Developing a Succession Plan for Your Small Business

Turning over control of your company to someone else. It may be the last thing you want to think about. As much as you may dislike the idea—and disliking it is a common response—developing succession plans is absolutely necessary for any small-business owner who wants his company to outlast him. And it's your obligation as well, says Francie Dalton, president of Dalton Alliances Inc., a management consulting company located in Columbia, Md.

"We all have a fiduciary responsibility to husband the succession of our companies, either planned or unplanned," Dalton says. "If you have employees, it's just irresponsible not to have a plan in the event of your sudden demise or incapacitation. You have to prepare for all possibilities. If you wait until you need the plan it's too late."

There are three huge errors small-business owners make when it comes to developing succession plans, says Dalton, adding that she calls these the "three Cs". The first, avoiding it altogether, or capitulation, has already been mentioned. The other two? Trying to find a clone ("No one will ever meet your standards," she says) and assigning succession based on chemistry, selecting someone you like rather than someone who can supply the necessary piece of the puzzle.

People are too intimidated by the idea of succession planning, Dalton says. "They make it more complicated than necessary—they just don't want to do it."

But getting started may be a lot easier than you imagine. The key, Dalton explains, is to identify the four following things:

• What skills does must your successor have? "You don't need to hire someone who has the same skills as you, but they need to be able to find the same skills as you," she says.
• What behaviors are essential? For example, if the owner of the company has to be able to sell, this is a completely different skill set than if they have to be successful with engineering.
• Where are your vulnerabilities? "This is huge," Dalton asserts. "You need to be able to identify where the organization is vulnerable today and three years from now. You need someone who can get the company through short- and long-term vulnerabilities, such as funding, or new competition coming into the market or hiring and retention."
• What talents are required? Skills can be learned, she says, but talent, such as the ability to inspire and motivate employees, is innate.

Dalton advises that any small-business owner mulling over his or her succession plans should convene and collaborate with people who know the business well, and include those who don't like you, she adds.

Why? "They are looking for an opportunity to vent," she responds. "They will tell you your blind spots so you can leverage them better. The more you seek out input from your detractors, the better position you're in to improve your position."

Develop the metrics that will allow you to calculate the deservedness of your potential successor, she advises. This is especially important if more than one person is vying for the job. Once you select your successor, give them complete transparency before you turn over the reins.

"And don't forget to have an out-clause so you can un-name the person if you feel that he or she isn't the right choice after all," Dalton cautions.

Still resistant to the wisdom of succession planning? That wouldn't surprise Brian Drum, CEO of Drum Associates, Inc., a New York City-based executive search firm for small and large businesses. The challenge for most small-business owners, who obviously harbor an entrepreneurial spirit, is that they don't know how to delegate—they started off doing everything themselves and haven't unclenched yet. But letting go is essential if the company is going to thrive long past your departure, he adds.

"You need to let people learn how to run your business," says Drum. "You need to create a business memory, which takes time to accumulate. You have to learn to become a mentor to people."

He suggests that owners see an attorney to discuss what could happen to the business if they don't develop succession plans in order to clearly understand the potential disaster that could befall their company should it suddenly find itself without its founder.

"If there's no plan in place, no one may step up to run the company," he says. "People may leave the business and take all your goodwill with them. This is why succession planning must cover both planned succession, such as retirement, and what would happen if you meet an untimely end."

If the business is family-owned, succession plans should be discussed with all family members, even those not involved in the business, says Drum, adding that this was the advice given to him.

"In my case, I have a daughter who has been with my business for six years and we have a succession plan for her to commit to," he says. "I have another child who is not in the business, but who is very successful in his own right. I discussed the plan with him and he was in agreement."

Finally, Drum thinks small-business owners should also draft a plan to sell their business, even if they don't intend to.

"This will give them an idea of the real value of the business, and will help them narrow down the search for a successor," he explains. "And it will provide the successor with an idea of the tangible value of the business and may provide more of an incentive for him or her to take over."