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Exit Strategy: Ensuring a Succession Plan for Family, Midsized Businesses

Fortune 500 companies have succession planning baked into their regular operations. A report last year published by the Harvard Law School Forum on Corporate Governance and Financial Regulation found: “In 2017, among S&P 500 companies, the CEO succession rate was 10.8 percent, in line with a historical average of 10.9. However, the industry analysis shows that, among retail and wholesale trade companies included in the index, the CEO succession rate was more than twice as high, at 22.7 percent.

But for family and mid-sized businesses, succession planning is not always properly considered. Challenging questions for these CEOs include:

  • What would happen to the business if the CEO left?
  • Would employees know how to carry on without that CEO guidance?
  • Would customers still receive the same level of attention they expect?
  • Is the CFO sufficiently authorized to manage all financials?

Nearly 78% of business owners say they plan to sell their company to fund their retirement, but less than 30% say they’ve developed a succession plan that will set up a seamless transition.

Choosing a Successor

Selecting the right successor is among a CEOs most significant decisions

The succession search must begin early — before, of course, the need for succession draws near. Some business leaders choose to elect a successor from within the company, while company owners may sell the company to an outside party.

Both approaches bring challenges. For an internal transition, CEOs face competing interests and personalities. The contest “loser” may leave, and depending on a company’s size, that singular loss can be devastating. For the CEO, the process begins with a shortlist of potential contenders. The process requires imagining these contenders as CEO — seeing them beyond their current duties. It means continual evaluation, even when the contenders are unaware that they are contenders.

When looking externally, the process is different. It can be more lengthy, and certainly more expensive. Filling executive leadership roles can be a time-consuming process. Finding the right outside partner to help guide the process is imperative. If possible, announcing a search committee can help. After all, secrets are hard to keep. The challenge is to avoid breaking trust with employees and current senior leaders.

Preparing Employees

When a leader exits, employees can feel like the company is going through a shakeup. Employees who experience a sudden shift in company leadership, culture, or rules may become frustrated, disengaged, or feel otherwise ill-informed. They may feel less motivated to work, which can significantly impact productivity. Even a planned succession can have a ripple effect throughout the ranks that may leave employees fearing for their jobs and the company’s future as a whole.

As with so much of leadership, communication is key. As we noted in a post on the importance of business communication: “Business leaders regularly stress the role good communication skills play in career success and outcomes. Communication within businesses is key for smooth operations to continue. This is why businesses spend so much time and money investing in improving their communication skills. They often get Corporate Communication Skills Training for their leaders so their business can grow thanks to good communication. Technology solutions are making this easier, such as intranet software, which can provide a business with collaboration tools to connect its employees with one another.”

Organizing the Details

Prepare the successor for success. 

Whoever is assuming the soon-to-be-vacated role will benefit from a thorough job description, access to systems, important contacts, and other critical details from Day 1. The person who is leaving the position will be one of the best resources to gather this information. HR should also be involved in ensuring a smooth transition so that the new candidate can feel confident and at home immediately.

CEOs shouldn’t wait until they are ready to retire or move on to a new company to begin succession planning. Like any business process, organizing the details is key. Review the plan annually. Indeed, for CEOs who haven’t taken on this step, an obvious New Year’s Resolution sits ready for the taking.