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Do you think succession planning is just for family businesses or for business owners who are close to retirement? Think again.

Whether retirement is 30 years away, just over the horizon, or not in your game plan at all, a succession plan is vital to ensuring the continued success of your business.

A good succession plan can help:.

  • Transfer ownership when the time comes
  • Maintain your lifestyle in retirement
  • Provide for your heirs financially
  • Prepare the business to handle unexpected events

Why is a succession plan so important?

Life happens—and unless you have a plan to deal with the unexpected, the business you worked so hard to build could crumble if you become disabled, die, get divorced, or decide to split with your business partner.

Think of a succession plan as peace of mind for the business you’ve worked so hard to build.

In this guide, learn how to develop a succession plan that works for your business.  

Some items covered include:

1. Decide how to exit your business. Should you:

  • Transfer the business to your heirs
  • Sell the business to your business partner/s
  • Sell the business to a key employee
  • Sell the business to an outside buyer

2. Conduct a business valuation

Even if you aren’t planning to sell your business, conducting a business valuation has many benefits. It helps you develop a retirement income strategy, properly value future owners’ shares, and purchase adequate insurance for protection planning. It can even make it easier for your business or potential buyers to get loans or attract investors.

3. Prepare for the transition

The transition period to new ownership is a vulnerable time for a business. Prepare both your successor and your business for a smooth hand-off.

4. Review your plan regularly

Creating a succession plan is a big accomplishment, so give yourself a pat on the back. But don’t just file your plan away and forget about it. Over the years, key employees may leave your business, family members may lose interest in taking the reins, and your own plans for your future may shift. Reviewing your succession plan annually with your team of advisors will help ensure a successful and seamless transition — no matter when or under what circumstances it happens.  

Covering Your Back: The Buy-Sell Agreement Whether you’re launching with one partner or 10, the buy-sell agreement protects stakeholders from sticky situations that could rock the entire boat.

7 Legal and Financial Steps to Closing Your Small Business Exiting a business requires filing paperwork to officially dissolve your business with the state and taking care of other legal and financial formalities.

Copyright © 2023 SCORE Association,

Funded, in part, through a Cooperative Agreement with the U.S. Small Business Administration. All opinions, and/or recommendations expressed herein are those of the author(s) and do not necessarily reflect the views of the SBA.


Buying and Selling a Business | Ultimate Guide

Business Succession Planning: 5 Ways to Transfer Ownership Of Your Business

Published October 11, 2019

Published Oct 11, 2019

Robert Newcomer-Dyer

WRITTEN BY: Robert Newcomer-Dyer

Business succession planning is a series of logistical and financial decisions about who will take over your business upon retirement, death, or disability. To write a succession plan, the first step is to identify the ideal successor to take over the business, then determine the best selling arrangement. This usually involves a buy-sell agreement, secured with a life insurance policy or loan.

There are five common ways to transfer ownership of your business:

  • Co-owner: Selling your shares or ownership interests to a co-owner.
  • Heir: Passing ownership interests to a family member.
  • Key employee: Selling your business to a key employee.
  • Outside party: Selling your business to an entrepreneur outside your organization.
  • Company: For a business with multiple owners, you can sell your ownership interests back to the company, then distribute them to the remaining owners.

How a Business Succession Plan Works

A business succession plan is a document that is intended to guide through a change in ownership by providing step-by-step instructions. If a purchase is involved, the sale price and purchase terms are clearly outlined, relieving stress for the departing owner’s family. A well-crafted succession plan aims to benefit everybody—the departing owner, the business, employees, and the successor.

A small business succession plan should include the following:

  • A succession timeline: Details regarding the circumstances when a succession would take place and specific dates as applicable.
  • Your potential successors: A list of potential successors, including strengths and order of consideration.
  • Formalized standard operating procedures (SOPS): A collection of documents, procedures, employee handbooks, and training documentation.
  • Your business’s valuation: The valuation of your business should include the method by which is valued and be updated frequently.
  • How your succession will be funded: Details including whether the succession is funded through life insurance, a seller’s note, or other funding options.

Who Should Create a Business Succession Plan

Succession plans are commonly associated with retirement; however, they serve an important function earlier in the business lifespan: If anything unexpected happens to you or a co-owner, a succession plan can help reduce headaches, drama, and monetary loss. As the complexity of the business and the number of people impacted by the exit grows, so does the need for a well-written succession plan.

You should consider creating a succession plan if you:

  • Have complex processes: How will your employees and successor know how to operate the business once you exit? How will you duplicate your subject matter expertise?
  • Employ more than just yourself: Who will step in to lead employees, administer human resources (HR) and payroll, and choose a successor and leadership structure?
  • Have repeat clients and ongoing contracts: Where will clients go after your exit, and who will maintain relationships and deliver on long-term contracts?
  • Have a successor in mind: How did you arrive at this decision, and are they aware and willing to take ownership?

Many business owners ignore succession planning because they don’t believe it’s necessary or put it off until they’re ready to retire. For small, simple businesses, a succession plan may not be necessary. However, consider what would happen to your business if you were no longer able to run the day-to-day operations. Who would take over? Would the business be viable?

When to Create a Small Business Succession Plan

Every business needs a succession plan to ensure that operations continue, and clients don’t experience a disruption in service. If you don’t already have a succession plan in place for your small business, this is something you should put together as soon as possible.

While you may not plan to leave your business, unplanned exits do happen. In general, the closer a business owner gets to retirement age, the more urgent the need for a plan. Business owners should write a succession plan when a transfer of ownership is in sight, including when they intend to list their business for sale, retire, or transfer ownership of the business. This will ensure the business operates smoothly throughout the transition.

The 5 Common Types of Succession Plans

There are several scenarios in which a business can change ownership. The type of succession plan you create may depend on a specific scenario. You may also wish to create a succession plan that addresses the unexpected, such as illness, accident, or death, in which case you should consider whether to include more than one potential successor.

Here are the five most common types of small business succession plans in detail.

1. Selling Your Business to a Co-owner

If you founded your business with a partner or partners, you may be considering your co-owners as potential successors. Many partnerships draft a mutual agreement that, in the event of one owner’s untimely death or disability, the remaining owners will agree to purchase their business interests from their next of kin.

This type of agreement can help ease the burden of an unexpected transition—for the business and family members alike. A spouse might be interested in keeping their shares but may not have the time investment or experience to help it blossom. A buy-sell agreement ensures they’re given fair compensation, and allows the remaining co-owners to maintain control of the business.

Potential Drawbacks

A buy-sell agreement with a co-owner requires a lot of cash kept on-hand. Your co-owner should be prepared to buy-out your shares, theoretically, at any moment. Many businesses will fund this plan with life insurance. Term life insurance is relatively inexpensive and can offset a lot of costs in the event of an owner’s death. Permanent life insurance is a bit more expensive with the added benefit of a payout in the event of retirement or disability.

If you choose to draft a buy-sell agreement with your co-owner, you’ll want to make sure a life insurance policy is stipulated in the agreement. The company can also purchase key person insurance that pays out in the event a key member of the business dies or becomes disabled. We recommend speaking with an expert for specific help on the type of policy you’ll need.

2. Passing Your Business Onto an Heir

Choosing an heir as your successor is a popular option for business owners, especially those with children or family members working in their organization. It is regarded as an attractive option for providing for your family by handing them the reins to a successful, fully operational enterprise. Passing your business on to an heir is not without its complications.

Some steps you can take to pass your business onto an heir smoothly are:

  • Determine who will take over: This is an easy decision if you already have a single-family member involved in the business but gets more complicated when multiple family members are interested in taking over.
  • Provide clear instructions: Include instructions on who will take over and how other heirs will be compensated.
  • Consider a buy-sell agreement: Many succession plans include a buy-sell agreement that allows heirs that are not active in the business to sell their shares to those who are.
  • Determine future leadership structure: In businesses where many heirs are involved, and only one will take over, you can simplify future discussions by providing clear instructions on how the structure should look moving forward.

Failing to address these steps may lead to a chaotic transition. For example, if a future leadership structure is not implemented, and the business passes on to more than one heir, the resulting power struggle may negatively impact the business. Alternatively, each heir may incorrectly assume the other will take over day-to-day responsibilities.

Before instructions can be given on who will take over leadership of the business, a future leader should be chosen. This is likely to be complicated when more than one heir is interested in taking over. Business owners can reference current business contributions and responsibilities from potential heirs to assist in choosing a successor.

Making business decisions within a family can get messy. Emotions can run high, especially after an untimely death or disability. Further, second-generation businesses rarely survive the transition, as they’re often sold by the inheriting family member, or fail outright. Only about 30% keep the same name and ownership following an inheritance.

Altogether, this should beg the question; is inheritance even the best idea? If your successor is skilled and business savvy, then perhaps the answer is “yes.” If not, you may consider selling your business to a co-owner, key employee, or outside buyer instead.

3. Selling Your Business to a Key Employee

When you don’t have a co-owner or family member to entrust with your business, a key employee might be the right successor. Consider employees who are experienced, business-savvy, and respected by your staff, which can ease the transition. Your org chart can help with this. If you’re concerned about maintaining quality after your departure, a key employee is generally more reliable than an outside buyer.

Just like selling to a co-owner, a key employee succession plan requires a buy-sell agreement. Your employee will agree to purchase your business at a predetermined retirement date, or in the event of death, disability, or other circumstance that renders you unable to manage the business.

A common drawback to key employee succession is money. Most employees aren’t in the financial position to buy the business they work for. Even if they are, having enough liquid cash on hand is another challenge.

One solution is seller financing, in which your employee pays you (or your family) back over time. There’s typically a down payment of 10% or higher, then monthly or quarterly payments with interest until the purchase is paid for in full. The exact terms of the loan will need to be negotiated and then laid out clearly in your succession plan.

4. Selling Your Business to an Outside Party

When there isn’t an obvious successor to take over, business owners may look to the community: Is there another entrepreneur, or even a competitor, that would purchase your business? To ensure that the business is sold for the proper amount, you will want to calculate the business value properly, and that the valuation is updated frequently.

This is easier for some types of businesses than others. If you own a more turnkey operation, like a restaurant with a good general manager, your task is simply to demonstrate that it’s a good investment. They won’t have to get their hands dirty unless they want to and will ideally still have time to focus on their other business interests.

Meanwhile, if you own a real estate company that’s branded under your own name, selling could potentially be more challenging. Buyers will recognize the need to rebrand and remarket and, as a result, may not be willing to pay full price.

Instead, you should prepare your business for sale well in advance; hire and train a great general manager, formalize your operating procedures, and get all your finances in check. Make your business as stable and turnkey as possible, so it’s more attractive and valuable to outside buyers.

One of the main drawbacks to an outside sale succession plan is the unexpected: It’s nearly impossible to predict exactly what the sales process will have in store. The process of selling a business to an outside party is complex and could encounter roadblocks like: your business not being as valuable as you anticipated, lack of credible buyers, your business not being able to sell at all, and more. Business brokers, like VNB Business Brokers , are experienced and well-versed in all aspects of selling and purchasing businesses on their clients’ behalf.

Consider outsourcing to a business broker so that you can focus on running your business and maintaining its value while professionals handle the sale. In addition to taking care of potential problems, VNB will ensure all steps of the process including finding and vetting buyers, structuring your deal, preparing documents, and negotiating terms. After one quick call, VNB Business Brokers will be able to tell you things like: what your business is worth, if the valuation price can be increased and how long it will take to sell your business.

Schedule a free consultation today and find out what the next step is.

5. Selling Your Shares Back to the Company

The fifth option is available to businesses with multiple owners. An “entity purchase plan” or a “stock redemption plan” is an arrangement where the business purchases life insurance on each of the co-owners. When one owner dies, the business uses the life insurance proceeds to purchase the business interest from the deceased owner’s estate, thus giving each surviving owners a larger share of the business.

An entity purchase is similar to a cross-purchase, in which you sell your shares to a co-owner or co-owners. In most circumstances, a cross-purchase is more financially viable. When co-owners purchase shares directly, they get a “step-up in basis,” which means the stock’s basis is revalued at its current price. With an entity purchase, the original basis remains, and your co-owners will be liable for potentially higher capital gains.

