Key Challenges in Business Succession Planning and How to Manage ThemOctober 21, 2019 October 15, 2019 /
Business succession planning is crucial for any business, especially if you want to keep it going for the longer term.
It’s not always prioritized by businesses, often because the need for it seems so far off in the future. In reality though, no one knows what is just around the corner and planning can help you to minimize any disruptions or negative consequences.
Let’s not forget the expected events either! Business succession planning is as much about considering the business owner and other key employee’s next steps as it is about considering illness or death. Everyone has to retire at some point.
With that said, there are often some major challenges business owners face when it comes to succession planning. Here, we’re outlining some of the most common issues:
We’ll start here because, honestly, this is what often has people procrastinating over doing any succession planning. There’s a level of discomfort involved. The idea that you might face illness, injury or death brings your mortality to the fore.
Even when considering planned retirement, many people feel morose at the prospect and would prefer to ignore it for as long as possible. A business owner may have mixed emotions about retirement, especially when they’ve built their business from the ground up and have a strong attachment to it.
The danger is that as long as the owner doesn’t wish to face reality, the business can be at risk. If something were to happen and no succession plan was in place, there’s a chance that the business can’t keep running.
What can you do about it? Basically, the sooner you’re prepared to face reality, the better. Consider the possible consequences of NOT having a plan — you’ll find that you can sleep better knowing that one is in place!
Secondly, think about the role that having a succession plan can play if you do have mixed emotions when it comes time to retire. If you take your time to consider all of the options carefully, you are less likely to make a decision based on a knee-jerk reaction. It will be easier to circumvent your emotions if you give yourself time for reflection.A major challenge for many business owners is simply to face the reality that succession planning is necessary Click To Tweet
Choosing a successor
Choosing a successor can be fraught with issues and emotions. Sometimes a business owner will have started grooming someone for the role years in advance, but other times they may have given it little thought.
There are a few different problems that are common when it comes to choosing a successor:
- Lack of a capable heir. In family businesses, there’s often a hope and an expectation that the business will be passed onto the next generation. However, this is not always practicable if there is no one capable of taking over the reins. Stories abound of incompetent or reluctant heirs taking over family businesses and ruining them.What can you do? Make an honest assessment early on. It might be your dream for a son, daughter, niece or nephew to take over, but is it theirs? Have they been putting the time into getting the appropriate education and on-the-job training? Do they know the business well? Have honest conversations with them about what they will need if they are to be chosen as the successor.
If there’s no way you’re going to have a family member who is up to the task, then your planning needs to look at other competent professionals who can step in; otherwise, you may be left with closing down the business.
- Going with your gut or sentimentality. This is partly related to the first issue — sometimes business owners are overly attached to the idea of passing the family legacy onto a relative, and they try to rope one of them into the plan even if it’s not the most practical option.Secondly, there’s often a tendency to go with a gut feeling, which can leave your decision open to bias. Everyone has biases, for example the comfort of familiarity. This might lead to choosing someone simply because there is something about them that appeals to you — they attended the same alma mater as you, for example.
What can you do? Try to base your decisions on factual information. For example, draw up a list of requisites for the role, including skills, experience and personal characteristics. Try to measure candidates against those qualifications as a first preference.
- Using current performance as the only criteria. Performance is important, but most people upgrade their skills and improve their overall performance as time goes by. If you were to take current performance as a key criteria for succession planning, you’re only looking at a snapshot in time.What’s harder to do is to see potential. Look at the people around you and try to make an assessment of their potential to improve while taking on new responsibilities. A lot of this will come down to attitude and work ethic, just as much as innate aptitude.
The potential for family disagreements is another reason that a business owner often feels uncomfortable with succession planning. This could be one of the factors that accounts for why only about 30% of family businesses survive to the second generation.
A PWC report uncovered some worrisome data on family-owned businesses. While around 75% aimed to pass the business to the next generation, 43% didn’t have a succession plan. This lack of a succession plan often only results in greater conflict.
A worst-case scenario is that family members end up in a fight that plays out in public. Lawyers and the IRS get involved (and usually are the only winners).
What can business owners do?
- Start planning — the earlier, the better.
- Formalize your plan and communicate with everyone. If people feel that they’ve been left out of the loop, it’s often the beginning of a conflict.
- Have a clear action plan with clearly defined roles and responsibilities. It’s the grey areas that leave room for argument and trigger conflict.
- Work with a family business advisor. It often helps to have a clear-headed third party involved who can keep everyone at arm’s length.
Planning for every level of the business
When business owners think about business succession planning, they often focus solely on who is going to fill their own shoes. The reality is that an effective succession plan needs to take a much broader view.
If people are moving up in your organization, who is going to take over their roles? Will you be left short in any critical areas? It’s important to recognize that it’s not just the C-suite who will be impacted by succession planning.
You can keep an eye out for the best performers within each area of your business, but it’s important to remember that someone who does a good job in their individual role doesn’t necessarily make a great leader. Look for the qualities of a good leader among those people.
Economic considerations can present a major challenge to succession planning, especially where there is some uncertainty involved. Events like economic downturns or recessions can impact the timing of your retirement, the funds you have available or even the structure you are able to maintain within your business.
This is why it’s very important to sit down with a qualified specialist in succession planning right from the outset. Part of their assessment should include how you are set up to weather any economic shifts, such as through diversified investments.
Keeping your plan “alive”
It may be challenging to get started with succession planning, but once you’ve got it done, don’t simply shelve it and forget about it. Your final challenge for business succession planning is in making it a “living” plan.
This means acknowledging that things may change, and that your plan may need to change along with these unexpected shifts. What if people whom you had planned to have in the line of succession opted to take up a different career, for example?
If something were to happen to you and the succession plan became outdated, this could be another source of conflict or confusion. Keep on top of any updates and you’ll have the peace of mind that comes with being prepared.
Business succession planning can’t be described as an easy task. There are many facets to consider, but one of the biggest challenges is often human emotion.
Feelings often run high around the ideas of retirement, death, or even simply relinquishing power. This is a great reason to go into succession planning with the help of a third party that specializes in this area.
It’s never too soon to start planning; in fact, it’s much better if you start sooner rather than later. This gives you the time you need to prepare yourself and everyone else who may be affected.