This information is derived from Rehmann’s Private Client Advisory (PCA) experience, a uniquely tax-aware approach to growing and protecting wealth through a team of specialists curated for each PCA client’s needs.
A worst-case scenario question for business owners: If you died today, who could step into your shoes to run your company tomorrow?
Less grim but equally important: If you plan to exit your business or retire in the next few years, or even the next decade, do you know who you’d want to take over?
Last one: If you’re unsure who could lead your company next, do you have a documented plan that shows your as-yet-unidentified successor how?
Whether you’re planning to exit your business years from now, or you want to ensure it survives losing you prematurely, having a leadership transition plan in place isn’t only critical to your peace of mind. It’s critical to business stability and continuity.
Why Does a Leadership Transition Plan Matter?
In the case of your untimely death or disability, a leadership transition plan offers clear direction and guidance in a time of crisis. It can help prevent the challenges that commonly arise on (and quickly sink) a captain-less ship.
Think: Power struggles among those vying for your empty seat. Or a too-hasty hire of an outside replacement. Valuable but panicked employees jumping ship. The loss of your vital institutional knowledge, customer relationships, strategic direction, and so on. Would your company survive such instability? If it doesn’t, the effect of your loss on your employees and family wouldn’t just be emotional; it could be financially devastating.
Although a planned exit is hardly a crisis on par with an unforeseen one, it can still be chaotic – for other company executives, managers, board members, staff, and the incoming leader, as well as for you and your family. A game plan for a well-organized transfer of leadership can minimize that chaos. It offers direction and guidance to stakeholders before, during, and after the transition.
When is the Best Time to Build My Transition Plan?
Creating a leadership transition plan is a significant part of your overall business transition and succession planning process. And just like that process, you should begin developing yours as early as possible.
Why? One, because life (and death, disability, divorce, disagreement, or distress) happens. In fact, the Exit Planning Institute’s most recent National State of Readiness Report finds roughly 50 percent of business owners exit unexpectedly, due to one of those “5 D’s.”
Two, if you’re lucky enough to exit your business at a future date you select, starting your transition plan now maximizes the time you have to prepare your business for the next leader – and to prepare your successor.
What If I Don’t Have a Successor In Mind?
In a recent study, 26 percent of respondents said their inability to name a successor was preventing them from creating a succession plan. Maybe, like them, you’re hesitating because you don’t know who is next. Maybe you don’t have a family member waiting in the wings. Or maybe you have several options and don’t know whom to choose. Maybe you hope to sell but are unsure whether to target an outside investor, a key employee, all employees through an ESOP plan, or a venture capital firm.
Rest assured, for all situations, there will be unknowns. Factors out of your control will arise. But by focusing on what you do know and giving attention to certain priorities – specifically in the human resources realm – answers will emerge.
Meanwhile, you can still develop the necessary framework to support a seamless leadership transition, whenever it happens, and whoever comes next. The foundation of that framework begins, naturally, in one of the most impactful areas for talent management that you already have: human resources. I’ll show you how.
HR Strategies to Build a Leadership Transition Strategy
Before you can develop a leadership transition plan for anyone else, it’s essential you first look closely at your own key role … or, let’s be honest, your key roles.
If you’re like most business owners I’ve guided through the leadership succession planning process, “owning” the business is the least of what you do. No matter how many employees and other senior leaders you’ve added over the years, you probably still wear multiple hats and shoulder dozens upon dozens of responsibilities.
Step 1: Define Your Responsibilities
Consider your day-to-day, weekly, monthly, and yearly tasks and obligations. Add in those you share with other team members. What about all the decisions you make? And those of which you’re a part? How about those commitments that aren’t required for operations but you take on anyway because you believe they’re worthwhile?
Think beyond your official role and functions and include all that happens with some effort or input from you. Don’t forget the significant relationships with valuable customers, vendors, and others in your network that you actively maintain.
To capture the most realistic assessment of your involvement, I don’t recommend creating this list all at once or even over a few work sessions. Rather, carry a small notebook or create a list on your phone. Jot down the tasks, decisions, and other business-related obligations as you move through each workday.