Despite this drawback, entity purchases can still be beneficial when you have a large number of co-owners. Drafting cross-purchase agreements with each owner can be cumbersome. An entity purchase agreement, in comparison, is much simpler to implement. It can typically be funded with a single life insurance policy for each co-owner.

How to Create a Succession Plan

There are several key steps necessary to create a comprehensive small business succession plan, and several ways to go about creating your plan. Some business owners may choose to create their own succession plan, while others may wish to engage the help of a professional, depending on the complexity of the plan and the business.

Whether you create your plan yourself or engage a professional, the five steps to writing a succession plan are:

  • Determining timeline: Define when the succession should take place, either on a predetermined date or in the event of death or disability.
  • Choosing your successor: If this is not a purchase by a specific party, consider choosing three or more potential candidates, filling out a profile for each.
  • Formalizing your standard operating procedures: Document your standard operating procedures (SOPs), including an organizational chart, employee handbook, operations manual, and any other recurring meetings or processes.
  • Valuing your business: Several methods exist to value your business. Once you have calculated your business’s value, it should be updated frequently.
  • Funding your succession plan: Define a specific path that lays out how the successor will purchase the business. Options include life insurance, loan, and seller financing.

Small Business Succession Planning Providers

Creating a small business succession plan can be complicated, and many business owners choose to engage a professional third party to help them determine the value of the business, the type of succession plan, and create any supporting documentation. The choice of provider may be based on the complexity of the business as well as the event being planned for.

For small businesses with multiple employees and simple to complex finances, a local CPA may be a viable option, or you might consider hiring a business attorney to help you draft the paperwork. For more complex scenarios, a business attorney and CPA should likely be involved, to ensure that everything goes smoothly when the succession plan kicks in.

Finally, for larger, more complex businesses, business owners may wish to consider working with an accounting firm with extensive experience in creating business succession plans. There are hundreds, if not thousands, of such firms. Business owners can start by researching local firms or may choose to work with one of the so-called “Big Four,” such as PriceWaterhouseCoopers—operating as PwC—which specializes in privately held businesses.

Succession Planning Pro Tips

Asghar Kazim

1. Avoid common mistakes

Asghar kazim, cfp, chfc, clu, principal & co-founder, united wealth group llc ..

“One of the most common mistakes business owners make in succession planning is failing to review their plan regularly. Time changes many things and, for your succession plan to be effective, it needs to be reviewed regularly and updated to reflect any changes. These could be company changes, tax law updates, changes in valuation, or new industry developments, among other things.

“For family-owned businesses, you’ll also need to consider aspects such as changing family dynamics—do all members have the same desire regarding what to do in the future, or are all key players still with the business? Business owners must update and adjust their business plan to reflect changes such as these.”

Whitney L. Sorrell

2. Create your succession plan at the right time

Whitney l. sorrell, jd, cpa, mba, principal attorney, sorrell law firm, plc.

“Business owners should start the succession preferably 5 years or more before they want to retire. Many business owners want to transfer their business to their family members in a way that minimizes the tax cost, holds the business assets in asset protected structures, continues the cash flow to the business owner post succession, and ensures a successful transition of management to the succeeding family members.

“The techniques bringing these benefits have better results over time. Other business owners are selling their business to a third-party buyer. Again, allowing time to prepare the business for sale will reach the highest possible price, and allowing time to properly structure that sale will allow the transaction to incur the smallest legal tax liability and the greatest level of wealth protection upon receipt of the sale price.

Ed Alexander

3. Consider the benefits of succession planning

Ed alexander, esq., founder, alexander abramson, pllc.

“The benefits of succession planning are that you don’t spend 30 years running and building a business only to leave empty-handed. Liquidating and closing up shop—not selling out—will be very unprofitable. The majority of the value of most businesses is in their goodwill and intangibles, not their hard assets.

“As I tell my clients, failing to plan is planning to fail. There have been many times when I’ve spoken to clients after their business sales, and they say to me, “I wish I’d started planning earlier.” They’re happy with the outcome, but they only realize after the fact how much even six months of additional planning could have improved the sale price.”

Bottom Line

While many experts recommend beginning succession planning three to five years ahead of retirement, it is never too early to begin. Knowing how your business will transition, who will take over, and how heirs and partners will be compensated are all keys to reducing future stress in the event of an owner’s sudden departure.

About the Author

Robert Newcomer-Dyer

Find Robert On LinkedIn

Robert Newcomer-Dyer

Robert has over 15 years of experience in sales leadership, finance, and business development. He recently spent six years leading a team of small business financing professionals, facilitating the deployment of critical capital to over 9,000 small businesses across the US.

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Home Small business Small business succession planning: establishing a legacy

Small business succession planning: establishing a legacy

small business succession planning by owners with team members

on December 22, 2023 at

Jessica Baker

This article has been reviewed for accuracy and adheres to our editorial standard

The Teamshares editorial team has fact-checked this article to ensure that sources, statistics, interviews, and claims meet our standard for accurate and unbiased advice. Our goal is to help educate, inform, and inspire an accessible path to employee ownership for small businesses.

Small businesses are an integral part of American life and its economy. There are an estimated 33.2 million small businesses in the U.S., employing 61.7 million people—nearly half of America’s workforce.

Today, however, our country faces a small business succession problem. Each year, more than 200,000 small businesses are listed for sale, but only about 30% of those businesses ever find a buyer . And without a buyer or a clear plan in place for when an owner decides to retire, small businesses often fail. This compounds when you factor in the current economic uncertainty.

Succession planning is crucial for small businesses because it helps owners and employees strategically prepare for what happens when a business owner retires and moves on from the company.

We spoke with Lauren Altschuler , CEPA, CBI, M&A Advisor at Transitions in Business, for her insight on small business succession planning.

With over 30 years of experience in sales, marketing, and management for retail and media companies, one of Lauren’s key focus points is bringing together buyers and sellers of privately held businesses for a sale. Her goal is to help clients increase the value of their biggest asset, their business, and ensure they have the right transition team in place when preparing for a sale.

At Teamshares, our goal is to help a network of 10,000 small businesses become employee-owned while supporting a generation of business owners through confident retirement.

We’ve worked with Lauren on small business acquisitions, and we’re excited to share her insights on the value of small business succession planning, strategies for small business owners, how to create a small business succession plan, and other tips.

What is business succession planning?

Succession planning is a business strategy for passing the leadership role of a company from the current owner to another person. Succession planning typically happens when owners are preparing to retire and need to hand off the reins to a “successor.”

Succession planning is not just a high-level strategy. It’s an in-depth process of preparing and training employees, documenting business processes, compiling financial statements, building an exit timeline, and much more.

Having a small business succession plan in place is critical to ensure processes run smoothly and the transition causes minimal interruption to business operations.

Small business succession planning can be even more important in the case of an unexpected transition caused by the death, illness, or disability of the business owner.

In a worst-case scenario, without a good small business succession plan in place, the family or heirs of a business owner may be forced to sell the company under duress, for less money than it’s worth and with no clear plan for what happens next for the company or its employees.

When to start a small business succession plan

Every business is different, so there’s no single right time or one-size-fits-all answer for when to start succession planning . But there are some general guidelines. “Ideally, a small business owner should begin succession planning at least three to five years before they want to sell their business,” Lauren explains.

Planning three to five years in advance gives business owners the flexibility to make careful and calculated decisions in preparation for a sale.

“On average, it takes a year to sell a business,” Lauren says. “Although some businesses take less time or more time, depending on how many challenges a sale poses to a buyer.”

Selling a business can be a very emotional process, and planning so far in advance gives owners time to work through their emotions and make good decisions for the business and sale.

Lauren encourages owners to have a “post-sale” plan in mind, to help ensure that their emotions don’t hinder a potential sale.

Small business succession planning strategies

Small business owners are experts at running their businesses. But, in many cases, they’re not experts in selling them. This is where brokers come into play.

Brokers can help small business owners avoid common pitfalls, introduce the seller to a larger pool of buyers, offer a wealth of industry knowledge, and act as a buffer between the owner and buyer.

Because selling a business is a very emotional process for owners and employees, a looming sale could cause significant shifts within a company’s dynamics and culture.

Small business succession planning allows business owners to fully consider the impact that selling a business will have on its employees and what the sale will mean for their future.

1. Selling a small business to an outside party

Selling a small business to a third party is a time-consuming process, and many small business owners simply don’t have the bandwidth to do it on their own while running the business.

A third party sale poses significant challenges to small business owners. Marketing the business to potential buyers, navigating due diligence, negotiating a transaction, the complexity of completing legal documentation, and providing the necessary tax documentation, are all difficult for a small business owner to navigate alone.

Even after the sale, small business owners often struggle with transitioning the business to its new ownership. To help mitigate this stress and uncertainty for former owners and employees, Teamshares has a clear, consistent, and proven process for transitioning companies to employee ownership with the goal of the business never selling again.

Are you a broker or business owner that needs an exit plan to keep your company and employees in place?

Ultimately, we believe that the most local and invested buyer—current employees—is the right one. Through the Teamshares model, employees eventually own 80% of the small business they’ve dedicated their time to. This leads to a better outcomes for the business and long-term wealth for employees.

At Teamshares, we look for small businesses to meet a specific set of criteria across geography, industry, real estate, earnings, and number of owners. These strict criteria allow us to close on 90% of the businesses on which we submit Letters of Intent (LOI)’s. The criteria are:

  • Geography : Only U.S.-based businesses
  • Retirement sale : The owner is of true retirement age, 50 or older
  • Steady owner earnings : Generally, Seller Discretionary Earnings (SDE), EBITDA plus owner compensation, of $400K to $2M in two of the last three years, tax return provable. We consider restaurant SDEs as low as $250K
  • Ownership : We prefer to work with only one or two retiring owners
  • Real estate : Both multi-year leases and real estate purchases on a case-by-case basis

2. Family business succession planning

Family succession planning is when the business stays within the family—typically going to an heir or someone in the next generation. However, statistically, many small businesses don’t stay within a family for generations.

According to the U.S. Small Business Administration (SBA), only 30% of family-owned businesses survive into the second generation, 12% into the third, and 3% into the fourth and beyond. Given this, it’s wise for owners to consider alternative succession planning strategies.

3. Selling the business to an employee

Directly selling a business to an employee may seem like a logical next step for some business owners, but there are significant barriers to entry. For an employee to purchase a business outright, the cost is often the biggest hurdle.

Many employees may not have access to the finances or the credit needed to make a large-scale purchase, especially in today’s lending landscape. This means that either an owner can’t successfully make the sale to an employee happen or they would have to accept a lower price than they hoped for.

In these instances, selling to a third party who shares the same vision for the business’s success and who has the liquidity to purchase the company may be a better option.

4. Liquidating the business

Liquidation is when an owner sells off the company’s assets. While commonly associated with insolvent businesses that need to pay off creditors and shareholders, this can also be a last resort option for owners who can’t find a buyer.

However, liquidating a business has negative impacts because it leaves employees without a job and a community without a small business.

How to create a succession plan

There is no one-size-fits-all succession planning process . Each plan should be specific to the business and determined by the needs of its employees, management, and operations.

But, according to Lauren, there are some baseline things that all buyers are looking for:

  • Steady increase in profits and revenue for three straight years
  • Established customer base
  • Low customer concentration
  • Residual income stream
  • Good, established reputation
  • Documented processes and procedures
  • Positive cash flow
  • Minimal reliance on the owner to train new leader
  • Growth market segment
  • Employee longevity and skills

If your business shares these qualities and you are ready to begin small business succession planning, the first step is building a timeline for when you plan to exit the company.

Build a timeline for exiting the business

For most owners, setting a timeline means deciding when it makes the most sense for them to retire.

“The best time to sell a business is when an owner least wants to. In other words, owners should sell their business when it’s running like a well-oiled engine, humming along without much effort. This is when the business will be most attractive to buyers,” Lauren says.

