What Is Succession Planning?

Succession planning is a strategy for passing on leadership roles—often the ownership of a company—to an employee or group of employees. Also known as "replacement planning," it ensures that businesses continue to run smoothly after a company's most important people move on to new opportunities, retire, or pass away.

Succession planning can also provide a liquidity event enabling the transfer of ownership in a going concern to rising employees.

Key Takeaways

  • Succession planning is a strategy for passing on leadership roles—often the ownership of a company—to an employee or group of employees.
  • Succession planning ensures that businesses continue to run smoothly after a company's most important employees retire and leave the company.
  • Succession planning involves cross-training employees so that they develop skills, company knowledge, and a holistic understanding of the company.

How Succession Planning Works

Succession planning evaluates each leader’s skills, identifying potential replacements both within and outside the company and, in the case of internal replacements, training those employees so that 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 large corporations, the board of directors, not just the CEO, will typically oversee succession planning. Also, in large corporations, succession planning impacts not just owners and employees, but shareholders as well. For small businesses and 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.

Recruitment

Succession planning starts with proper hiring practices with the goal of choosing candidates that are capable of rising the ranks as time goes on. For example, an experienced person from another company might be courted and groomed for an executive-level position.

Training 

Training includes the development of skills, company knowledge, and certifications. The training might include having employees cross-train and shadow various positions or jobs in all the major departments. This process can help the person become well rounded and understand the business on a granular level. Also, the cross-training process can help identify the employees that are not up to the task of developing multiple skill sets needed to run the company.  

In small companies, the owner alone may be responsible for succession planning.

Benefits of Succession Planning

There are several advantages for both employers and employees to having a formalized succession plan in place:

  • Employees know that there is a chance for advancement and possibly ownership, which can lead to more empowerment and higher job satisfaction.
  • Knowing that the company is planning for future opportunities reinforces career development among employees.
  • Management's commitment to succession planning means that supervisors will mentor employees to transfer knowledge and expertise.
  • Management keeps better track of the value of employees so that positions can be filled internally when opportunities arise.
  • With succession planning, leadership and employees are better able to share company values and vision.
  • With Baby Boomer business owners and leadership retiring in huge numbers, a new generation of leaders will be needed.
  • Shareholders of publicly traded companies benefit from proper succession planning, such as the case when the next candidate for CEO is involved in business operations and is well respected years before the current CEO retires. Also, if investors observe a well-communicated succession plan, they won't sell the company's stock when the CEO retires.

Succession planning can also cultivate a new generation of leaders, thereby providing an exit strategy for business owners who want to sell their stake.

Special Considerations: Life Insurance

In a business 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 would not otherwise 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.