Do this for at least a month or two before moving to Step 2. Continue to update your responsibilities list each quarter to ensure your developing transition plan remains current.
Step 2: Consider When, How, and Who
Once you’re satisfied that you have a fairly faithful record of all you do, flesh out which tasks and obligations you could let go. Then, consider how, when, and to whom. Early on, it’s likely no single member of your leadership or management team can carry your entire load overnight. Could you peg different managers or leaders for different tasks, in case an emergency exit occurs?
If you’re unsure who would be capable, that’s OK. The sheer practice of thinking through each item will prove eye-opening. It will not only illustrate each area you need to disentangle yourself from but also force you to consider what’s needed before you can offload each responsibility to someone else. Think: instruction, introductions, training, shadowing, mentoring, etc.
Outlining what’s needed will enable you to assess the time, resources, and effort required. It will also help you prioritize your responsibilities and, crucially, identify gaps – in resources, skills, or even personnel – that must be fulfilled before you can confidently offload anything.
Step 3: Document Your Contingency Plan
Your list of responsibilities and conclusions about who/what/when/how will serve as the foundation of your leadership transition strategy for your planned exit. And you will continue to build on that foundation as you, your business, and any potential successors evolve. (More on that in Step 4.)
These lists will also serve as the blueprint for a more urgent need: developing a formal contingency plan in case you exit prematurely. Using these lists as a starting point, meticulously document your role, responsibilities, and operational procedures. The documentation should include a detailed description of daily tasks, their how-to’s (if no one but you knows), your decision-making processes, and key contacts in and outside your organization.
Additionally, outline your strategic vision and any short- and long-term goals for the company, providing clear guidance on the direction you believe your business should take. This comprehensive documentation will serve as a valuable resource for the successor or interim leader(s) you designate, ensuring they have the necessary information to immediately take over and maintain business continuity.
Your contingency exit plan should also include a clear chain of command, defining the roles and responsibilities for each key position within your company. Finally, as you communicate your intentions regarding the future of the business, include any plans for growth, potential challenges, and strategies for overcoming them.
By proactively addressing these aspects, you’re giving the new leader both a roadmap and the guidance of your experience. You’re also minimizing the potential for disruptions, critical to maintaining the confidence of your employees, customers, and stakeholders after you’ve gone.
Step 4: Develop and Train Your Successors
Whether you’re still considering or have identified one or more potential successors, development and training will be your primary focus as you near your planned exit date. Once you’ve defined the hard and soft skills needed for your role, consider those a successor would need for other roles or areas of business operations — areas where first-hand experience and understanding could benefit how they would lead and manage in your role.
Your objective is to map out a plan that will strengthen their current skills and ensure they develop new ones. By taking into account each individual’s life stage, availability, interests, etc., you’ll be better able to create customized coaching and development plans that work both for them and in the best interest of your company. This could mean extra education or training, which might take a year or more.
As your potential successors grow and demonstrate success in each new role or challenge you’ve mapped, a promising leader may emerge. If you haven’t already, begin shifting specific tasks and responsibilities from your plate to theirs.
Strengthen Your Talent Pipeline
Naturally, as your potential successor or successors advance and take on new responsibilities, they’ll leave prior positions and responsibilities behind. This offers your business an excellent opportunity to expand its talent management efforts through the ranks, thereby increasing engagement throughout the company – a key factor in successful strategic planning.
Multiple studies have found that growth and development opportunities, or a lack thereof, are pivotal to employee engagement. In fact, Gallup Reports consistently show that improving engagement has far-reaching effects on the overall success of a business. It significantly reduces absenteeism and turnover, decreases the number of safety incidents, improves productivity and performance, increases customer loyalty, and even boosts profits.
When you give employees opportunities to grow, take over new responsibilities, advance their skills, and/or step into bigger, better roles, you’re giving your employees the incentive to stay with and strengthen your company. This creates a stronger talent pipeline for your business overall. (Click here for a free how-to webinar on designing clear career paths within your company.)