She also recommends that owners engage a broker to help with the process and to ask them the right questions to find a good match. Lauren suggests asking potential brokers the following questions:

  • Do you co-broker?
  • Do you charge anything upfront?
  • What is your process?
  • What is your average time on the market for a sale?
  • Of the businesses you’ve listed, how many have sold?
  • Do you have any testimonials?
  • How many businesses with similar EBITDA have you sold?

Owners should talk to at least three brokers to get different points of view.

“Find at least one broker who is local, so you can meet with them in person. Additionally, it’s important to get referrals from your Advisor Team (CPAs, attorneys, financial advisors, etc.),” Lauren explains.

Determine the value of the business

Once you have a timeline and a broker, the next step is to determine the value of your small business. This is one area where brokers can help.

“As your business broker, the first thing in our strategy is to analyze your operations, finances, market potential, and industry trends,” says Lauren.

“We take that information and advise you on steps to prepare your business for sale, and generate a business profile that represents your company in the most attractive way possible.”

Lauren suggests talking to an M&A advisor who understands the current market climate and regularly works with both buyers and sellers. This ensures they have a holistic view of the market, and can help you assess the value of the business and any associated property or capital equipment.

“M&A advisors have a pretty good idea about how much buyers would be willing to pay for a business based on a set of evaluation criteria. These typically include multiples of cash flow to cover debt, their salary, and a decent return on their investment,” Lauren continues.

“The numbers have to make sense, or buyers will walk away,” Lauren says. ”So it’s important for owners to have a good grasp of the market value of their business. It serves as a benchmark for improvement and helps you decide if it’s the right time to go to market.”

Lastly, Lauren emphasizes the importance of maximizing your seller discretionary earnings (SDE). Your seller’s discretionary earnings are a measure of your financial performance in the lead-up to the sale. Sellers should be strategic about when the business is put on the market to show the highest earnings possible.

When timed right, every dollar of SDE could net $2 to $3.50 more in selling price. If you grow your sales by just $30,000 in this period, your business could reap an extra $100,000 in sale price. Because growing businesses sell for a premium, every effort should be made to show financial growth during this time period.

Compile financial statements

Putting your financial affairs in order is a crucial aspect of business succession planning. “If you don’t already have them, hire a bookkeeper, controller, or fractional CFO consultant to help you clean up the balance sheet, generate a profit and loss statement, and remove personal expenses from the income statement,” Lauren suggests.

According to Lauren, “most buyers will want to look at the last three to five years of a company’s cash flow.

This is also the perfect time to have a CPA conduct an audit of your business.

“During an audit, a CPA will review your company’s management and provide independent verification of your financial information,” Lauren says. “Doing so signals due diligence to prospective buyers and shows that they can trust the thoroughness and accuracy of your company’s financial statements.”

Document processes and operations

When you sell your business to an outside party, the buyers aren’t initially going to be up to speed with the key operations and processes. This can create bottlenecks for your team when a successor takes over.

For this reason, it’s important to compile a number of documents to ease the transition, including:

  • A list of things the owner does for day-to-day operations. These should be broken up into essential versus non-essential tasks.
  • A list of key employees and positions along with their duties and responsibilities.
  • A list of all assets and facilities.
  • A compilation of related documents, employee handbooks, and training documentation.

Next, you’ll want to consider who will be your successor.

Choose a successor

Choosing a successor is probably the most important decision in small business succession planning. Ultimately, this transition affects the company’s future, its viability, and the state of the workplace for employees.

Typically, owners have a number of different options to choose from: a family member, a business partner, an employee, or a third-party successor.

At Teamshares, we believe in hiring generalist leaders to accelerate the growth and to complement what was previously successful at the business.

Announce the succession plan

Selling a small business is a delicate matter. Honesty and transparency are important for the customers and community, but especially for employees who’ve dedicated so much time to the business.

There are a few approaches to take when it comes to announcing the sale of a business: telling everyone when you list your business, after an LOI has been submitted, or immediately after the sale. Telling employees upfront, even in small numbers, tends to be risky for several reasons:

  • Not being able to answer questions about who the buyer will be
  • Not being able to answer questions about when the business will be sold
  • Not knowing what changes will be made

Regardless of when you choose to announce the sale of your business, it’s important to consider how the news will be delivered, as this can be very emotional for both employees and the owner.

If possible, we recommend telling key employees about the decision first. This can be a good opportunity to take leaders or managers to lunch or coffee and let them know why you’re selling the business. At these meetings, it’s important to show appreciation and reassure employees that they still have a job.

It’s also important to stress how the small business succession plan will be gradual and explain how it will help preserve the legacy of the business and guarantee its continued success.

If you’re selling a business to Teamshares, this is a great opportunity to explain the value of employee ownership and how, as the current owner, you will remain in the business for 45 days after the sale.

Succession planning tips from a small business broker

As a small business broker, Lauren suggests a number of succession planning tips that owners should employ:

  • Prepare for a sale by building out your team of advisors.
  • Solidify a relationship with a financial advisor, an M&A attorney, a business broker or M&A advisor, and a CPA.
  • Get a broker’s opinion about the business’s value and share it with a lender to find out if they would finance it. If not, be sure to have them explain why.
  • Make sure your financial processes and records are in order.
  • Get a list of due diligence items from your broker ahead of time so you can start to compile the documents you’ll need for a potential buyer. These take time, so it’s better to start early.

“Ultimately, the more prepared you are for your business sale, the smoother the process will be. The better prepared your exit strategy is, the more likely it will sell and the higher the selling price it will command,” says Lauren. “Even a few minor enhancements can dramatically increase the marketability of your business.”

Selling a small business is an incredibly emotional decision for both the owner and its employees. It’s essential to start planning early on, to have the time to work through those emotions and make good decisions for the business.

At Teamshares, we understand how important your small business is to you, and are focused on preserving your legacy while providing a win-win situation for the employees who have worked so hard to help build the business. If you’re a broker or a selling owner, find out if Teamshares is the right buyer for your small business .

Teamshares writers follow strict principles for sourcing credible information within articles. Any outside information including direct quotes, paraphrased information, and concepts that are derived from external sources adhere to our standards for accuracy and transparency.

  • 2022 Small Business Profile United States 33.2 million small businesses Share of employees working at small businesses by state Business dynamics. (n.d.).
  • UNITED STATES. (n.d.).
  • Altschuler, Lauren. Interview. Conducted by Jessie Baker, 7 Mar. 2023.


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How to Create a Business Succession Plan

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For many small business owners, maintaining positive cash flow and a stable balance sheet can be an ongoing battle that consumes virtually all of their time. Even retirement often seems like a distant speck on the horizon, let alone plans to hand over the business. However, establishing a sound business succession plan is beneficial for most business owners and can be absolutely necessary for some.

For business owners that are at or near retirement, the issue of succession cannot be ignored. In this article, we will take you through the steps you'll want to take to create a successful succession plan.

Picking a Successor Isn't Easy

Many factors determine whether a succession plan is necessary, and sometimes the logical and easy choice will be to sell the business lock, stock, and barrel simply. However, many owners prefer the thought of their businesses continuing on even after they're gone.

Choosing a successor can be as easy as appointing a family member or assistant to take the owner's place. However, there may be several partners or family members from which the owner will have to choose — each with a number of strengths and weaknesses to be considered. In this case, a lasting resentment by those who were not chosen may happen, regardless of what choice is ultimately made. Partners who do not need or want a successor may simply sell their portion of the business to the other partners of the business in a buy-sell agreement .

How Much Is the Business Worth?

When business owners decide to cash-out (or if death makes the decision for them), a set dollar value for the business needs to be determined, or at least the exiting share of it. This can be done either through an appraisal by a certified public accountant (CPA) or by an arbitrary agreement between all partners involved. If the portion of the company consists solely of shares of publicly-traded stock, then the valuation of the owner's interest will be determined by the stock's current market value.

Life Insurance: The Standard Transfer Vehicle

Once a set dollar value has been determined, life insurance is purchased on all partners in the business. In the event that a partner passes on before ending his relationship with their partners, the death benefit proceeds will then be used to buy out the deceased partner's share of the business and distribute it equally among the remaining partners.

There are two basic arrangements used for this. They are known as "cross-purchase agreements" and "entity-purchase agreements." While both ultimately serve the same purpose, they are used in different situations.

Cross-Purchase Agreements

These agreements are structured so that each partner buys and owns a policy on each of the other partners in the business. Each partner functions as both owner and beneficiary on the same policy, with each other partner being the insured. Therefore, when one partner dies, the face value of each policy on the deceased partner is paid out to the remaining partners, who will then use the policy proceeds to buy the deceased partner's share of the business at a previously agreed-upon price.

As an example, imagine that there are three partners who each own equal shares of a business worth $3 million, so each partner's share is valued at $1 million. The partners want to ensure that the business is passed on smoothly if one of them dies, so they enter into a cross-purchase agreement. The agreement requires that each partner take out a $500,000 policy on each of the other two partners. This way, when one of the partners dies, the other two partners will each be paid $500,000, which they must use to buy out the deceased partner's share of the business.

Entity-Purchase Agreements

The obvious limitation here is that, for a business with a large number of partners (five to ten partners or more), it becomes impractical for each partner to maintain separate policies on each of the others. There can also be substantial inequity between partners in terms of underwriting and, as a result, the cost of each policy.

There can even be problems when there are only two partners. Let's say one partner is 35 years old, and the other is 60 years old — there will be a huge disparity between the respective costs of the policies. In this instance, an entity-purchase agreement is often used instead.

The entity-purchase arrangement is much less complicated. In this type of agreement, the business itself purchases a single policy on each partner and becomes both the policy owner and beneficiary. Upon the death of any partner or owner, the business will use the policy proceeds to purchase the deceased person's share of the business accordingly. The cost of each policy is generally deductible for the business, and the business also "eats" all costs and underwrites the equity between partners.

3 Reasons to Have a Business Succession Plan

Creating and implementing a sound succession plan will provide several benefits to owners and partners:

  • It ensures an agreeable price for a partner's share of the business and eliminates the need for valuation upon death because the insured agreed to the price beforehand.
  • The policy benefits will be immediately available to pay for the deceased's share of the business, with no liquidity or time constraints. This effectively prevents the possibility of an external takeover due to cash flow problems or the need to sell the business or other assets to cover the cost of the deceased's interest.
  • A succession plan can greatly help in establishing a timely settlement of the deceased's estate .

The Bottom Line

Proper business succession planning requires careful preparation. Business owners seeking a smooth and equitable transition of their interests should seek a competent, experienced advisor to assist them in this business decision.

American Bar Association. " Forms of Stock Purchase Agreements ," Page 1.

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Your Business Needs a Succession Plan: Here Are the Basics

Succession planning may be the single-most neglected aspect of business ownership. Don’t make the same mistake that so many others do. Instead, get started with your plans today.

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In Part 1 and Part 2 of this series on selling your business, we’ve examined the questions facing owners who entered 2020 ready to make their move, breaking down how the COVID-19 pandemic changes the situation and how to increase a business’s value if you decide to delay bringing it to market. There’s another way forward, though — standing pat and not selling.

Tax Wrinkles for Work-at-Home Employees During COVID-19

If you were a business owner who was considering putting your company on the market but decided not to sell (or at least not anytime soon), what steps should be you taking now? The goals are to ensure preservation of the current business, as well as provide for an orderly and stable future transition when the proper time to sell arrives. Accordingly, the first and most critical step is setting a goal to implement both a business continuity plan and a business succession plan. The sooner, the better.

We have all learned a valuable lesson from the COVID-19 pandemic: A significant business disruption can happen with very little advance notice, and not being prepared can be disastrous.

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Developing a Business Continuity Plan

Armed now with the knowledge of how the pandemic impacted your own business operations, you can now plan. Did the travel restrictions impair your sales efforts? Did the substantial increase in employees working remotely overburden your IT infrastructure? Did your vendors and suppliers make requests that you couldn’t respond to effectively?

The goal of a business continuity plan is to identify that which is essential and that which is not and to place the business in a position where it can continue to operate during a disruption. Ideally, the business continuity plan would include:

  • A comprehensive strategy for keeping the business operating day-to-day.
  • An assessment of essential and non-essential operations and processes.
  • An analysis of key employees/positions and how each would be impacted by a disruption and, specifically, the potential loss or unavailability of key employees.
  • A review of facilities and analysis of how the business operates if one or more location becomes unavailable.
  • A plan to protect, secure, back up and replicate, if necessary, critical data systems, infrastructure and applications.

