Succession Planning

DEFINITION of 'Succession Planning'

A strategy for passing each key leadership role within a company to someone else in such a way that the company continues to operate after the incumbent leader is no longer in control. Succession planning ensures that businesses continue to run smoothly after the business’s most important people move on to new opportunities, retire or pass away.

BREAKING DOWN 'Succession Planning'

Succession plan entails evaluating each leader’s skills, identifying potential replacements both within and outside of the company, and in the case of internal replacements, training those employees so they’re prepared to take over. Succession planning is not a one-time event; succession plans should be reevaluated and potentially updated each year or as changes in the company dictate. In addition, businesses might want to create both an emergency succession plan in the event a key leader needs to be replaced unexpectedly and a long-term succession plan for anticipated changes in leadership.

In small companies, the owner alone may be responsible for succession planning. In large corporations, the board of directors, not just the CEO, will typically oversee succession planning. Also, in large corporations, succession planning not only impacts owners and employees, but also shareholders.

For small, family-owned companies, succession planning often means training the next generation to take over the business. A larger business might groom mid-level employees to one day take over higher-level positions. In a partnership, one method of succession planning has each partner purchase a life insurance policy that names the other partner as the beneficiary. That way, if a partner dies at a time when the surviving partner otherwise wouldn’t have enough cash to buy the deceased partner’s ownership share, the life insurance proceeds will make that purchase possible. This type of succession plan is called a cross-purchase agreement and allows the surviving partner to continue operating the business.