession plan (in terms of competency, knowledge, skills, experience, and so on). These will inform the job description for the role, to ensure you’re recruiting the right candidates. You should also seek input from team members during this process and incorporate feedback in your plans.

3. Find your successors

Perhaps you’re planning to pass your company down to family members or a long-time employee, or you’re looking to maintain ownership but take a back seat in managing the day-to-day. Either way it’s important to identify potential successors in advance, so that you can best prepare them to step up. The same goes for other critical roles in the business.

Assess the availability of internal and external candidates for key roles, using the job description you created to carry out the process fairly. When selecting potential candidates, on top of skills requirements, make sure individuals are up for the challenge of taking on more responsibility. Are they keen to upskill? Are they adaptable and engaged? Have they expressed a desire to stay at the company long-term?

You should also factor succession planning into performance reviews throughout the year and review your broader recruitment or talent management strategy to account for these plans. Once you’ve identified chosen individuals, communicate your plans with both incumbents and potential successors so that everyone is on the same page and working together effectively to achieve the best outcomes for the business.

4. Talent management

The next step in the succession planning process is about bridging the gap between candidates’ current and future roles. Significant time and effort will need to be committed to learning and developmentthe earlier you start, the better. Identify where there are skills gaps in existing talent pools, and what training, mentoring or certifications would be required for individuals to succeed in their new roles. 

For some, it may be their first time in a senior leadership position. You should work with your HR team to design professional development programmes in line with these skills gaps. Again, you should focus on future business needs when developing these programmes.

5. Test and iterate

When it comes to delivering your business succession plan, carry out regular reviews, encourage feedback, and be prepared to adapt your strategy as you go. This includes any learning and development programmes, recruitment drives, or communications to the wider company. It’s unlikely you’ll get it right first time, and business priorities may change over time.

It’s important to track your progress by measuring the effectiveness of any succession planning activities. There are a number of performance metrics you could use for this, depending on your goals (simply having a plan does not equate to success). Among others, these include:

  • Number of successful placements from your talent bench
  • Successor readiness for the role
  • Change in employee turnover/retention rates
  • Internal vs external placement ratio
  • Hiring costs/time

Changes in ownership

For business owners looking to sell their companies, there are a number of additional steps to the succession planning process, typically involving support from specialist advisers. Financial planning is a major component of this, from business valuations and capital structure to compensation plans, shareholder agreements and tax considerations. 

The information contained in this article is for general information and use. It does not constitute any form of advice and is not intended to be relied upon in making any investment decision. Independent advice should always be sought as to whether a particular transaction is suitable having regard to your personal and financial circumstances.

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