These are only a few of the many issues for consideration when developing a business continuity plan. Many of the details are industry-specific, and you need to work with your key employees and advisers to address the challenges likely to face your particular industry. Consider meeting and discussing with your vendors, customers and suppliers the challenges that were presented by the COVID-19 restrictions. Get their views on how things could have been handled more effectively. Information is key to developing a plan that will actually work.

There’s Never Been a Better Time for Business Owners to Make a Move

Once you develop a plan, revisit it regularly and adjust and update it so that it is always ready to go when you need it. If, for example, your CFO retires, you will need to consider how the loss of that person and their particular knowledge will affect the plan. Will their successor have the wealth of historical knowledge necessary to obtain and transfer information in a timely manner? If not, consider how you address the gap. Every organization seems to have those “go-to” people who have been there forever and without whom things run much less smoothly. Consider how the plan is impacted if those individuals are unavailable. The key takeaway is that the plan needs to grow and change with the business in order to work effectively when the disruption happens.

Developing a Business Succession Plan

No matter what your plans are for the future of the business, eventually, you will transition it to someone. Perhaps that someone is a purchaser, or perhaps you will transition to your family, key employees or some combination of the two groups. The point is that transition will eventually be unavoidable. Ideally, you get to control and be part of the process. That, however, is not always the case. Unexpected death of an owner, key executive or employee can cripple a business if no successor has been identified and there is no plan for transitioning management.

Every business succession plan looks different. Not every business owner wants to transition their business in the same way or at the same time. Some owners want to exit completely at a certain date. Others want to stay involved to a lesser degree over time but never exit entirely. These issues, as well as many others, must be considered. The plan should be designed to:

  • Address anticipated timing.
  • Identify one or more successor.
  • Address the value of the business.
  • Provide for implementation of the plan.
  • Discuss communication with employees, customers and family.
  • Include tax planning.
  • Provide for contingencies.

In my long career as a business lawyer, I have observed that succession planning is the single-most neglected aspect of business ownership. Maybe it’s human nature to think that we’ll always have time to deal with it later. The truth is, if you don’t get around to it and the unexpected occurs, the impact on your family and employees could be devastating. Also, we see many executive job candidates asking about a company’s transition planning before they are ready to commit to working there. Lack of a transition plan can therefore have a negative impact on attracting and retaining talented employees and executives.

The best way to approach the process, in my experience, is by dedicating a year to the effort. Spend three or four months discussing the process with your family, executive employees, your bank and other key stakeholders. Get your lawyer and accountant or other tax adviser involved from the outset. Develop and refine the plan over the next few months, and implement it over the last three or four months. One year is what you need. Negotiate the fees with your professional advisers in advance and get a budget for each phase. When it’s done, you’ll thank yourself, and your business will be better off for having gone through the process.

Final thoughts

As touched on in this article and the other parts of this series, the COVID-19 pandemic was and remains a major disruption that couldn’t have been foreseen by most business owners at the start of 2020. The confusion of the early days, however, is beginning to clear. For owners who were planning for a transition, there is path forward — be it bringing the business to a changed market, delaying the decision or staying put for a time.

No matter the decision, proper preparation and organization will make it easier.

Help! I Can’t Afford to Sell My Business

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA .

Patricia Farrell is a corporate law attorney in Pittsburgh. With a primary practice in business services, she regularly represents privately held businesses in mergers, acquisitions, divestitures and other major transactions, both in the United States and in Europe, Asia and Australia. She also has a broad corporate practice where she assists with corporate governance as well as succession planning for business owners and a variety of other day-to-day business issues.

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All You Need to Know About Small Business Succession Planning

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Small businesses make up a significant portion of the United States economy. According to the U.S. Small Business Administration, they represent 99.7 percent of U.S. employer firms and 64 percent of new private-sector jobs. [1] However, when small businesses are owned by family, it can create complications when planning for a company's future. While many small business owners may be reluctant to hand over control of their business, having a succession plan is key to its future success.  

The Importance of Succession Planning

Business owners need to plan ahead and have an exit strategy for what happens to their business after they retire, or if they encounter unfortunate worst-case scenarios such as severe illness, disability, or death. Without a good succession plan, your family or other heirs might be forced to sell the company under duress and be shortchanged on the value of the business you've built. If there's no clear plan in place for who's in charge of the company, your business might end up directionless and at risk for failure.

Building a successful small business is the work of a lifetime. Make sure that your legacy is secure — and your finances and family are protected — by creating a solid succession plan to decide how to manage, sell, or pass on your business to a new generation of ownership.

We talked with an expert in small business succession planning to find out more about what small business owners need to do starting now to secure their futures.

When to Get Started

As a small business owner, you're often focused on what's happening today, and might be reluctant to grapple with the emotional decisions related to succession planning, such as who to name as the CEO's successor and which family members or employees to sell the company to. But it's important to have these conversations and work through the emotions now, when you have time and flexibility to make careful decisions, rather than put your family and heirs in an emergency situation down the line.

“Statistics bear out that 60-70 percent of small business owners wish to pass along their businesses to the next generation of family members, yet only about 15 percent ever do that," says Eido Walny, founder of the Walny Legal Group, an estate planning boutique law firm in Milwaukee. [2] “The key to understanding that massive disconnect is in the lack of business succession planning. Business succession can't be founded on a wish. Handing over keys one morning is not a plan. There is a lot that needs to be thought through, and the facts bear out that very few business owners give enough thought to succession planning."

Walny says that the worst situation that happens from a lack of business succession planning is when the owner has a medical emergency.

“No one plans for the day a death or disability or even divorce will turn a business upside down," Walny says. “So the best time to plan for those events is well before they become a reality. That is especially true if there are multiple owners in the business. You want to plan so that you are not accidental partners with someone's ex-spouse or even their children."

So when is the right time to start? "At startup. If not then, the second choice is right now. Get a succession plan in place. You'll be happy to have it when you need it eventually. But that time could be tomorrow," says Walny.

Pay Attention to Tax Efficiency

One challenge for business succession planning is that it requires the business owners to adopt a different strategy for running their businesses. For most businesses during normal operations, they try to operate as tax-efficiently as possible by maximizing deductible expenses and minimizing profits. However, this strategy can backfire during the lead-up to selling the business. If you're planning to sell in a few years, it's worthwhile to adjust your tax planning strategy to maximize the value of your business to prospective buyers.

“Most small businesses are run for tax efficiency, which usually means low profit statements," Walny says. “Any business owner knows that low profits does not mean the business is doing poorly. But low profits mean that an outside buyer will not make an offer for the full value — the true value — of the business. Buyers look at historical financials. As a result, good succession planning means that a business owner will stop running the business for tax efficiency and start running the business for maximum value, even if it means higher taxes.

"The results will be a much stronger offer from prospective buyers, even at the expense of tax dollars," Walny continues. "But it takes time to do that and work up the historical financials. So this is another reason why succession planning needs to be done well in advance."

Get Power of Attorney

Keep in mind it helps to put your wishes in writing ahead of time by using the durable power of attorney — a written document that lets you designate a trusted person to act on your behalf in case you become incapacitated by illness, accident, or disability.

A durable power of attorney lets you instruct who will manage and control your affairs while you are incapacitated. As part of making these advance directives for your financial affairs, you can also set up a comprehensive business plan to be enacted by your designated person with power of attorney, to include transfer of assets and business holdings into a newly formed business entity, if you so desire. The benefits include valuation of your business, tax considerations, asset protection, and preparing for the next phase of management.

Watch Out for Estate Taxes

Business succession planning is not only a matter of managing business operations and choosing an ideal CEO-of-the-future; it's also important from a tax planning standpoint.

Depending on the size of your business and the state where you live, estate tax can be an underrated issue for business succession planning.

Business succession planning touches on every vital issue that affects your business and personal finances: taxes, business operations, grooming the next generation of leaders for your company, and securing your family's financial future. It can be a complex and emotionally fraught topic, but it's essential to the future of your business and your family's well-being to have the tough conversations now and create a solid business succession plan.

All of these issues reinforce the importance of creating a business succession plan as soon as possible — but even "today" is not too late. Talk with a professional estate planning attorney, tax attorney, or other professional advisers to make sure your interests are protected — and that your company is ready for a prosperous future without you.

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Business Succession Planning: A Step-by-Step Guide

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Business succession planning is a valuable tool for both small businesses and growing enterprises. In small businesses, succession planning means effectively managing changes in ownership or leadership. In larger organizations, it that can help to avoid potential talent gaps that have a detrimental effect on the company. The right strategy can help you plan ahead so that you can transfer knowledge and retain employees in key roles. And this is a top priority in these uncertain, post-pandemic times.

With that in mind, we have created a step-by-step guide to help you design and implement a plan that sets your business up for long-term success . We will take a look at the benefits of succession planning in HR and break down the succession planning process to help you understand everything that’s involved.

What Is a Succession Plan?

Why is business succession planning important, what is succession planning in hr, the business succession planning process in 5 steps, business succession planning best practices, succession planning template, succession planning tools.

  • Create a succession plan with performance management software 🚀

So, what is the definition of succession planning? How can you apply it to your business?

Business succession planning is a process that helps you prepare your company for the future. Essentially, it’s about creating a strategy and process for identifying potential future leaders and developing their skills so that they are ready to take on a new role when one of your key employees leaves the company.

Through careful planning, communication, training, and feedback, you can create a successful change management strategy that prepares you for potential transitions in your business. This helps you avoid key player talent gaps. It also helps you proactively develop your inclusive leaders of the future.

Despite its valuable role in business planning, according to a survey conducted by SHRM last year, only 44% of HR professionals claim that their organization has a succession plan in place. What’s more, only 21% of those that do have a plan in place have created a formal succession management plan.

Do you have a detailed succession plan in place? If not, then you’ve come to the right place.

According to the 2021 Global Leadership Forecast , companies around the world are facing a leadership crisis. In fact, only 11% of surveyed organizations reported that they have a “strong” or “very strong” leadership bench, the lowest rating in the past 10 years (it has been in decline since 2011’s reported 18%). This drop has been attributed to a decline in leadership development and transition training in organizations.

Understandable given the distractions the world has had over the past couple of years.

Nonetheless, this figure shows just how important it is for organizations to work on their succession management strategies. This is the most effective way to ensure that the leaders of the future have the right skills and experience to guide them to success . And this is what business succession planning is all about.

By preparing strong leaders for the future, you can help your organization reach its long-term goals, reduce employee turnover , and build a stronger and more resilient business that’s ready to thrive.

Benefits of Business Succession Planning

In case you’re still not convinced, let’s take a look at some of the specific benefits of business succession planning in a bit more detail.

  • Identifying and developing your existing employees for future leadership roles helps you to promote from within . Aside from reducing turnover and hiring expenses , this also helps you ensure your future leaders have the right organizational knowledge and internal relationships , something which external recruits will lack.
  • Promoting the development of your existing employees shows them that you are willing to invest in their future . This can be a great morale boost that motivates employees to stay at your company. This helps you stay competitive and attract top talent to your business.
  • A well-designed succession plan helps you formalize training for both present and future leaders. It keeps your business moving forward and helps you retain your top performers .
  • Business succession planning is also an effective tool for mitigating the risks of organizational change . This helps you avoid any potential talent gaps when someone leaves your company. It also helps you pass on valuable institutional knowledge to future leaders before it’s too late.

Succession planning in HR consists is a vital part of talent management. It’s all about your role as an HR professional in identifying key roles and positions that may need filling in the future and finding and developing internal candidates who may have the right skills and experience to fill them. The right strategy can help you retain staff, cut recruitment costs and better manage your internal recruitment processes .

HR succession planning is the process of identifying, selecting and developing employees who could potentially become key players with the right development. This helps you prepare for potential organizational changes so that you have skilled and engaged employees waiting to fill key leadership roles when the time comes.

As an HR professional, you play a significant role in preparing and facilitating your organization’s succession management strategy. However, for your succession planning in HR strategy to succeed, it’s equally important to get the support of senior management so that your plan is as effective as possible and aligned with your organizational goals .

