Implementation of a corporate succession plan

The Succession Planning Process

Every owner, every company and every situation is exceptional. There is no one plan that fits all situations and businesses. Effective succession plans share enough essential elements to provide a roadmap to determine what needs to be addressed. To create an effective succession plan, the owner must first consider the suitability of current management; the incentives, if any, to hire and retain good employees; and to determine if future leaders are already on board. The successor should not be a reflection of the current owner. Everyone has their own skills, ideas and goals that become part of the succession plan and help the company grow. Owners should work with their advisors to determine what talent is available and whether the qualities of a good leader are evident.

It is to be checked who is the most qualified candidate. Alternatives are an initial search by the company’s board of directors, if any, and hiring a professional search firm. The owner can also recognize possible successors within the company.

When an owner wants a child or other relative to take over the business, it is important to conduct a rigorous screening that assesses the strengths and weaknesses of several potential candidates. Key employees who are knowledgeable about all aspects of the business should also be consulted. After the search is complete, the owner must make a choice. Plans fall through when an owner completes the process only to decide no one fits. This type of decision will demoralize employees and could result in some leaving the company. The credibility of the owner is also questioned.

The acquisition decision must be communicated throughout the organization. This move could result in someone who has been passed over leaving the company. However, risk can be mitigated if the plan is communicated effectively and a team approach is followed. Simply choosing a successor does not end the process. As business circumstances change, the succession plan and its effectiveness must be re-evaluated. This is not an opportunity for owners to change their minds abruptly. Rather, it is a chance to rejuvenate the strength of the plan and validate the decisions made. The selection should only be changed if performance or business circumstances change significantly.

The succession plan should reference other policies that the company will implement that address the situations that will be addressed beyond ownership succession.

Effective succession planning should identify strategies for dealing with urgent situations, including death, disability, or unexpected departure. By considering these situations, the owner or board will be better prepared to make informed decisions instead of being rushed.

Who to involve in the succession planning process

A business owner should consult with the various advisors they have worked with over the years of their business. This includes financial advisors, bankers, legal advisors, accountants and colleagues. If the company has a board of directors, they should also be involved in setting up and implementing the succession plan.

There should be a formal plan that includes specific goals and established timetables that allow the process to be reviewed and evaluated as it progresses. Specific tasks can be assigned to smaller groups. Such a group can compare how other companies have prepared plans and identify weaknesses that should be avoided in the current company plan.

Succession Planning and Incentives

During the creation of the plan, the company may determine that more experience is needed in certain areas. Resolving these findings could be solved by hiring key people or retaining key people who are already part of the company. Creating incentives that will keep these employees at the company is critical to a good plan.

Cash and stock incentives should be considered. Stock incentives can be used to retain key executives or other key employees, for example through an employee stock ownership plan. Several other stock-based plans provide incentives to hire and retain key personnel. These include stock options, restricted stock purchases, stock appreciation rights and phantom stock plans. These incentives are increases over time and not a one-off change of control. They offer a program in which a group of owners is created who are gradually endowed with the success of the company. In addition to these plans, which generally prove very effective, an owner can use other techniques to transfer ownership to a designated successor, whether it be a family member or a key executive. These strategies typically involve gradually selling stocks over time with appropriate vesting schedules. Equity is earned through this plan and paid for in cash, services, or both.

Many companies employ a variety of these techniques to create a wide range of stock-based incentives for key employees. Any strategy requires significant legal, tax and accounting considerations. Owners should seek the advice of tax and legal advisors to ensure these plans are structured and implemented in the most efficient and cost effective manner.

evaluation and documentation

As the plan is implemented, it should be continually referenced to ensure execution is in line with the plan. Senior management and the board should periodically evaluate the plan to determine whether it continues to work or needs revision. The succession plan must be as consistent as the selection process. It cannot be considered an absolute, immutable document. Rather, it is an evolving representation of the organization’s future needs and goals. The transfer of ownership aspects of the plan must be carefully documented and given positive consideration. This creates a mutual understanding of the terms of the transfer.

The company should have an effective staff appraisal policy, which should be part of succession planning. These guidelines help identify potential leaders and successors. They also provide guidance for successfully coaching specific employees in developing a broader, more inclusive management team.