Free Succession Planning Article

In a Growth-Drive ‘Business Advisor Mastermind Group’ meeting this week we got on the topic of succession planning. This prompted me to write this article which you can use in your client-facing marketing and deliverables. 

Best-in-Class Businesses Use This Tool to Protect Cash and Transferable Value

Who should read this article? Business owners and CEOs of privately-held businesses with $2MM or more of annual revenue. Is this you? 

Background: One of the key growth-driving objectives for creating predictable profits, growth and maximized transferable value is a plan-within-a-plan: your strategic plan should describe the orderly transfer of accountabilities in the case of short and long-term leadership absence.  This is called succession planning, and having a succession plan is the hallmark of a best-in-class business because it protects cash and actually increases business value. Why? Because the market hates risk, and this plan mitigates existential risks to the business asset. 

There are two types of succession plan, one where  you are planning for the succession of your business to others, and the other describes a plan to replace senior leaders in the event they cannot perform their duties for a prolonged period.

We will look at ownership succession in our next article. Make sure you get it by subscribing. 

Five things to consider when planning succession for your senior leadership team:

1. What is a succession plan? In the context of this article, succession planning refers to the steps you will take in the event that you or one of your senior leaders is temporarily or permanently unable to perform their duties. This is essentially business continuity planning. To avoid confusion, ‘Succession Plan’ as used here does not refer to planning for the orderly transfer of the business to a third party - an event for which we also provide services. 
   
   
2. Why is succession planning  important? Having a succession plan is important because it provides for the orderly business continuity when you or one of your senior leaders is unable to perform their duties due to illness, death,  long-term absence or separation (termination/ resignation).
   • Having an up-to-date succession plan protects business cash flow, profitability and growth. 
   • Protecting and enhancing transferable business value: your business has intrinsic value. Losing the CEO or other senior leader poses significant risk to business operations and revenue; risk depresses transferable value. Having an up-to-date succession plan is both a growth driver and value driver as it protects and even increases company value by mitigating these risks. 
     
     
3. How should you approach succession planning?  Creating a succession plan is key to having an effective senior leadership team. Best-in-class businesses can operate smoothly in the absence of the CEO or other senior leader.  Consider the perspective of the private capital markets: if you ran a private equity group would you invest in a business than can't function without the CEO?

There are different considerations for short and long-term absences. Here is some guidance for tackling this issue - what should you do?

CEO: Document key CEO accountabilities; create decision-making protocols; empower the senior leadership team to meet these accountabilities in line with the protocols; conduct regular simulations to test and improve effectiveness. [Author’s note: this is how to cure owner dependence.]

Senior Leadership Team: Identify covered members; document accountabilities; identify internal and external succession candidates by role and accountability; prepare written knowledge transfer and onboarding protocols; communicate the resulting plans with key stakeholders; plan funding for succession.¹ 

• Identify which members of your senior team need a succession plan.
• Create up-to-date accountabilities for each role, plus function mapping. 
• For short-term absences (2 weeks-1 month): assign accountabilities to the affected leader’s subordinates and/or relevant senior leaders.
• For long-term absences (+1 month): identify a list of internal plus 3-5 external succession candidates. 

Internal candidates:

• What training and support will they need to achieve equal or greater accountability performance? Note: a '9 Box' is a helpful tool for planning internal succession and professional development more generally.
• By what date do you believe they can become 100% effective? To the extent possible use data to determine this metric. 
• What budget is required to reach 100% effectiveness?

External candidates:

• What training and support will they need to achieve equal or greater performance?
• By what date do you believe they can become 100% effective? 
• What budget is required to reach 100% effectiveness?

6. How will you fund the succession plan?

This is an especially relevant question for replacing the CEO, and applies to temporary (for example hiring a Factional CEO) and  permanent absences. Can the business afford to pay your compensation as well as that for your replacement? Funding is also an important consideration for permanently replacing a Senior Leader. The funding portion of the plan should account for signing bonuses to attract talent and to offset lost compensation/equity from prior employment. Additional expenses include relocation and the negative impact on your business from the succession-triggering event. There are three typical options to fund a succession plan:

• • Cash from operations: this can draw down cash reserves and may negatively impact profitability. The one key question: can the business afford it?
  • Commercial Debt: relying on your line of credit or adding company debt can negatively impact your balance sheet and may use funds needed for orderly business operational performance. The one key question: if commercial debt is used, is there sufficient reserve to fund payroll in the event of a cash shortfall? 
  • Personal Debt: is typically backed by personal or property guarantees. The one key question: Imagine a scenario in which you are incapacitated and circumstances force the bank to foreclose on their security interest, in this case the CEO’s home - what happens then?
  • Insurance: a quality underwriter can provide an insurance product covering succession; these plans need not be expensive (for example company-owned term death and disability insurance).  The one key question: is peace of mind worth the investment?

Additional considerations: the succession plan might also address retaining current employees. Imagine that you as CEO unexpectedly leave the business due to disability or death. Will this cause uncertainty leading senior leaders and key employees to feel they have no other choice than to protect their families by seeking stable employment somewhere else? Insurance proceeds can be applied both to succession and to retention. 

Recap, three key takeaways:

1. The best practice for protecting your business is to prepare for the future considering the short-term and long-term risks posed by losing senior leaders. 
2. Craft a plan, keep it up-to-date, and make it a habit of routinely testing the plan's effectiveness.  

Having a succession plan protects cash, insulates the business from unforeseen events and increases business value.

[1]:  CEO and Senior Leadership continuity courtesy Growth-Drive ‘Execute’ guidance for building a best-in-class business. ©2024 Growth-Drive.

To each of you: email blog@growth-drive.com to get a copy of this article you can use your marketing collateral (printed or digital). 

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Thank you, together we are executing towards our vision of helping $1 Trillion of privately held businesses increase strategic capacity in the three dimensions of business growth™. -George

Additional Resources: 

Every member of our community can help with strategy and questions like continuity. See for example Growth-Drivers Jeff Ketchum, expert at building effective senior leadership teams; Patricia Malone PhD who is a strategy and execution guru; exit planning thought leader Michael Desiato CPA; public company senior leader-turned Business Advisor Tim Martin; Growth Advisor Larry Prince of Prince Leadership and more.

See also: BEI's (Business Enterprise Institute) excellent Owner-Based Planning program.

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