Talent Management and Succession Planning: Employee Buy-in

Business succession planning is also about managing your existing talent so that you are able to retain as much institutional knowledge and experience as possible. This means that, aside from working with senior management, you also need to rely on the feedback of your employees.

What do we mean by this?

Essentially, it’s all good and well managing and developing your existing talent, but they need to be on board with your succession plan and have a genuine interest in remaining at your company and developing their skills. Otherwise, the time and money you invest in preparing them for future leadership positions will be wasted.

Make sure the potential succession candidates you select are:

  • Interested in learning new skills
  • Comfortable with change
  • Motivated and engaged
  • Able to adapt to uncertainty and new working environments
  • Willing to take on more responsibilities
  • Up for a challenge

performance software

Now that we’ve discussed what business succession planning is, let’s take a look at what you need to include in your succession planning process.

Make sure your succession planning framework includes the following 5 key stages.

Define & Align Your Goals

The first step is creating a succession leadership plan. This means you need to define your goals and align them with your business. You may need to meet with senior leaders for this phase to ensure your goals are aligned with your overall strategy.

You also need to have a clear idea of who you are as a business before creating your succession leadership plan. Once you understand “who” you are, you will be better equipped to identify your potential new leaders.

Finally, to complete your plan, you need to:

  • Define the roles, skills, and experience that each successor will require (your succession profiles). Make sure you gather as much feedback on this as possible from your team to help you get a full picture of what you need to include in your succession plan.
  • Create a forecast of your company’s needs . Where do you need to be as a company within the next 5 years? How will your organizational structure change over this time? Think about your turnover trends, compensation strategies, who may be due to retire, and training and development plans for the future.
  • Update your job descriptions to reflect the information you’ve gathered. Make sure you are clear about your expectations . This will help you define the right candidate profiles for your succession plan.

kpi template for succession planning

Create Your Succession Strategy

Defining your goals is one part of your plan, but you also need to create a comprehensive succession planning strategy to make sure you are on the right track – you need a business strategy game plan !

So, what does this mean, exactly?

Put simply, you need to define a series of actions and strategic moves that help you align your succession goals and objectives with your overall HR strategy .

Consider the following:

  • Where do you want to be as a business? What roles, positions, skills and experience will you need to succeed?
  • Which senior/leadership roles do you need to create a succession plan for?
  • Will you take business succession planning into account during performance appraisals in order to identify potential candidates throughout the year?
  • Does your business have any specific vulnerabilities that may affect your succession plan? (For example, a high percentage of employees that are due to retire soon)
  • Have you considered adjusting your hiring strategy to account for successor roles?

The key here is to be as proactive as possible with your strategy. Anticipate potential gaps in your workforce before they occur.

Identify Potential Candidates

The next step is to evaluate your current workforce in order to identify key positions that may need filling in the future, and key employees that may be suitable replacements. This is where you will implement the succession profiles and job descriptions that you created in the previous step. The more information you include in your profiles and descriptions, the easier it will be to identify the right match within your existing workforce.

Generally speaking, the best candidates will be supportive, proactive, engaged with learning and development, great problem-solvers, adaptable and able to take on more responsibility.

It’s important to be as objective as possible in this stage. You also need to consider that potential candidates may not currently be in leadership roles. It’s all about finding potential. The most effective way to do this is by using succession planning tools and metrics, rather than relying on personal opinions. More on this shortly.

Establish Professional Development Opportunities

As soon as you have your list of potential candidates and you know what skills they need to work on in order to eventually fill the role you have matched them to, it’s time to create a professional development plan to help them get where they need to be.

Which skills does each candidate need to develop? What learning opportunities would help them get the right experience and expand their current skillset? Are there any knowledge gaps that you need to address?

Create a list of the skills each candidate currently has vs. the skills they need to acquire, then work out the best way to offer them suitable opportunities for learning and development. Create individual development plans, offer formal training, consider creating a mentoring or coaching program to support them, and encourage continuous feedback and communication.

Implement Your Plan

The final stage is implementing your business succession plan. This will usually be a gradual transition with multiple short and long-term layers.

The first layer involves officially announcing your succession plan and notifying potential candidates. You then need to roll out your individual development plans and arrange training. Introduce candidates to their mentors, if you are using them, and encourage them to meet regularly. This will show your employees that you support their professional development, and you can see that they have potential.

Most importantly, make sure you collect regular feedback to see how your individual development plans are progressing, and if potential candidates are on track to reach their succession objectives.

Here are a few business succession planning best practices to help you create a plan that sets you up for success:

  • Formalize your plan . The sooner you create and formalize a detailed succession management plan, the better. Make sure your succession planning process focuses on all key stages. That means not just identifying the roles and skills you need for your future leaders, but also implementing individual development plans to get your workforce where they need to be.
  • Make sure your succession planning in HR plan is dynamic . Succession planning is all about change management. Be prepared to adapt to change by constantly updating your plan.
  • Collect regular 360-degree feedback . This will help you keep track of your employees’ interests, skills, performance, strengths, weaknesses, and opportunities.
  • Promote open communication . This will help you build trust and set clear expectations.
  • Consider your entire workforce . Don’t just focus on your managers. Your leaders of the future might be hiding in lower-level positions. Look for potential, not existing skills.

One of the most valuable tools you can use for this strategy is a succession planning template. The right template will help you define key roles within your company and identify suitable replacements. Make sure you include a template in your HR audit checklist (check out this HR audit checklist template if you don’t already have one!)

Here are a few examples of the information you can collect with a succession plan template:

  • Current key employees and potential replacements
  • Key skills and experience that each position requires
  • Candidate training and/or experience level
  • The time it would take to onboard a candidate for an existing position
  • An overview of upcoming vacancies (for example, key employees that are due to retire)

hr audit checklist

In order to create and manage an effective business succession planning strategy, you need to use the right succession planning tools. These are the tools that will help you identify which candidates could potentially be future leaders at your organization. They also help you identify potential succession gaps and map the right candidates to the right positions.

Ideally, you should be using a range of tools to help you get a full picture. Here are a few examples of succession planning assessment tools that will help you with this:

  • Personality assessment tools : to help you get a comprehensive picture of your existing culture (e.g. tools for tracking motivation levels)
  • Behavioral assessment tools : to help you identify and analyze employee leadership skills and assess how they behave at work (e.g. situational judgment tests)
  • Cognitive assessment tools : to evaluate critical thinking and reasoning skills related to performance (e.g. a cognitive aptitude test)
  • 360-degree feedback : to gather valuable input from employees and their peers in order to understand their readiness to take on future roles (included in most performance management software solutions)

Succession Planning Software

Finally, once you have designed and implemented your business succession plan, you need to regularly monitor progress. This will help you determine if your plan is working and if potential candidates are on track to reach their succession goals.

And this is where succession planning software can help.

Succession planning software isn’t as daunting as it sounds. In fact, most HRIS systems can provide you with the data you need.

The first thing you need is access to key metrics and KPIs . This includes turnover rates, retention rates, cost-per-hire, time-per-hire, and the rate of planned positions being filled. You also need to evaluate performance metrics to determine if business succession planning candidates that have taken on their new role were ready for it.

Did they achieve the training and experience they needed during the development phase in order to take on their new leadership role? If not, what could you have done better?

By analyzing the right data, you can determine what areas of your business succession planning strategy you need to work on in order to continuously improve the quality of your succession candidates. And by using the right HR software and performance management software you can easily identify talent gaps, make comparisons between employees, and simplify the succession management process.

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Improve your operations and grow your business with resources and best practices from bbsi's business consultants., succession planning for small businesses.

business owners develoing a succession plan

Considering the amount of determination and hard work that goes into running your own business, it can be difficult to imagine passing along those responsibilities, or even the whole business, to someone else. Yet, this is a reality most business owners will eventually face. Having a plan in place to ensure that your business can transition to the next phase of its lifecycle is crucial to ensuring a seamless process when the day comes. Below you’ll find some best practices for successfully planning for your business’s future.


What is Succession Planning? >>

What is a Succession Plan? >>

How Do You Identify High and Low-Potential Employees? >>

Why Should Companies Have a Succession Plan? >>

Benefits of Succession Planning >>

Succession Planning Best Practices >>

9 Steps for Creating a Business Succession Plan >>

How BBSI Can Help with Succession Planning >>

Prepare for the Future of Your Business with Succession Planning >>

What is Succession Planning?

Succession planning is a long-term plan intended to outline the continuity of employee knowledge and responsibilities over time. This plan is a crucial asset for a company’s evolution and growth throughout its lifetime. By focusing on long-term business goals, succession planning can help you embrace the right mindset for the future. This form of planning is used to embrace existing talent and create a clear path forward for your company. Creating a dedicated plan that supports and encourages your staff will ensure you have the necessary leadership and specialized knowledge documented to continue throughout the lifecycle of your business. 

Jump to the 9 Steps for Creating a Business Succession Plan >

What is a Succession Plan?

A succession plan is a spreadsheet or document that outlines all of the people in your organization, as well as positions that are currently available in the company or will become available as your company grows. The outlined positions must address not just the current state of your company, but also the future state over the next three to five years. 

The plan should include any positions crucial for your company to grow and reach its goals, and which of your employees will fill those roles. It is common practice to list employees who have the potential to take over key roles and numerically define their potential for success in the role by percentage.

With this information, companies can identify talent gaps and recognize employee potential. When employee potential is clearly outlined, companies can take steps to guide employees toward future positions and keep an eye out for how their potential and preparedness will change throughout the years. The plan itself should include a snapshot of an employee based on the company's needs and their individual potential.

Download the Succession Planning Pack

How do you identify high and low-potential employees.

Low-potential employees can be low-performing employees or, in some cases, high-performing employees who may not be interested in advancement. Though people commonly think that low-potential employees are a bad thing, however, that isn’t necessarily true as they often make up around 70% of your workforce . 

High-potential employees are capable of growing into challenging positions. When you identify these individuals, you can look at skill gaps and identify areas of growth to ensure they can meet key needs at a later date. This is important for teaching soft skills and core competencies that can be utilized years from now.

Why Should Companies Have a Succession Plan?

Succession planning is important for all businesses, and especially for small or family-owned businesses because it empowers owners to look comprehensively at the future of their company. Often, a business owner's first instinct is to leave their business to their children. However, multi-generational succession planning tends to have a low success rate, with 40% surviving the transition to a second generation, 13% surviving to a third generation, and only 3% surviving to a fourth or beyond.

Having a succession plan in place ensures your business has dedicated employees who possess the passion and knowledge to continue operations, whether you sell your business or pass it on to your successor. 

Helps Fill Key Management Positions or Replace Owners

Companies often focus on day-to-day operations instead of long-term planning. Some believe they can hold off on replacing key roles until the people in those positions leave, but often that isn’t realistic. Most businesses change and evolve over time. These changes can be in response to market dynamics, or common changes with your employees, like staff moving away or transitioning to other positions or industries. Being prepared for these inevitable changes can make necessary adjustments much easier.

Helps Owners Sell Their Business

When most entrepreneurs start their business, they don’t imagine selling them — but they should. Regardless of how you feel today, you should always keep your exit plan in mind. If you’d like to eventually sell your business for a premium price, you have to make it an attractive purchase for potential buyers. 

Succession planning allows you to build a strong management team and strategic vision, giving you a higher chance of selling your business on the terms you want.  

A good management team and refined processes will help you build a well-functioning operation that attracts prospective buyers and eases the transition to new ownership.

Benefits of Succession Planning

There are several key benefits of succession planning. Let’s explore some of the key ones.

Improves Employee Engagement and Retention with Targeted Career Development

Modern employees prioritize opportunities for growth , and companies that cannot offer career development will have trouble retaining top talent. Succession planning allows you to work with your employees to define their career paths and find opportunities for them as your business continues to grow. Family-owned businesses can offer their employees fulfilling careers with growth potential, but that often comes down to having a great plan in place.

