More than half of all small businesses in the U.S. are now owned by people over the age of 50. And as the average age of small-business owners and entrepreneurs creeps upward toward retirement age, many are left wondering who will take over when they leave.
This question keeps many business owners up at night, particularly those who are looking to start a “new chapter” — one with fewer days spent in the office — in the next five or 10 years. Many have been building their businesses for decades, and the thought that it might not survive long past their retirement can be disappointing.
It’s not all gloom and doom, however. There is still plenty of time for business owners to chart the future of their businesses by investing the time to create a solid succession plan.
A staple of strategic human resources management, succession planning involves identifying future potential leaders within the organization and developing them to take over leadership roles when the people currently in those roles resign, retire or otherwise leave the company.
Succession plans also help leaders better understand how the skills and people the organization has today stack up against those it will need in the next 10 years to ensure the business can adapt to future challenges.
While succession planning is especially critical for organizations whose leader or founder is looking to retire, every company can benefit from having such a plan. Not only does going through the process of creating a succession plan help minimize disruptions in the case of a crisis, such as the unexpected death or departure of a member of senior management, it also provides a sense of stability that strengthens the entire organizational structure.
The single biggest mistake organizations make when it comes to managing leadership transitions is waiting until someone is ready to leave to think about who will replace them. While not all transitions come with the luxury of time, finding the business’ future leader is not something any organization wants to have to do on short notice.
Business owners will want to start seriously thinking about creating a succession plan about five years before they plan to step down. This gives the leadership team enough time to figure out exactly what their exit strategy will be, whether that means keeping the company in the family, having another partner or group of employees buy out the owner’s stake or selling the business to a third-party. Whichever of those strategies is in play will help inform the succession plan.
Starting the process of developing a succession strategy may sound daunting, but it doesn’t have to be. In her article for Upsize Magazine, Beck-Howard breaks it down into a few simple steps:
1. Identifying potential successors
At the core of any successful succession plan is a solid strategy for identifying potential successors. In some cases — such as a family-owned business – the ideal successor may be fairly obvious, but in others, the choice may not be so simple.
When evaluating potential successors, it’s important to look at the whole person. Their previous experiences and their education all matter, not just what they are doing today.
Key factors to look for are a deep knowledge or understanding of your industry, a propensity for forward-thinking that will allow them to foresee and overcome future challenges and an ability to lead and manage people. It’s often helpful to create a leadership profile that outlines these characteristics and other desired skills to use as an outline or rubric when choosing a successor.
2. Creating a written succession plan
Up until this point, a succession plan might largely exist only in the mind of the business owner or in informal documents. At some point (typically about five years prior to the business owner’s targeted retirement or exit date, if it’s known), these ideas will need to be formalized and be turned into a written succession plan.
This document should include details about the preferred exit strategy, the profile used to identify potential successors, the names of any employees tapped as potential successors and a transition plan for certain key tasks or functions from the current owner to the successor.
3. Choosing a successor
Ideally, business owners will be able to find good candidates within their current workforce. If not, it may be necessary to begin looking outside the organization, while also continuing to develop the existing talent pool.
Once candidates are chosen, the real organizational development work begins. As part of the selection process, the business owner should create opportunities for potential successors to step up and lead projects or teams within the organization so the owner can evaluate their performance and leadership abilities.
Generally speaking, the process of training a successor will take between 18 and 24 months. It’s important not to rush this assessment period. However, the more time a business owner gives themselves to evaluate the candidates, the more confident they will be in the decision.