According to the Office of Advocacy, there were 32.5 million small businesses in the U.S. in 2021 employing 46.8% of the private workforce. Clearly, small business success plays a vital role in the country’s overall economic growth, but there’s one hitch: Succession planning and the lack thereof.
What is Succession Planning and Why is It Important?
Succession planning is the process in which businesses determine how they will fill leadership positions as they become vacant. Not having a succession plan contributes to a business’ lack of long-term success, and long-term success is hard to come by. U.S. Bureau of Labor Statistics reveal that:
- Just 36% of businesses survive the ten-year mark.
- Only 12% reach twenty-six years.
- Less than 1% hit their 100-year anniversary.
Unfortunately, understanding that succession planning is important has not convinced many small and family-run businesses to formalize their own plans or to select a successor or successors. Sadly, without succession planning, these businesses move forward without understanding their future.
For example, day-to-day operations are conducted with limited vision. Employees are left wondering if they can advance their careers with a company that may not exist when the current leadership is no longer in charge. And when change occurs due to resignations, layoff, illness, death, or outside pressures, the business falters.
Without a doubt, businesses need to jump on the succession planning train, and the sooner the better. But they must recognize that succession planning isn’t a one-and-done process.
“Rather, it should be reevaluated and updated each year or as changes dictate within the company,” Investopedia declares. “As such, it evaluates each leader’s skills, identifying potential replacements within and outside the company and, in the case of internal replacement, training those employees so they’re prepared to assume control.”
Succession Planning Gone Wrong
Lest small businesses think they’re the only businesses affected by either no or poor succession planning, let’s take a look at a billion-dollar company that almost paid a high price for their failure to properly plan.
McCain Foods, a Canadian-based frozen food company, is the largest manufacturer of frozen potato products. Brothers Wallace and Harrison McCain founded the company in 1957, but when it came time to decide on a succession plan, they had conflicting ideas.
According to Tharawat Magazine, “Wallace thought his son Michael, with his Ivy League business degree, was the natural heir to the business. Harrison and his children did not agree. They suggested it should be an outsider who takes over day-to-day management.”
Ultimately, the decision was made to hire an outsider, but it came with a price. Wallace left to run Maple Leaf Foods, a rival company.
In a Harvard Business Review article, authors Claudio Fernández-Aráoz, Gregory Nagel, and Carrie Green conducted research on the cost of poor succession planning
“According to our analysis, the amount of market value wiped out by badly managed CEO and C-suite transitions in the S&P 1500 is close to $1 trillion a year. We estimate that better succession planning could help the large-cap U.S. equity market add a full point to the 4% to 5% annual gains that Wall Street projects for it. In other words, company valuations and investor returns would be 20% to 25% higher.”
Though these numbers may not correlate to small and midsized businesses, they highlight the critical nature of succession planning.
So, How Should SMBs Approach Success Planning?
Succession planning isn’t difficult, but it does take time. A new and complimentary Playbook by Acumatica, “Success Planning Strategies: An Adaptable 4 Step Process for Business and Industry Executives,” notes:
A familiar mistake executives make is rushing their exit. Instead, planning should start years before the exit date. Extended time allows the outgoing executive to clean house and make changes to empower their successor’s chances for success. It also enables the retiring executive to work alongside their successor before leaving the organization. Finally, after officially departing from the organization, the exiting executive continues to work with their successor in an advisory and oversight role.
With this in mind, here are the four general steps in creating a successful succession plan:
The steps are thoroughly explained in the Playbook. Also included is a Succession Readiness Survey, providing businesses with immediate insights into where they’re at in the process. If a business isn’t ready to pass the baton, this Playbook is a valuable resource.