Takes a Proactive Approach to Solving Future Challenges

No matter how hard you work, eventually, your business will face challenges. Personal or family problems, changes in the market, and unexpected staffing changes can all present unplanned bumps in the road. With a succession plan in place, you can be prepared to manage a change before it becomes a crisis. Waiting until the situation demands a response can lead to problems for your staff and has left many business owners stuck in less than ideal situations. Don’t wait for a health crisis, accident, or unexpected move to negatively impact your business.

Improves Company Culture by Creating a Learning Organization

Employees love companies that encourage growth and development , which is even more true among younger generations. Succession planning can create a culture in which leaders find ways to challenge their staff, recognize hard work, and track employee performance. 

It is important to create an environment that encourages, trains and rewards good behavior to lead your company in a positive direction. This will nurture employees who are passionate about learning and career development.

business owner looking at tablet with his team

Gives Leaders Greater Ability to Manage Lower Performing Employees

When an employee isn’t performing to the highest standards, it becomes difficult for management to respond or find the desire to do so. Ultimately, this leaves lower-performing employees carrying on with poor work and higher-performing employees carrying more of the workload.

A good succession plan can help managers find the power and desire to coach their employees and encourage them to improve. This means giving warnings or terminating an employee with multiple offenses, as well as providing clear benefits or incentives when someone performs well. With a good succession plan, you can hold managers accountable, encouraging them to be consistent with employees and continuously check on performance levels.

Helps Companies Promote Internally vs. Hiring Outside

External hiring is common, but it does come with its fair share of added expenses and training. When you promote internally or allow internal employees to step into prominent positions, you already know the person's capabilities. This means you can identify gaps and areas for improvement in advance and put plans in place to help the employee improve.

With an external hire, you can never truly guarantee what their performance will be after the interview process ends. There will always be a slight difference between the person you interviewed and the person who walks in the door on Monday. While external hires can be great, they introduce more variability. 

Internal promotions can help your leaders tap into low and moderate-potential employees to build their talent, so they can take on bigger opportunities down the line. This provides your business with a secure pool of talent and shows employees your willingness to invest in their development. 

Succession Planning Best Practices

The following best practices can help you create a succession plan to lead your company down a successful path, whether you are running it yourself or passing it along to someone else.

Start with Strategic Planning Before Succession Planning

Before creating a succession plan, you need a clear idea of where you want the company to go. This is where strategic planning comes in. Ask yourself where you want your company to be a year, two years, and five years from now. Consider new areas of expansion, areas that might be phased out, and what the future of your company and industry will look like. Look beyond the day-to-day survival strategy, and at your company's future potential instead.

Keep Legislation in Mind During Planning

Laws influence the way you do business whether you want them to or not, and these laws can change. You should plan for existing laws, but be ready to flex if new ones arise or existing ones change. If and when the time comes, you will need to know when the changes or new legislation will go into effect, so you can better plan for them. For example, Colorado has the Equal Pay for Equal Work Act requiring companies to post promotional opportunities internally.  Planning ahead for legal requirements is important and will save you time and compliance headaches. 

Don’t Label Employees “C” Players

In the nineties, companies began labeling low-performing employees as “C” players and removing them from their organizations. But this thought process can be extremely damaging to the culture and the psychology of an organization. Companies should refrain from labeling employees as “C” players and acknowledge how such labels influence how the organization will view and treat them.

Use Competency Mapping and Tools

Competencies are skills, experience, and anything else that can be used to elevate a business or improve workplace culture. Business owners and managers should utilize tools to count their employees' competencies and set up benchmarks to track their progress in areas of growth potential. With these tools, it becomes easier to understand which skills are needed for specific roles and how an employee can grow into them.

Conduct Regular Career Development Discussions and Measure Performance

A good performance management structure is crucial. This means using a method or system for regular feedback, paired with career development discussions. Helping employees identify and actively pursue goals is critical for the organization and individual, but only works when they have regular check-ins with feedback, even if it’s just a confirmation the person is progressing. Holding employees accountable and making development a priority can help them gain a sense of ownership and encourage them to take their own steps forward.

Get started with succession planning and employee career development with our  Succession Planning Pack

Utilize Mentorship

Mentorship is a powerful tool for teaching both soft and technical skills in a comfortable and supportive environment. Most importantly, mentorship is a powerful and emotional experience that allows people to exchange knowledge and build trust. The development that follows mentorship can have lasting, positive impacts that will grow company culture and push your business forward.

Two mechanics working on a car

Keep Succession Planning Confidential

Succession planning involves a significant amount of sensitive information, which is why internal planning discussions must stay confidential. Scoring employee proficiency and identifying areas for improvement shouldn't be public information, as it could negatively impact their growth, opinion of the company, and culture overall. 

Though much of the information will be shared with the individual and used to encourage growth, succession planning must be kept behind closed doors with the exception of the decision-makers involved. Employees should not feel like their areas for development are on display for their peers.

Communicate Career Development Plans to Employees

While you might not want to share every bit of succession planning with an employee all at once, it is important to involve them in the plan. If you identify a candidate for a future role, tell them, so you can gauge their interest. By sharing this information, you demonstrate to employees that they have a team supporting and sponsoring their growth. It also shows there is a clear path for progress , and you want them to succeed. In some instances, it might be appropriate to share this news with the rest of the staff as the employee’s responsibilities and focuses change. 

9 Steps for Creating a Business Succession Plan

Creating your business succession plan can be accomplished with these nine steps.

1. Identify Significant Business Challenges and Goals for the Next 1-5 Years

Before you start succession planning, you need to discuss the future of the company with senior leaders and staff. You should address the overall company strategy and goals you have for the company’s future. This includes new products and services, as well as expansion opportunities or potential partnerships. Determine your company’s next steps, as well as your own, so you can plan accordingly. For example, if you plan on retiring or selling the business within the next few years, you have to start preparing now. Knowing where the business is headed will help you plan effectively.

2. Identify Critical Positions for Business Continuity and Success

After you identify where the business is going next, assess how employees fit into the plan. To determine how staff will play into the future of your company, begin looking at positions important for success and identify their future state. Do these positions exist already? Are they vacant? It is critical to identify what your company will need in order to fill them. 

3. Identify Competencies, Skills, and Institutional Knowledge Critical to Success

After considering the company’s future and critical positions, map out which skills potential candidates need for these roles. Identifying future vacant positions and job requirements helps you prepare for the future your company deserves — one that is built on talented staff.

4. Consider High-Potential Employees and Determine Their Needed Competencies

Talent plays a key role in succession planning, so you must assess your staff and their future with the company. Recognizing employee potential and aligning that potential with the organization’s strategy for the future is important for growth and development. 

A succession planning matrix should be used here and they come in three forms. The matrix can have three boxes, six boxes, or nine boxes. A simple three-box matrix can be enough, but owners who want to focus on a more intense level of detail will benefit from adding additional boxes for their convenience.

Alt text: Succession planning 9-box matrix infographic showing the 9 different levels of employee potential and performance. The x-axis shows performance rankings of low, moderate, and high; the y-axis shows potential rankings of low, moderate, and high. Employers should use the 9-box matrix to categorize each of their employees into one of the potential/performance levels.

5. Create a Succession Planning Template

Once you have assessed the potential of your employees, the next step in the process is to add the employees to a Succession Planning Template . This template helps you identify which employees need to grow into future roles. Ask yourself what skills need to be developed to move your company and employees forward. This template should include critical positions, competencies, high-potential employees, action items, and a general commentary. You should record the information captured during the first four planning steps into a single and simple space you can refer back to in one quick glance.

coworkers discussing career development

6. Discuss Career Development with High-Potential Employees

In order for succession planning to help your company achieve its goals, employees need to know when they are being considered for important positions. Employees are more likely to lean in and pursue necessary growth when you make them aware of their potential future with the company. Sharing this information should occur before selecting employees for succession in case they are not interested in the role you’ve identified for them. It is important to know who is and isn’t willing to advance to ensure you don’t spend time and resources developing employees who don’t want to move into a certain role, even if they seem like an obvious fit.

7. Create Your Talent Pipeline

Your talent pipeline is the path you will use to fill key roles. After identifying your interested internal talent, you may still have vacant positions you’ll need to bring in external candidates to fill . Accounting for this upfront makes it much easier to track your progress toward filling critical positions. Continuously updating your document allows you to stay on track and gives you a snapshot of key employees and their developmental progress as they grow into their future positions. 

8. Document Key Employees’ Institutional Knowledge Before They Leave the Organization

Employee knowledge is a precious resource organizations must make a concerted effort to document and preserve, especially with the increasing number of workers approaching retirement age. The knowledge and skills of experienced employees are critical for minimizing interruptions that come with the transitions.

9. Revisit Overall Succession Plan Quarterly and Annually

For a succession plan to be effective, companies must revisit the plan on a regular basis. Having scheduled discussions about recruiting new talent and promoting employees with potential, noting existing skills gaps, and removing termed employees will help keep your plan on track. 

Succession plans should be consistently revisited and target employee performance should be discussed and responded to, whether that means creating new avenues for career development or addressing poor performance. Analyzing data over time will demonstrate how well your plan is working.

How BBSI Can Help with Succession Planning

At BBSI, we provide you with a dedicated team of professionals to help your company leaders facilitate the succession planning process to ensure your business sticks to its plans and makes progress toward its future goals. Our trusted partners will keep your information confidential and help you identify answers to the questions that keep you up at night .

As we work together, we will continuously revisit your plan to ensure your company stays on track and in compliance with federal and state legislation, while also offering advice for developing and managing talent. Contact your local branch today to see how BBSI can help you with your succession planning and talent development.

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  • Succession Planning
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This article is going to explain what succession planning is and how it can be applied to your business.

After reading this guide, you will have a strong idea of creating or improving your succession planning process and the best practices involved.

What is succession planning?

Business succession planning, benefits of succession planning, succession planning process, succession planning best practices, faq about succession planning.

  • Succession planning template

Succession planning is the process whereby you identify new leaders and develop them to take over the role of the incumbent.

For businesses to thrive, it needs to avoid moments of crisis and lack of leadership.

At some point, succession planning will help with such a situation by preparing a candidate for a planned or emergency replacement. This could be because of retirement, a new opportunity, or in the event of death.

Succession planning is your safety net to ensure that business operations can remain smooth. A robust process will help you identify key individuals who could fill leadership positions.

In the best-case scenario, you will be given advance notice when someone is going to leave. A succession plan prepares you for the worst-case scenario and no notice.

At the same time, an effective succession planning strategy will avoid any questions of succession where leadership positions are concerned.

In the monarchy, this is often resolved through the order of succession. A well-understood model that passes the office to the nearest descendant. This model is also common with family-run businesses that intend to leave the business to their children or next of kin.

Banner for succession planning template

In business, succession planning plays a vital role in identifying candidates to take on more challenging roles. When an important postholder departs they leave behind a void that can disrupt the company.

No matter the size of your business, a succession plan is a key to having a smooth transition.

Large companies such as Pepsi , Microsoft , and General Electric have well-known succession plans for executive talent.

For large corporations, it will typically fall to the CEO and the board of directors to oversee the succession plans. They will evaluate employees to identify leadership qualities and provide training for those in consideration.

Often the succession plan will look internally for candidates to take over positions. However, some companies may look to external candidates and may even employ the use of headhunters.

Smaller-scale companies may not need a comprehensive succession plan compared to large businesses. However, there will still be a need to identify someone to take over in the event of an emergency.

Therefore it is wise to train potential successors so they are prepared to step up if the need arises.

Types of succession plans

There are two types of succession plans that should be considered. This will give your business something to fall back on in the case of an emergency.

1. Long-term succession plan

The first type of succession plan you should consider is your long-term succession plan. This is the plan that you will more or less stick to as a standard for key positions.

A succession plan of this nature can be reevaluated and changed as the company grows. For large companies, this would be the plan that outlines the details of succession for all key positions.

2. Emergency succession plan

A secondary emergency succession plan can also be created, where appropriate, to be deployed in the event of an emergency.

This type of plan may involve more temporary measures but is intended to keep operations running smoothly.

This could see other senior members of staff take on extra responsibilities while a replacement is sought.

Many small and medium businesses do not have a succession plan. Of those that do, some of them have only informal plans.