Communicate Your Intentions
You and the incoming leader(s) are the nucleus of your leadership transition plan. But catalyzing a smooth transition doesn’t rest on you and them alone. The feelings and perceptions of your workforce before, during, and after the leadership transition will impact its success.
As with any area of business where change is afoot, clear communication is essential. Am I recommending fully open, transparent, detail-rich communication at every stage of the planning and hand-off process? Never. Sharing too much information, too often, can be overwhelming and cause confusion and unnecessary worry.
Instead, think about which stakeholders – executive team members, board, senior leaders and/or managers, employees, family, etc. – would benefit from knowing what, when.
Then begin the conversation by listening. Ask your workforce to gauge their current state of readiness for change. Develop a communication plan that includes informing and involving your leadership team early in the process. This way, they’ll feel included and ready for the transition.
When it comes to communicating with any group of stakeholders, timing and method are crucial. To avoid surprises and level set expectations, communicate to each group of stakeholders when and how you’ll share changes and updates. Give all groups time to process changes and the opportunity to ask questions of you (or another leader) involved in the process. Make sure all stakeholders feel welcomed and valued. This will help ease worries and support a more positive transition experience.
Cultural Harmonization
Cultural harmonization is another important aspect of a smooth transition. This involves integrating new systems and operations while ensuring that the people side of the business is taken care of. Any new leader will bring some sort of change – in vision, perspective, approach, or even company direction.
Some changes will be more significant and immediately tangible. If the next owner brings your company into the fold of their company, for instance, it’s not just a matter of your employees gaining a new leader with a new perspective. It’s usually a merger – two different workforces with different approaches, operations, opportunities, and, likely, some overlap in roles and responsibilities.
In such cases, there will be bigger changes, like mandatory 401(k) adjustments or a different healthcare benefits provider. Address any mandatory or other known, impactful changes and identify opportunities for cultural harmonization. Once again, listening and maintaining clear and consistent communication throughout the process can reveal areas of concern for employees, enabling leadership to appropriately direct resources and attention and reduce uncertainty and anxiety
Keep the employees’ needs and feelings in mind through each milestone. Clear and consistent communication is essential to maintaining a positive experience for everyone involved, your successor included.
Your Takeaway
If you plan to hand down your business to a family member or someone else close to you, the value of building a leadership transition plan is obvious: It creates stability, which increases the odds of the next generation’s success and the continuity of your family business. It validates your life’s work and furthers your family’s legacy. It gives you and your successors more opportunity to positively impact your community, often for decades to come.
The potential benefits might be harder to see if you’re hoping to sell to a total stranger or venture capital firm. But rest assured, your efforts to smoothly transition your business to the next leader will prove valuable, too.
Much like a turnkey home in a market flooded with fixer-uppers, a business that shows it’s prepped and primed to exchange hands with minimal complications poses more promise, less risk, and fewer challenges than similar businesses.
That can attract the interest of more buyers, increasing your chances of selling and potentially strengthening your position in negotiating price and terms. In an age where 30 percent of businesses fail to find a buyer, increasing the odds of successfully selling your business can’t be underestimated. You’ll be more likely to walk away in a financial position that enables you to pursue your next chapter, while your employees and community continue to enjoy economic security and benefits a thriving local business affords. The sooner you start planning your exit, the more choices you’ll have for your business’s future and your own personal and financial well-being.
About the Author:
Boasting 25+ years of experience in human resources, Elizabeth has held HR leadership roles in privately held, publicly traded, and private equity firms. Her consulting work — long focused on collaborating with the leaders and HR teams of family-owned and small- to mid-sized private businesses — crosses multiple industries: manufacturing, insurance, healthcare, aerospace, professional services, news and media, and more. Elizabeth brings deep knowledge of and experience in the full scope of HR management, including training and organizational development, recruitment, union labor relations, benefits and compensation plan designs, company culture change and employee engagement, investigative behavioral analysis, executive coaching, as well as due diligence in mergers and acquisitions on both sides of the process.