Succession planning

Every organization has people who play critical roles. When one of them leaves, they often take vital skills, relationships and institutional knowledge with them. Succession planning is a process that identifies the contributions and responsibilities associated with those roles and prepares for them to be taken on by someone else. It helps ensure that the business can continue to function with minimal disruption.

The CEO plays one of, if not the most vital role in any organization. If they step down, retire or leave the business—sometimes unplanned—a significant change occurs.

In the case of an owner-CEO,

• a family member might take over the position
• it may be transferred internally to someone on the team
• the business might be sold to a third party

It’s essential to ensure that whoever takes over has the right skills and support to keep the business running smoothly.

“A succession plan can be created as needed when a departure is expected or proactively as a safeguard against the unexpected,” says Nyron Drepaul, Senior Business Advisor with BDC Advisory Services.

Succession planning is not just for the CEO

While the CEO role is where the need for a succession plan is most obvious, it’s not the only one. It’s wise to have succession plans for all senior leadership team members and highly specialized employees whose skills, seniority or corporate memory would create a void if they were to leave.

“If you’re not sure if you need a succession plan for a particular role, ask yourself what would happen to the business if that person were gone for three months,” Drepaul says. “If the impact would be significant, make a succession plan.”

What are the benefits of succession planning?

There are multiple reasons to engage in succession planning:

It gives you time to prepare the successor

Stepping into a new role is challenging, especially when it comes with the responsibility of running a business. Advance planning allows you to identify who will take on the role and ensure they have the necessary skills and training.

It helps protect business value and shareholder interests

If not handled well, a leadership or ownership transition can lead investors and customers to lose confidence, affecting profitability. With a succession plan in place, customers and shareholders can see that you’re taking steps to ensure your business stays on track, which will improve confidence in the company’s ongoing ability to deliver the same service and continued positive returns.

It supports ongoing business relationships

Business is often built on relationships. If the CEO leaves suddenly, the company may lose what that person had built with important clients, suppliers and other partners—potentially leading those partners to go elsewhere. Planning means your successor can meet key clients and ensure they stay loyal to the company.

It protects institutional knowledge

Vital information one person holds can be difficult to retrieve if that person suddenly leaves. Succession planning ensures critical knowledge is passed along before it’s too late.

All these elements support the same ultimate objective: business continuity.

The sudden departure of a CEO, owner or other key employee can be highly disruptive to a business. It can leave people guessing who holds responsibility for essential tasks. That can make governance challenging and cause conflict without consensus on company direction. All this uncertainty can result in unmet business objectives and customers going elsewhere.

“That’s why planning is key,” Drepaul says. “It’s the only way to ensure viability and continuity of the organization when there’s a change in leadership.”

What is the process of succession planning?

Although every succession plan will look different, Drepaul says the process, which usually takes three to four months to complete, typically involves following these steps:

1. Assess the current state of the organization

Look at the organizational and ownership structure of the business and map out all current roles and responsibilities of the leadership team and other critical positions. Identify key customers, suppliers and other relationships that need to be maintained.

2. Determine the desired future state and identify potential gaps

Map out what the organization would look like under new leadership regarding structure, roles and responsibilities. Identify gaps between its future and current states. Look at potential missing skills in a designated successor or responsibilities that would need to be taken on by someone else. Repeat this process for all members of the leadership team and any other critical roles within the company.

3. Develop an action plan to execute the transfer

Create a plan that details what would need to be done over the next 12 to 18 months to address the identified gaps.

Suppose the plan is being developed to manage an expected transition. In that case, it may include identifying a specific successor for the role. Based on the skill sets of the successor and other team members, the plan will set out how best to distribute the responsibilities of the person leaving.

“The current CEO might also handle marketing and sales, but that doesn’t mean the next CEO will necessarily also take on those responsibilities,” Drepaul says. “But someone will have to.”

The action plan should include a roadmap to ensure the successor has all the necessary skills and information. If other members of the leadership team will be taking on some of the current CEO’s responsibilities, the plan should cover any training they may need.

The plan might also:

• specify how long the current CEO will stay in the role
• set out a timeline for a phased transition of responsibilities
• indicate what (if any) advisory role they will take on after stepping down

On the other hand, if a succession plan is being developed as a contingency against an unplanned departure, it may include fewer specifics. Instead, this type of action plan would outline the process for distributing responsibilities, the skills to look for in a replacement and the steps to launch the recruitment process.

Best practices for effective succession planning

Drepaul recommends the following best practices to support succession planning:

Start early

“Business owners often come to us hoping to retire in the next six months,” Drepaul says. “But that’s not nearly enough time. A good transition is usually a multi-year process, so don’t put it off. Start now.”

Taking on this exercise several years before a departure allows enough time to prepare the successor and do the hand-off in phases. Transitions involving a change of ownership require readying the business. That would include ensuring the finances are in order, taking care of legal matters and ensuring all tax considerations are appropriately addressed.

Incorporate succession planning into overall strategic planning

Succession planning is different from regular hiring. Bringing on a new leader can affect the whole organization. It’s a process that requires strategic thinking.

For this reason, succession planning should be incorporated into your strategic planning process.

Review your succession plan annually and make revisions based on any changes within the business, market evolutions or other relevant circumstances.

“No plan survives first contact with reality,” Drepaul says. “But you do need a plan. Just make sure it’s responsive and flexible.”

Get outside advice

An ownership change has significant financial and legal implications, and business owners should not attempt to navigate them on their own. Drepaul recommends seeking the support of experts, including lawyers, tax accountants, strategic consultants, business valuators and bankers.

“It sounds like a lot, but getting the right advice will ultimately simplify the process,” Drepaul says.

Communicate the plan

Once you know someone plans to leave, communicate with your staff and external stakeholders. Clear communications will ensure everyone understands what’s happening, inoculating the business from potentially harmful rumours.

At your side to plan your next step

Learn how BDC can help with advice and financing support for internal buyouts and other ownership transactions.

Related definitions

Find out more in our glossary