This can be a risk for your business as there could be unforeseen incidents that could occur such as death. It is worth creating a formal, written succession plan that is developed and easily accessible.

Here are some of the benefits for businesses of any size to create a succession plan:

1. Candidates ready to start

When an upcoming promotion, retirement, or departure is approaching you will have the next generation of leaders ready to go.

Thanks to your succession plan the replacement will already have the skills required to take over the role.

2. Encourages managers to develop junior employees

Your succession plan can help your managers to start developing lower-level employees.

The plan helps to define clear progression routes through the company so managers can share appropriate training and information with junior staff.

Managers will also be able to start training their replacement when promotions are approaching.

3. It leads to higher job satisfaction

Employees report higher job satisfaction when there is a succession plan at their company. This is because it helps to define routes to progressions and lowers job insecurity.

A succession plan can help employees understand what they need to do to achieve a promotion. It can help with goal-setting and giving employees a sense of direction at work.

4. Helps to track progress

Succession planning can help your managers to track employee progress through performance reviews.

Internal opportunities can also be quickly filled with knowledgeable employees who have been upskilled and crossed trained.

5. Keeps shareholders confident

Whenever a high-ranking postholder leaves the organization it can leave shareholders feeling uneasy.

In some cases, they may look to sell their shares. A good succession plan can help keep investors on board.

For positions like CEO or CFO, the board may have had some input into the choice of successor. This will give the shareholders confidence in the company and the new postholder.

6. Cultivate and maintain company loyalty

Having a strong culture of promoting from within can lead to increased company loyalty.

You can attract talented employees who will stay with you for a long time. This helps them to have a strong understanding of the businesses, morals, and expectations.

Employees are more likely to stick around for the long term if there are defined advancement opportunities.

Instead of an informal plan, it’s a good idea to make a comprehensive document that outlines how succession should work.

Small and family businesses may only need a limited plan that outlines succession for a single person.

Larger corporations may need a comprehensive document that starts with the hiring process and works its way through the ranks and details different leadership positions.

The fundamentals of your succession plan will remain the same which is what we’re going to look at now.

It’s also worth pointing out that this document can be revised and amended whenever it is necessary.

1. Determine the scope

You will need to figure out how comprehensive you want your succession planning to be.

A small business might only need to find a replacement for ownership. Medium and large businesses may only want to consider the succession plan for their C-suite of employees.

It may also be the case you want a succession plan that covers every eventuality from store manager to distribution to CEO.

Ask yourself the following questions to decide what is best for your business:

  • Do you only need a plan that covers senior management?
  • Do you want a succession plan that covers the entire organization?
  • Are there any vulnerabilities in your business? Such as having a division with a higher amount of employees nearing retirement. Are you prepared for that?
  • Should performance reviews be used to help identify potential candidates?
  • Should the talent acquisition process be a part of your succession plan?

It’s important to understand what your specific needs are as well as the needs of the business.

The size and type of your business can help to inform some of your decisions but ultimately every business will be different.

2. Identify key positions and skills

First, you have to identify the key roles in your organization that will be good to secure.

It could be the CEO, CFO, CCO, CHRO, and different heads of departments.

Second, you might have some specific specialists that are unique to the industry or your business, e.g. it might be some highly skilled engineer, programmer, scientist, etc.

Consider the following questions to identify key positions and the skills needed for that post:

  • How does this position impact the company?
  • If this position became vacant, how would that affect the company?
  • Are there some big risks if this position became vacant?
  • What skills (both hard and soft) are needed for this specific role?

The objective is to figure out how crucial the position is. If the company would be severely affected by a vacated position then this is one that should be considered within your succession plan.

You will also need to understand what specific attributes are needed for the role. That way you can build your training and development around nurturing those key skills.

3. Identify potential candidates

Perhaps the most crucial stage is finding the employees that might be suited to a tougher challenge .

You could ask the current postholder for help determining who could step up in their absence.

It’s also worth considering that the right person for the job isn’t necessarily the next in line. Candidates could be sidestepped in the role or there could be other promising candidates in the business.

You may wish to make hiring a part of the plan and therefore can use interviews to vet potential recruits for career prospects.

Try to answer the next questions:

  • Who are the strongest candidates to step into this role?
  • What skills do they possess that could benefit their new office?
  • What skills are the candidates lacking?
  • Does this person have the appetite for more responsibility?
  • What training will they need to succeed?

It’s important to identify people who want more responsibility. Your top choice maybe someone who is happy in their current role and not looking to change.

This is something that can be gauged during annual reviews or in meetings about their professional goals.

4. Speak to the candidates

It would be wise to speak with the people you are considering.

This will give you a clear answer if they would be interested in the role.

Don’t make any promises but explain that they are being considered for leadership.

Explain that nothing is guaranteed as there are plenty of moving factors to consider. This includes the current postholder, the company, and the candidates.

However, you can gauge their interest and it may help to encourage high-performing individuals to remain loyal to the company.

5. Work on professional development

Leadership development is worth investing in particularly for employees you have identified for succession into key roles.

There are a variety of ways to develop potential successors and help them to develop leadership skills.

You can create a leadership development plan to ensure candidates have the right skills and are a good fit for leading positions. Employees being groomed for leadership roles can be developed in several ways .

You need to test your employees to make sure they can meet the demands of the increased responsibilities.

Some of the ways this can be achieved are through:

Connect the candidates with business leaders in your company. They can help to develop the skills of succession candidates and even share knowledge that might not be immediately obvious.

You can send prospects on courses to help develop their skills. These could be in-house courses or ones run through independent third parties.

Task forces

Task forces and project management is a great way to test your candidates. This will give them the opportunity to lead a team and test how well they cope under pressure.

When you think about development consider the following questions:

  • What is the best way to upskill?
  • What resources are required and available?
  • Are there some additional skills needed?

The focus should be on improving a candidate’s interpersonal abilities and communication skills that are important in a leading position.

You will also want to give them the opportunity to learn and develop the necessary skills required to do the specific job.

6. Trial and error

There should be ample opportunity to give your succession plan a trial run with the candidates you are considering. For example, if the postholder is away on holiday or off sick for an extended period you can use this as an opportunity to try someone in the role.

The benefit here is twofold, the candidate will get a feel for the position and appreciate the opportunity. While you can assess whether they are the right candidate for the position.

Note: Such tests can affect the team so pay close attention to this . This is especially true for external candidates and people from different teams. Not everybody will like it, unless the candidate is a strong leader from the inside of the team.

This is what you need to consider:

  • How does the employee interact with others?
  • Have they kept the department running smoothly?
  • How do they handle issues that arise?
  • How do they react to stressful situations and conflicts?
  • How much help do they need in the role?

You want to see them step up and take control of the position. This will help identify if there is any specific training they need to take the role full-time.

You can gauge whether someone is wrong for the position. This may come down to their interpersonal skills or ability to deal with new challenges.

7. Refine and redefine

Your succession plan is something that can be developed over time.

It may be that what was working years ago isn’t quite the same now.

You may need to adjust the succession plan to adapt to a changing business landscape. As the business grows you may need to redefine what is included in your succession plan.

It would be prudent to start with the most important roles in the business. After all, you can’t totally predict when a key position will become vacant.

Once you have those key positions locked down you can start to expand the scope of your succession plan.

1. Start from key roles

You should start with the most important roles first.

Which of the positions will have the greatest effect on your business if the postholder doesn’t turn up tomorrow?

Roles at an executive level are going to be the most disruptive ones. From there work out the specific skills and knowledge required for the role. This will help you to create your plan and identify potential successors.

Once the most pressing roles are covered you can look at what other roles are important to include.

2. Talk to your employees

Your succession plan will affect people and may make some people feel nervous.

It’s important to explain the scope of the succession plan and why certain roles are included in it.

You may only look to include executive positions or your plan may include managers and supervisory staff as well.

By giving a clearly defined scope you can avoid members of staff second-guessing their position.

3. Collaboration between management and HR

This is a process that should be driven by the business leaders with support from HR where necessary.

It is not strictly an HR process and therefore senior leadership should be communicated with regarding the succession plan.

Gain insights, input, and information from across the senior positions to help the succession plan run smoothly. Interviewing the post holders about the wants and needs of their job can provide crucial information.

4. Forecast your business needs

You should have an emergency succession plan in place that can deal with the untimely vacancy of a position.

Alongside this, you can create a detailed forecast and a longer-term plan. This is necessary to address things like upcoming retirement and promotions.

You will also need to consider how quickly the business can mobilize to fill this position.

A strong succession plan will understand how it will impact the business in 6 months, 1 year, and 5 years.

5. Create a pipeline of talent

Create a pipeline of talent so you have individuals ready to take up new challenges as they arrive.

A pipeline of this kind is essential for finding a talented successor but it’s also a good idea to help fill newly created positions. New recruits can be included in your pipeline of talent.

You can learn about this in our talent acquisition guide.

Even if you don’t have any open positions currently, you can still start cultivating a pool of talented individuals.

6. Annual talent reviews

Your succession plan is something that should be continually developed.

This includes reviewing the candidates on an annual basis or more. People may have moved on or into new positions within your company. Promising candidates may no longer be performing at the standard you would like.

Take a look at your succession plan every year and adapt and change things where it is necessary.

7. Build the learning culture inside your organization

It will help you nurture and grow potential candidates as well as new talents.

When you have identified the individuals that are being considered for senior positions you will need to develop their skills.

You can work with the candidates and they can lead their own individual development plan.

This ensures that their progress is actively monitored and they can take ownership of the process.

Managers should be on hand to provide guidance, resources, and provide timely reviews.

Why is succession planning important?

Succession plans make your business disaster-proof. They provide a concrete plan for filling key roles and help to avoid times of uncertainty. It can be reassuring for investors to know that there is a carefully considered plan in place.

How to do succession planning?

Succession planning should be conducted by business leaders with support from the HR teams. All affected individuals need to be involved in the process. Start with the end goal to identify what you need to achieve. Each business will have different needs so consider which positions will have the biggest effect on operations.

What is business succession planning?

Business succession planning is the process whereby you identify candidates to be groomed for senior positions. Specifically, when the incumbent leaves the role, this could be for a promotion, retirement, or an untimely death. Your business succession plan is in place to facilitate a transfer of power and keep your business sailing smoothly.

What is the correct order of the succession planning process?

  • Identify which positions need to be included
  • What specific skills are required for those roles?
  • Identify people who could be a good fit
  • Start grooming them for succession
  • Review your succession plan and candidates annually

Succession Planning template

Avoid moments of crisis and lack of leadership by preparing candidates for a planned or emergency replacement.

succession plan for small business

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The Key to Successful Succession Planning for Family Businesses

  • James Vardaman

succession plan for small business

Don’t exclude non-family members from the discussion.

Successfully passing the baton to the next generation is a goal for many family business leaders. It can also be a sound business move if the right steps are taken. By clearly communicating family succession intentions, developing strong relational bonds, and proving the fitness of next generation leaders, family firms can achieve buy-in from their nonfamily employees. Not only will this make for a smooth leadership transition, but it can also increase nonfamily identification with both the family and the firm, creating a more productive and satisfied workforce that propels the firm for years to come.

The succession process is one of the biggest challenges facing family firms, as most fail to remain a family business past the second generation. Among those that do succeed, a key concern is how nonfamily personnel will receive a successor. Perceptions of nepotism in succession can undermine nonfamily employee commitment to the business and their continued participation in the firm. Addressing this common issue can be difficult because the ability to choose a family successor and provide employment opportunities for family members is often a primary aim of family business owners. Thus, a key challenge for family businesses is gaining buy-in from nonfamily employees for the next generation of family leadership .

  • WT Will Tabor is an Assistant Professor of Business Administration at Mississippi College. His research focuses on family businesses and organizational ethics. His work has been published in Family Business Review and The Journal of Business Ethics .
  • JV James Vardaman holds the Chair of Excellence in Free Enterprise at the University of Memphis and is the author of Global Talent Retention: Understanding Employee Turnover Around the World .

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Free Succession Planning Templates

By Joe Weller | September 24, 2018

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In this article, you’ll find free, downloadable templates for succession planning, including those for emergency succession, career succession, CEO succession, nonprofit succession, board succession, family business succession, and law practice succession.

