Succession Planning

AAA

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.

INVESTOPEDIA EXPLAINS '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. 

RELATED TERMS
  1. Cross-Purchase Agreement

    A document that allows a company's partners or other shareholders ...
  2. Business Recovery Risk

    A company's exposure to loss as a result of damage to its ability ...
  3. Judo Business Strategy

    A plan for managing a company by using speed and agility to mitigate ...
  4. Leadership

    The ability of a company's management to make sound decisions ...
  5. Business Activities

    Any activity that is engaged in for the primary purpose of making ...
  6. Business Ecosystem

    The network of organizations – including suppliers, distributors, ...
RELATED FAQS
  1. When is outsourcing a bad alternative to vertical integration?

    Outsourcing is a bad alternative to vertical integration when there are capacity balancing issues. For example, if a business ... Read Full Answer >>
  2. What is expected to happen to Rupert Murdoch's empire after his death?

    Multibillionaire Australian-American business magnate and media mogul Rupert Murdoch, founder, chairman and CEO of News Corp ... Read Full Answer >>
  3. Why doesn't Warren Buffett name a successor for Berkshire Hathaway?

    In 2014, Warren Buffett named his son, Howard, as his cultural successor at Berkshire Hathaway. Howard will not have an executive ... Read Full Answer >>
  4. What is the difference between the cost of capital and the discount rate?

    The cost of capital refers to the actual cost of financing business activity through either debt or equity capital. The discount ... Read Full Answer >>
  5. Why should investors research the C-suite executives of a company?

    C-suite executives are essential for creating and enacting overall firm strategy and are therefore an important aspect of ... Read Full Answer >>
  6. How does transfer pricing help business?

    Transfer pricing involves the trade of goods or services between two related companies, and both can come out the winner. ... Read Full Answer >>
Related Articles
  1. Personal Finance

    How To Improve Your Leadership Skills

    Being a leader can help you in your career. Here are some tips for improving your leadership skills.
  2. Investing Basics

    The Basics Of Corporate Structure

    CEOs, CFOs, presidents and vice presidents: learn how to tell the difference.
  3. Professionals

    The Path To Becoming A CEO

    Think you have what it takes to be chief executive? Find out what those at the top have in common.
  4. Investing Basics

    A Peek Into Shareholder Meetings

    Shareholder meetings can be glamorous, exciting or controversial, but not particularly revelational. Here's a quick look at what to expect.
  5. Entrepreneurship

    What Is Servant Leadership?

    Robert Greenleaf developed the concept of servant leadership, and many believe it is the key to avoiding greed-based company activity.
  6. Entrepreneurship

    Female CEOs Who Climbed The Corporate Ladder

    These women climbed the ladder and broke the glass ceiling.
  7. Entrepreneurship

    Getting To Know Business Models

    Learning how to assess business models helps investors identify companies that are the best investments.
  8. Entrepreneurship

    CEOs Who Blazed The Trail (Kroc, Hock And Welch)

    The right CEO can make all the difference in a company's market position.
  9. Entrepreneurship

    The CEO Dream Team - Walton, Schwab, Marcus And Blank

    The successes of these three CEOs can be linked back to one common factor: customer service.
  10. Options & Futures

    Keeping An Eye On The Activities Of Insiders And Institutions

    These transactions reveal much about a stock. We go over what to consider and where to find it.

You May Also Like

Hot Definitions
  1. Net Worth

    The amount by which assets exceed liabilities. Net worth is a concept applicable to individuals and businesses as a key measure ...
  2. Stop-Loss Order

    An order placed with a broker to sell a security when it reaches a certain price. A stop-loss order is designed to limit ...
  3. Covered Call

    An options strategy whereby an investor holds a long position in an asset and writes (sells) call options on that same asset ...
  4. Butterfly Spread

    A neutral option strategy combining bull and bear spreads. Butterfly spreads use four option contracts with the same expiration ...
  5. Unlevered Beta

    A type of metric that compares the risk of an unlevered company to the risk of the market. The unlevered beta is the beta ...
  6. Moving Average - MA

    A widely used indicator in technical analysis that helps smooth out price action by filtering out the “noise” from random ...
Trading Center