The COVID-19 crisis is just one more reminder about the importance of a succession plan. A smart succession plan is just good business, protecting your legacy, company. Customers, employees, and relatives when a family business is impacted.
Most large companies have them, but many small and mid-size business owners avoid developing them. Yet these smaller companies are likely the companies that need the plan most, as a large company can likely manage through a death or disability of a CEO,. We all know that small business owners wear many hats, from making sales to ordering supplies, managing payroll and signing the paychecks!
The reality is many small business owners don’t plan for what will happen to their companies during a prolonged illness or after their deaths. Unforeseen circumstances could put their businesses at risk of shutting down. Indeed, according to a recent study, 72% of entrepreneurs have no succession plan in place to handle leadership transitions. What’s more, According to surveys by Wilmington Trust, nearly 80% say they are too busy managing their companies to deal with making a plan. Financial experts recommend that business owners have a plan in place in case of illness, disability or death, and an exit strategy in place if they are planning to retire.
Planning now for these scenarios is critical for small businesses because it will help avoid a power vacuum, which could lead to power struggles and court fights, and it helps maintain business continuity for your employees, partners and customers.
In a recent global report that surveyed more than 1,800 family businesses, the 2019 STEP Global Family Business Survey, 70% of global family businesses report they do not have a formal succession plan. In many cases, there are millennial family members who are highly educated and already leaders in their firms and ready to take over, researchers said. The report also found that fewer than half – 47% – have a succession plan in case of unexpected events such as death.
What should your succession plan contain? It should establish protocols for addressing the temporary or permanent incapacity of the person at the top and other company leaders. It should ensure that key leaders have access to all critical company resources from payroll and operating lines of credit, and don’t forget about company passwords. The protocols should establish who has company signatory authorization and delegate other operational decisions and essentials such as maintaining relationships with customers, lenders and investors. Lastly, it should include communications guidelines for getting the message out internally and to your clients, investors and suppliers.
Your succession plan should also contains a strategy for hiring and grooming new talent to meet projected company needs. Update the plan periodically, so that the company is positioned to flourish, no matter what.
Here are some strategies to begin your succession planning, at least for the case of an unexpected illness, disability or death:
- Evaluate the leadership skills and competence of your team members. This is essential to developing a hierarchy of succession. Give these leaders opportunities and training, while mitigating competitive tensions that arise as they yearn for the throne. Be honest and make sure you have the right person or people to take over for the short and long-term.
- Cross-train your employees. Too often, much of a small business owner’s knowledge remains in his or her head and isn’t shared, and in the case of an unforeseen loss or departure this could be devastating to the business left behind. And even if you don’t think you’ll need a replacement in the near future, prepping someone to assume an important role creates an invaluable safety net. Offer mentoring opportunities, job shadowing and training. Open up the lines of communication throughout your small business – your employees will feel more vested in the company’s success.
- Do a trial run of your succession plan. A vacation is a great time to have a potential successor step in to assume some responsibilities. The employee will gain experience while you learn how prepared the person is to take on a bigger role.
- Succession plans should be in writing — with the help of accountants and attorneys. That will reduce the chances of a court ﬁght, which could hurt the company’s finances and diminish the value of the company. The plan should also include a valuation for the business. Designate a trusted power of attorney.
- Involve your partners in your planning.When there are co-founders or partners in a business, they should have a written agreement that spells out what happens to the business when one of them dies.
Today’s devastating pandemic is a reminder that none of us is invincible. If you don’t already have one, you owe it to your company, your clients, your family and yourself to put your succession plan in place now.