Implementing a Business Succession Plan
The Succession Planning Process
Every owner, business, and situation is exceptional. There is no such thing as one plan fits all situations and businesses. Effective succession plans share enough essentials to provide a roadmap for determining what needs to be addressed. To create an effective succession plan, the owner must first consider the aptitude of present management; the incentives, if any, that exist to hire and retain good employees; and to determine if any future leaders are already onboard. The successor should not be a mirror image of the current owner. Each has their own skills, ideas, and goals which becomes part of the succession plan and help the business grow. Owners should work with their advisors to establish the talent available and if the qualities of a good leader are obvious.
A determination as to who is the most qualified candidate must be considered. Alternatives include an initial search by the company’s board if there is one and the use of a professional search firm. The owner may also recognize any probable successors within the company.
When an owner wants a child or other relative to take over the business, it is important to conduct a rigorous examination that assesses the strengths and weaknesses of several potential candidates. Key employees who are well-versed in all aspects of the business should be consulted as well. After the search is completed, the owner must make a choice. Plans fail when an owner completes the process only to decide that no one fits. This type decision will demoralize employees and could cause some to leave. The credibility of the owner is also questioned.
The decision as to who will take over must be communicated throughout the entire company. This step might cause someone who was passed over to leave. But the risk can be mitigated if the plan is effectively conveyed and a team approach is taken. Simply choosing a successor does not end the process. As business circumstances change, the succession plan and its efficacy must be reassessed. This is not an opportunity for owners to abruptly change their minds. Rather, it is a chance to rejuvenate the plan’s strength and confirm the decisions made. The selection should change only if there is a significant modification in performance or business circumstances.
The succession plan should reference other policies the company will execute that address situations that will be addressed beyond ownership succession.
Effective succession planning should identify strategies for handling urgent situations, including death, incapacity, or unanticipated departure. By considering these situations, the owner or board will be better prepared to make informed decisions as opposed to frenzied ones.
Who to Involve in the Succession Planning Process
A business owner should confer with the various advisors with whom they have worked during the years they have been in business. This includes financial advisors, bankers, legal counsel, accountants, and colleagues. If the company has a board of directors they should also be involved in establishing and executing the succession plan.
There should be a formal plan, which includes specific goals, objectives, and defined timelines, that allows the process to be scrutinized and assessed as it proceeds. Specific tasks may be assigned to smaller groups. One such group can compare how other companies have established plans and determine any weak points which should be avoided in the current companies plan.
Succession Planning and Incentives
While creating the plan it is possible that the company will determine that more experience is needed in certain areas. The resolution of these findings could be resolved by hiring key people or retaining key people already part of the company. Have incentives in place that will keep these people within the company is crucial to a good plan.
Cash and equity incentives should be considered. Equity incentives can be used to retain key executives or other key employees such as through an employee stock ownership plan. Several other equity based plans provide incentives to hire and retain key personnel. They include stock options, restricted stock purchases, stock appreciation rights, and phantom stock plans. These incentives involve increases over time rather than a one-time change of control. They provide a program in which a group of owners who are gradually vested as the company’s success is created. In addition to these plans, which generally prove highly effective, an owner can use other techniques to transfer ownership to a specified successor, whether family member or key executive. These strategies usually involve a progressive sale of equity over time with suitable vesting schedules. Through this plan the equity is earned and paid for with cash, services, or both.
Many companies employ an assortment of these techniques thereby creating a wide range of equity-based incentives for key employees. Each strategy requires significant legal, tax, and accounting issues. Owners should seek the advice of tax and legal advisors to assure that these plans are structured and implemented in the most efficient and cost effective way.
Evaluation and Documentation
When the plan is implemented, it should be referenced on a continuing basis to ensure execution is in accordance with the plan. Senior management and the board should regularly evaluate the plan to determine whether it remains operational or requires revision. The succession plan must be as forceful as the selection process. It cannot be viewed as an absolute, unalterable document. Rather, it is a developing illustration of the future needs and goals of the organization. The aspects of the plan relating to ownership transfers must be carefully documented and considered in favorable ways. This will provide mutual understanding of the terms and conditions of the transfer.
The company should have an effective personnel evaluation policy, which should be part of the succession plan. These policies help identify prospective leaders and successors. They also provide a guide to successfully coaching specific employees while developing a broader, more inclusive management team.
Article Source: https://EzineArticles.com/expert/David_G_Komatz/1543625