Succession Planning: How to Prepare Your Next Generation of Business Owners

When it comes to family-owned businesses or small enterprises, one of the most crucial steps toward ensuring their long-term success is succession planning. According to Harvard Business Review, nearly 70% of family-owned businesses fail to transition to the next generation. That staggering statistic highlights the importance of properly preparing the next generation of leaders. Without a thoughtful and well-executed succession plan, a business that has been built over years (or even generations) can falter when leadership transitions occur.

As a business owner, it’s essential to not only think about your company’s present and future growth but also how to equip the next generation to take over seamlessly when the time comes. This process doesn’t just involve choosing the right person to step into leadership roles but also setting them up with the knowledge, resources, and mindset to continue your legacy. In this article, I’ll explore the concept of succession planning, why it’s crucial for business continuity, and how you can best prepare the next generation to lead.

What Is Succession Planning?

Succession planning refers to the process of identifying and developing potential future leaders within your organization. It’s about preparing the next wave of managers, executives, and owners to take over key roles when necessary, whether due to retirement, illness, or other unforeseen circumstances. Succession planning involves more than just selecting a successor; it includes training, mentoring, and setting up systems that ensure a smooth transition of leadership.

Succession planning should be part of the business strategy from the beginning, and it needs to evolve as the business grows and changes. A successful plan helps mitigate risks, maintain stability, and preserve the company’s culture during a leadership transition.

Why Succession Planning Is Crucial?

The business world is unpredictable. Without a solid succession plan in place, your business is vulnerable. When leadership changes unexpectedly, it can lead to confusion, loss of direction, and even the dissolution of a business. This is particularly true for small businesses or family-owned enterprises, where leadership and ownership are often tied to personal relationships and legacies.

Additionally, succession planning isn’t just about replacing someone who’s leaving. It’s also about identifying opportunities for growth and innovation through leadership changes. When done right, succession planning can inspire fresh ideas and perspectives, leading to a more robust and dynamic business operation.

The Risk of Not Planning: A Real-Life Example of Failure

I’ve seen firsthand how failing to plan for the future can be detrimental. Take the case of Toys “R” Us, which filed for bankruptcy in 2017. One of the primary reasons for its downfall was the lack of effective leadership succession. After the company’s founder passed away, the leadership struggled to evolve in a changing market and lacked clear direction. While the company’s brand and legacy were strong, the absence of a well-prepared successor led to a series of poor decisions and ultimately financial decline.

The key takeaway from this example is that when you don’t have a clear plan in place to pass on leadership to the right person or group, it can lead to chaos that negatively affects the entire business. Succession planning isn’t just about picking someone to fill your shoes; it’s about ensuring that person is equipped with the right skills, vision, and understanding of the company’s core values.

A Success Story: How Succession Planning Saved a Business

On the other hand, a great example of successful succession planning can be seen in the case of Walmart. When founder Sam Walton passed away in 1992, the company had already been preparing for his departure by identifying a successor and establishing a clear transition plan. Walton’s children were groomed to take leadership roles, and the company maintained its strong corporate culture while evolving to meet the demands of a changing retail landscape. Today, Walmart continues to thrive, largely due to the strong foundation set by Walton’s succession plan.

In this case, effective succession planning allowed the business to remain competitive and continue its growth trajectory. The Walton family members were not only prepared to take over, but they also had a clear vision of how to lead the company forward, ensuring its longevity and success in the retail industry.

How to Prepare the Next Generation of Business Owners

As a business owner, preparing the next generation of leaders is a delicate process. Here are some strategies I’ve found effective in ensuring a smooth leadership transition:

1. Start the conversation early:

One of the tips to prepare your next generation of business owners is to start the conversation early with your potential successors. Don’t assume that they know your intentions or expectations, or that they share your vision or interest for the business.

Have open and honest discussions with them about their goals, aspirations, and concerns. Find out if they are willing and able to take over the business, and what role they would like to play.

Also, communicate your plans and reasons for succession to other stakeholders, such as your employees, customers, suppliers, partners, etc.

2. Assess their skills and readiness:

Another tip to prepare your next generation of business owners is to assess their skills and readiness to lead and manage the business. Don’t let sentimentality or nepotism cloud your judgment.

Evaluate their strengths, weaknesses, opportunities, and threats as potential successors.

Identify any gaps or areas for improvement in their knowledge, skills, abilities, or attitudes. Provide them with training, coaching, mentoring, or feedback to help them develop their competencies and confidence.

3. Involve them in the business:

A third tip to prepare your next generation of business owners is to involve them in the business as much as possible. Give them opportunities to learn about the business operations, finances, customers, markets, competitors, etc.

Expose them to different aspects and functions of the business, such as production, marketing, sales, accounting, etc. Assign them projects or tasks that challenge them and allow them to demonstrate their capabilities.

Encourage them to share their ideas and opinions and listen to their feedback.

4. Create a succession plan:

A fourth tip to prepare your next generation of business owners is to create a succession plan that outlines the steps and timeline for transferring leadership and ownership of the business. A succession plan should include the following elements:

● The goals and objectives of succession
● The criteria and process for selecting the successor(s)
● The roles and responsibilities of the successor(s) and the current owner(s)
● The training and development plan for the successor(s)
● The valuation and financing method for transferring ownership
● The legal and tax implications of succession
● The contingency plan for unexpected events or changes

5. Implement a transition strategy:

A fifth tip to prepare your next generation of business owners is to implement a transition strategy that ensures a smooth and successful handover of the business. A transition strategy should include the following elements:

● The communication plan for informing all stakeholders about the succession
● The timeline and milestones for transferring authority and accountability
● The support system for providing guidance and assistance to the successor(s)
● The evaluation and feedback mechanism for monitoring and measuring performance
● The exit plan for retiring or exiting the current owner(s)

Conclusion

Preparing the next generation of business owners is a significant undertaking that requires careful planning, development, and effective communication. Whether you’re running a family-owned business or a small company, preparing your successors is an investment in the future of your business.

By starting the conversations early, assessing their skills and readiness, involving them in the business, creating a succession plan and implementing a transition strategy, you can set the stage for a successful transition of ownership.

Remember, just as you worked hard to build your business, your successors need the same guidance, mentorship, and preparation to lead it into the future.

Download: Succession plan template © Commonwealth of Australia 2020.