The one certainty for business is that they are now facing more uncertainty and unexpected challenges. Business must plan for the sudden departure of their leadership and preparing qualified successors to take over.
Succession planning now plays a role in business and commercial law. It is designed to ensure that business continues to operate effectively after its key people move on to new positions, retire or die. It can also provide liquidity allowing the transfer of ownership to talented and rising employees.
The board of directors, in addition to the CEO, will usually manage succession planning. In large corporations, succession planning also impacts shareholders.
In small and family-owned businesses, this planning typically involves planning so the next generation can take over. Larger businesses may prepare mid-level employees to move into higher-level positions.
The first step is recruiting candidates that have the potential to review promotions over time. This includes identifying talented employees outside the business.
Planning should include providing cross-training to employees, so they have the necessary skills and knowledge and understand how the business works. It needs to include evaluation of employee’s skills, identifying replacements within and outside the business and training current employees to take leadership roles.
Succession planning must assure that employees have the certifications required to perform certain tasks. Shadowing other workers is another component. Cross-training may also identify employees who cannot develop multiple skills needed for leadership positions.
Succession planning should be reviewed and, if needed, updated each year. An emergency plan may be needed to prepare for the replacement of a key leader unexpectedly. A long-term plan can address anticipated leadership changes.
In partnerships, partners often enter a cross-purchase agreement and purchase a life insurance policy naming the other partner as a beneficiary. The insurance proceeds will allow the surviving partner to purchase the deceased partner’s share and continue to operate the business.
Succession planning has many benefits:
- Employees are empowered, have more job satisfaction, and engage in career development if there are advancement opportunities.
- Supervisors will mentor and share their knowledge and expertise to employees.
- Management closely follows employee performance.
- Management and employees share the company’s values and expectations.
- With the anticipated retirement of employees from the baby boomer generation, companies can prepare for a new generation of leadership.
- Planning reassures shareholders that a new CEO can take over operations so that they will be less likely to sell off company stock when the current CEO leaves.
- Planning helps assure that current employees do not leave if there is a sudden leadership change.
Attorneys can help develop options to address unexpected events. They may also prepare documents and plans to meet their needs.