Emergency Succession Plan Template

Emergency Succession Plan

This template provides an outline for creating an emergency succession plan to help ensure a smooth transition when an unexpected leadership change occurs. Use the template to develop your own strategic plan for how to handle the temporary or unexpected absence of an executive director or similar role. Identify the key responsibilities of the role that need to be maintained, plans for interim or other hiring options, and procedures for implementing the emergency plan.

Download Emergency Succession Plan Template

Excel | Word | PDF | Smartsheet

Career Succession Plan Template

Career Succession Plan Tracking Spreadsheet

This comprehensive succession planning worksheet includes a spreadsheet for tracking multiple roles, retirement status, potential successors, required training, and other information. It also includes two sheets for detailed employee succession planning: One matches the competencies required for a position with those held by a potential successor, and the other focuses on internal and external training plans to help fill any competency gaps. This is an Excel template that you can easily modify to include additional data.

Download Career Succession Plan Template

Excel | Smartsheet

CEO Succession Plan Template

CEO Succession Plan

Create an executive succession planning template to prepare for a planned or unplanned CEO departure. Use this outline to develop a thorough plan, whether for a temporary or permanent leadership change. The template includes sections for detailed procedures and communication planning. It also includes a section to closely examine the role of the CEO and the attendant responsibilities that need to be addressed.

Download CEO Succession Plan Template

Excel | Word | PDF

Nonprofit Succession Plan Template

Non Profit Succession Plan

As with corporate succession planning, nonprofits need clear plans to help ensure continuity of leadership and management needs. Create a nonprofit succession plan to cover short-term, long-term, emergency, or multiple types of leadership change. Define procedures to be followed by staff and board members, clarify responsibilities for the board of directors, plan for communication with stakeholders, and provide a timeline for implementation. This template also allows you to compile key financial, legal, insurance, and other information for easy access.

Download Nonprofit Succession Plan Template

Board Succession Plan Template

Board Succession Plan

Track the length of service for each board member and identify successors. This is a simple succession plan template that you can use to identify committee members and the roles they serve, list term years with start and end dates, and create plans for re-election or succession. Edit the spreadsheet to include any additional board member information that you want to keep track of.

Download Board Succession Plan Template

Family Business Succession Plan Template

Family Business Succession Plan

Family businesses can use this template to create succession plans for retiring owners, for the sale of a business, or for unexpected leadership changes. Determine whether family members will be successors and what skills they need to develop in order to be prepared. Define the organizational structure, personnel changes that will take place in the event of a succession, legal and financial considerations, and risk management plans for potential issues.

Download Family Business Succession Plan Template

Law Practice Succession Planning Template

Law Firm Succession Plan

Whether you’re a sole proprietor or partner in a law firm, this succession planning template provides a basic outline for creating concrete goals related to retiring or transferring ownership, identifying capable successors, making a timeline for implementing the succession plan, and more. Create a sense of security for your law practice by setting a clear plan and reviewing it regularly.

‌ Download Law Practice Succession Planning Template - Word

Talent Pool Development Template

Talent Pool Development Plan

This worksheet is designed to help you identify high-potential employees in order to create a talent pool for future positions. These are employees who, with the right career development, could be successors to important leadership positions. Use the worksheet to find key competencies and create an action plan for employees to gain skills and reach goals. Keep track of training and other activities, along with associated results.

Download Talent Pool Development Template

Excel | PDF

How to Create a Succession Planning Template

Once you have selected a template that works well with your business or organizational needs, you can customize it to create a personalized succession plan. Here are some of the elements commonly included in a succession plan:

  • Position: This may be one or multiple positions, usually leadership positions, that you will need to fill in the case of a planned or unexpected absence. The plan can provide a detailed look at the key functions of and competencies required for this position.
  • Incumbent: This refers to the person currently in the key role.
  • Candidates: This is a list of potential employees or others (such as candidates for board membership) who have the skills to move into key roles.
  • Readiness Rating: Evaluate candidates to determine current competency levels and gaps that need to be filled. A rating is a quick way to indicate how ready a candidate is to move into the role, and may be based on a range of factors, including performance ratings, specific skills, willingness and ability to relocate, and other assessments.
  • Development Needs and Action Plan: Whatever competencies a candidate lacks will need to be developed. A specific plan shows training or other actions that the organization will take to manage this development and track its progress.
  • Organizational Chart: Some succession plans include a visual description of key roles and may include photos of the incumbent and candidates in addition to names and other details.

Other common details include communication planning, retention risk information for the incumbent or candidates, procedural guidelines for an emergency absence or a temporary leave, financial and legal information, and more. In some cases, a simple spreadsheet is adequate for identifying talented candidates, planning action steps, and tracking progress. A more comprehensive plan includes supporting documents and clear guidelines for ensuring that leadership roles and management functions continue without interruption.

The Benefits of Succession Planning

Succession planning can support businesses and employees by increasing staff retention, improving performance, and boosting employee confidence. It assists in identifying the critical positions within an organization and tracking potential vacancies so that you can prepare for future personnel needs. It is also a way of aligning future business objectives with employee development by helping high-potential employees gain the knowledge, experience, and skills they need to take on leadership roles. Employees get the benefit of advancing toward promotion, and businesses can help ensure that they fill current and future positions with the right candidates.

Businesses can save money by investing in internal employees, improving staff retention, and preparing for unexpected leadership losses. Succession planning also helps create smoother transitions, whether they’re related to organizational expansion, the sale of a business, retirement, or an emergency situation. Moreover, it can help fill new positions by providing a talent pool that you can draw from. You need to review and update a succession plan regularly so that planning and employee management become ongoing processes.

The Succession Planning Process

Succession planning has at least three stages: identifying future business challenges and key roles, evaluating and selecting employees based on critical competencies, and preparing those employees to fill future positions. Here’s a closer look at some of the steps involved:

  • Strategy: Connecting succession planning to strategic business planning just makes sense. Defining challenges and goals for the future provides information about what roles you will need moving forward. Identifying the negative effects (on an organization) of the absence of key positions helps to clarify what competencies, skills, and knowledge are critical for business continuity. Strategizing is also an opportunity to engage senior leaders in the process and help staff understand their roles. Tracking when key positions are likely to become vacant can also help create a more specific timeline for succession.
  • Candidates: Create a list of possible candidates based on potential for leadership roles. Of course, the selection process needs to be fair, that is, based on a standardized evaluation process and criteria related to critical competencies and the future potential of each employee. Once you’ve created a talent pool, you can make training plans to fit the competencies that each candidate needs to develop. In order for an employee to accommodate development opportunities, you may need to adjust their schedule or workload. It’s possible that, without undergoing further training, education, or certification, a candidate may already be qualified to fill a position that is not yet open. In that case, be sure to keep them engaged — otherwise, you risk losing a potential leader to another organization.
  • Progress: Reviewing and updating plans on a regular basis allows you to track progress and meet milestones. Create a timeline that fits with strategic plans and upcoming vacancies, and include contingencies in case an unexpected transition occurs.

Succession planning may sound like an overwhelming endeavor, but given the potential benefits, it’s worth the investment now to avoid undue challenges later. And, according to the Society for Human Resource Management (SHRM), succession planning might be easier than you think once you break down the process into steps.

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More From Forbes

Succession planning: cultivating potential, fostering greatness.

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Satyen Raja, Founder & CEO of WarriorSage Trainings , author, advisor & mentor to CEOs, business leaders and global influencers.

In the dynamic world of business, succession planning stands as a pivotal process, crucial for the long-term success of any organization.

This concept, often overlooked, is about foreseeing the future of a company through its leadership. It's about recognizing and nurturing the potential leaders who will steer the company toward continued success and innovation.

The Essence Of Succession Planning

At its core, succession planning is not a mere procedural task. It's an art form, deeply rooted in the wisdom and maturity of current leadership. This process involves identifying individuals within an organization who not only possess brilliance and know-how but also embody a deeper understanding and commitment to your company's mission and values.

Drawing inspiration from the Shaolin Kung fu tradition where a black belt is expected to produce ten more black belts, succession planning in business is about creating a lineage of leaders. This is something I've done personally over many years; in this time, I've found that it is about selecting the right individuals over striving for quantity. It's about looking beyond mere qualifications to find those who can be nurtured into greatness. These are individuals who might not yet realize their full potential but given the right opportunities and guidance, can grow into exceptional leaders.

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Trump will pay more than 111 000 per day as he appeals fraud ruling, trump appealing fraud trial ruling: here’s what happens next with case—and his $454 million fine, the role of loyalty and consistency.

A key aspect of identifying potential successors is understanding their loyalty to the company's vision and mission. It's about finding those who are committed not only to the company's immediate goals but also to its long-term objectives and ethos. These individuals often exhibit consistency in their actions and intentions, echoing the ancient wisdom of the I Ching, which values long-term perseverance and steadiness over transient brilliance.

The primary challenge in succession planning arises when decisions are made in haste or out of immediate necessity. Such an approach often leads to short-sighted choices that don't align with the company's long-term goals. True succession planning requires a calm, strategic mindset, inspired by practices like those of the Shaolin temple and First Nations wisdom elders who plan with a vision extending over generations.

I find that an often overlooked aspect of succession planning is its emotional dimension, particularly for founders and CEOs. For them, the company is akin to a child, evolving from infancy to maturity. Recognizing the stage of this evolution is crucial in determining when and how to start the succession process.

Effective communication is crucial during this transition, requiring a delicate balance in the information you relay to employees to help mitigate uncertainty and uphold morale. Communicating the succession plan should be done thoughtfully, ensuring that it aligns with the team's mission and is shared at an appropriate time to foster connection and readiness for new leadership dynamics.

Balancing Short-Term And Long-Term Goals

As a steward of leadership, I've come to understand the delicate balance between addressing immediate needs and nurturing long-term succession goals. This critical balancing act is not just about filling positions; it's an endeavor that requires a deep understanding of what truly drives organizations forward.

The journey begins with a rigorous evaluation of potential successors. This isn't a mere assessment of what they promise to bring to the table but a careful consideration of what they can actually deliver. In my experience, inspired by the wisdom of the Shaolin tradition, the essence lies in their ability to go beyond mere words. Seek individuals whose actions resonate with your organizational ethos and whose track record of delivery outshines their verbal commitments.

Succession planning, therefore, involves distinguishing between those who merely have promising ideas and those who have a proven ability to execute these ideas effectively. This criterion is pivotal in ensuring that our short-term responses are in harmony with long-term strategic objectives.

Balancing Skills And Conviction

Another key aspect in identifying potential leaders lies in their conviction and authority. This is not about mere confidence; it's about the inner strength and determination to lead, especially through challenges. These individuals should not only possess the necessary skills but should also demonstrate the leadership qualities vital for guiding a team. They need to embody your company’s ethos, acting as authentic representatives who can further your collective vision. The cornerstone of this balance is in identifying individuals who demonstrate a consistent ability to follow through on their commitments.

In line with the principles I advocate, evaluating a potential leader's capability through incremental steps is crucial. This approach mirrors the gradual progression in martial arts, which allows for a steady build-up of trust and understanding. It's about providing opportunities to demonstrate their leadership in smaller, manageable scenarios before escalating them to larger roles. This method ensures that while our immediate leadership needs are addressed, we are also methodically nurturing a leader who aligns with our long-term aspirations.

Reassessing Succession Strategies

A company may need to revisit its succession planning if signs of mistrust, reduced loyalty, gossip or low productivity emerge. These are indicators of a disconnect between the new leadership and the team, signaling a need for immediate action. It's crucial to address these issues promptly to prevent further disruption and to maintain the harmony and efficiency of your organization.

Overall, effective succession planning is a multifaceted process that extends beyond identifying potential leaders. It involves nurturing these individuals, balancing the company's current needs with its long-term vision and handling the emotional and communicative aspects delicately.

This process is about building a legacy that transcends generations, rooted in loyalty, trust and a deep connection to the company's core values. As leaders, our role is to prepare future leaders to take the helm, ensuring the enduring success and evolution of the organization.

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Satyen Raja

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