Does a small business need a succession plan? Absolutely!
Many business owners are caught up in the day-to-day operations of their businesses and devote very little time to thinking about the future. Mary C. Kelly and Meridith E. Powell in their book Who Comes Next? state that, “Continuously operating in crisis mode can make organizations dangerously shortsighted. When leaders are trying frantically to meet monumental daily challenges to survive, succession planning routinely drops to the bottom of the to-do list.”
Business owners need to be thinking about a succession plan for not only themselves, but for every key leadership role in their company. However, most of the business owners that I’ve known can quickly feel overwhelmed by this idea. It’s helpful to simplify the concept of succession planning – it’s simply about talent development and talent deployment.
First, let’s talk about key leader succession. Then we will discuss owner succession.
There are 3 to 5 key leadership roles in every company, depending on the size and industry. The three roles that are essential in EVERY business are sales, operations, and finance. Marketing is another key role, and it may or may not be combined with sales.
The fifth key role is human resources (HR), but again, this depends on the size of the staff. For our purposes we will focus on the essential three. The same approach can be applied to marketing and HR if those key roles exist in your business.
The first step for the owner of a small to midsize business is to make sure that you have strong leadership in each of these 3 essential roles. Too often the business owner fills one or more of these roles. So, we must begin by building a leadership team that can operate without the owner’s toil.
Without a leadership team the owner really does not have much of a business, they only have a job. And as Michael Gerber shares in his book, The E-Myth Revisited, “If your business depends on you, you don’t own a business-you have a job. And it’s the worst job in the world because you’re working for a lunatic!”
Without a leadership team the owner is carrying the entire burden of the business on his/her shoulders. This is not scalable, and worse yet, it is exhausting. So, the first step is to build a solid leadership team [LINK TO A LEADERSHIP DEVELOPMENT BLOG POST] to help you lead the company.
With a solid leadership team in place, the second step is to document these 3 key processes using a process flow chart. This is a high-level overview of what happens in each of these areas of the business. Here is an example of what a typical finance/accounting process looks like.
Once each key process is documented then identify the 1 to 3 most important procedures needed for each step of the process. For example, for “Billing” you might have a procedure for logging time and materials used on a project or job, and a procedure for producing/generating an invoice, and a procedure for sending out the invoice. Fortunately, today a good software program like QuickBooks automates much of this for us. If you are leveraging technology well your “Billing” function may be one simple procedure documented as a checklist.
Some companies have invoicing software or point-of-sale software, or project management software that automates this entire function. The more you can automate the better! The idea is to make every step of the process easy to understand and execute. This will make training easy.
Accounting procedures combined with documented policies and good internal controls will give you a strong, replicable finance/accounting process. This same exercise should be completed with the other essential roles as well (sales, marketing, operations, and HR).
The third step is to begin training someone behind the accounting leader to perform every procedure in the finance/accounting process. With simple and clear documentation this will be a very doable step. The goal is to always have someone behind the leader who can step in at a moment’s notice to fill the role when the key leader departs. In larger companies it is wise to build a bench at least 3 deep in each of the key role areas.
But what about the owner? What is their succession plan?
This question is a little more complicated. We typically refer to this as an “exit Strategy.” How does the owner plan to exit the business?
Make no mistake, the owner will exit the business one day. It is best to have a plan rather than to wait until it happens suddenly. There are 3 factors to consider for owner succession: financial, business continuation, and timing.
The first consideration is financial. What is your ultimate financial goal with the business? Do you want to sell it or pass it on to a family member?
If you choose to sell it do you intend to sell it to a financial buyer, a strategic buyer, the employees (e.g. E.S.O.P.), or a family member? Maybe you want to franchise it or sell licenses to your proprietary tools or systems. Are the proceeds from the sale going to be your retirement funds? Do you plan to sell this business and start another business?
There are many options so it would be wise to engage a business or executive coach to help you plan your exit. Once you determine your potential financial return on the sale it would be wise to engage your CPA and a financial advisor to help you create a good tax strategy and investment strategy.
The second consideration has to do with business continuation. This goes back to building a strong leadership team with a growing bench of talent. If your business cannot run without you, you have very little to sell.
But if you have a good leadership team your business can continue under someone else’s oversight. This greatly increases the value of your business. I encourage business owners to create a separate business continuation plan that could be immediately put in place should something happen suddenly to the owner.
This plan could also take into consideration the continuation of the business in the event of a catastrophic event (e.g. tornado, hurricane, flood, loss of a major customer, natural disaster, etc.)
The third consideration for the business owner is timing. When is the right time to exit the business? The best course of action is to prepare your business so that you can act quickly when the time is right.
I’ve seen business owners who did not build their processes or people. They did not maintain strong financial reports and performance. Then the time came that for personal reasons, economic reasons, health reasons, psychological reasons, family reasons, market conditions, etc., that the owner needed to pull the trigger and exit the business.
Maybe a strategic buyer shows up with cash in hand ready to buy a business just like yours. I’ve seen it happen more than once! As a business owner you want your business to be ready to sell at any time.
You may not be planning to sell for years to come, but you want it to be ready! Oftentimes, the financial return an owner receives from his/her business is determined by timing. So, get your business ready and keep it ready. Have a continuous improvement process in place so the business just gets better and better year after year.
It’s too late to build a leader when you need a leader. Leadership development, process improvement, and succession planning takes time. In fact, it never ends. If you need a coach to help you get your succession planning on track, let us know, especially if you are considering family succession. We’re here to help you.