The Harvard Business Review reports that every year 10% to 15% of corporations must appoint a new CEO; yet research from Stanford University has found that only about half of boards have a specific successor in mind to prepare for such an event.
It’s even worse at small businesses, where 58% of small business owners do not have a succession plan to govern what the company will do when they retire or face some other “transition event”.
“Statistics bear out that 60-70 percent of small business owners wish to pass along their businesses to the next generation of family members, yet only about 15 percent ever do that,” says Eido Walny, founder of the Walny Legal Group, an estate planning boutique law firm in Milwaukee. “The key to understanding that massive disconnect is in the lack of business succession planning.
Succession issues are not merely about convenience; they can exact a heavy toll. A study of the 2,500 largest publicly traded companies found that organizations that end up terminating their CEO lose an average of $1.8 billion in shareholder value when compared to companies with a replacement succession plan. For a smaller business without a succession plan, a transition event can even trigger an existential crisis that could lead to the end of the company.
What can small businesses do to ensure their operations will endure when leaders or owners leave?
1. Start planning now.
According to wealth advisory group Wilmington Trust, “The sooner an owner begins to plan a transition, the better the odds of achieving their financial and personal goals.” Even in small businesses, good transition plans can take years to develop, because the next generation of leaders must often be groomed and prepared. The more time the business has, the more options it will have at the time of transition, and the readier it will be.
2. Identify potential successors – and put them to work.
One issue in succession planning is that potential successors may not be prepared with the necessary skills, nor even know what performance is expected or required in that role. To help address this, potential successors can be put in charge of projects representative of the CEO’s, business owner’s, or other leader’s typical work. This gives current leaders a chance to evaluate the successor’s capabilities, while giving the successor an opportunity to develop and practice critical skills.
Succession planning applies not just to leaders, but to anyone in an organization who has important skills. The Society for Human Resource Management (SHRM) advises companies to conduct “retirement coaching” to ensure knowledge and skills can be preserved and transferred from leaders and workers to their successors. Knowledge management is an essential aspect of succession planning.
CoAdvantage, one of the nation’s largest Professional Employer Organizations (PEOs), helps small to mid-sized companies with HR administration, benefits, payroll, and compliance. To learn more about our ability to create a strategic HR function in your business that drives business growth potential, contact us today.