According to the Office of Advocacy, approximately 46.8% of the U.S. private workforce is employed by small businesses. Small businesses play a vital role in America’s economic success, but there’s one problem: Lack of succession planning.
Succession Planning: What Is It and Why Is It Important?
A succession plan identifies how businesses will fill vacancies as leadership positions arise. It is difficult for a business to achieve long-term success if it does not have a succession plan.
U.S. Bureau of Labor Statistics reveals that:
- Thirty-six percent of businesses survive ten years, and only twelve percent survive 26 years.
- There are fewer than 1% of companies that celebrate their 100th anniversary.
Many small and family-run businesses are not implementing succession plans or selecting successors despite understanding the importance of succession planning. Sadly, these businesses move forward without understanding how the lack of succession planning will affect their future.
Daily operations are conducted with limited vision. A company may cease to exist once the current leadership is no longer in charge, leaving employees wondering whether they will be able to advance their careers with the organization. As a result of resignations, layoffs, sickness, death, or outside pressures, the business falters.
The sooner businesses begin succession planning, the better. However, succession planning isn’t a one-off activity.
Reevaluation and updating should occur annually or as conditions change within the organization. Consequently, each leader’s skills are evaluated, potential replacements within and outside the organization are identified, and internal replacements are trained, so they’re prepared to take over.
Mistakes In Succession Planning
Small businesses must remember that they are not the only ones affected by poor or no succession planning. Look at a billion-dollar company that almost lost its entire fortune due to its failure to plan properly.
The largest frozen food manufacturer in the world is McCain Foods, a Canadian company. After founding the company in 1957, Wallace and Harrison McCain had conflicting ideas about succession planning.
According to Tharawat Magazine, Wallace thought his son, Michael, with his Ivy League business degree, was the rightful heir to the company. Harrison and his children disagreed and suggested an outsider should manage the business.
They ultimately hired an outsider, but it came at a price. Maple Leaf Foods, a rival company, was the next stop for Wallace.
According to a Harvard Business Review article, the amount of market value wiped out by poorly managed CEO and C-suite transitions in the S&P 1500 is close to $1 trillion a year. By improving succession planning, the large-cap U.S. equity market could add a full percentage point to its projected 4% to 5% annual gains. This would mean a 20% to 25% increase in company valuations and investor returns.
The data may not relate to small and mid-sized businesses, but they demonstrate the importance of succession planning.
Succession Planning for SMBs
While succession planning isn’t difficult, 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 that rushing their exit is a common mistake executives make. Instead, planning should start years before the exit date.
By extending the transition period, the outgoing executive can clean house and make changes that will enable their successor to succeed. A retiring executive can also work closely with his or her successor before leaving the company. Additionally, the exiting executive continues to work with their successor as an adviser and overseer.
For a successful succession plan, follow these four steps:
- Preparation
- Evaluation
- Transition
- Exit
You can find a detailed explanation of these steps in the Playbook. The Succession Readiness Survey provides businesses with an immediate assessment of where they stand in the succession process. This Playbook offers valuable guidance for businesses not yet ready to pass the baton.
You can download the Playbook to learn how succession planning works, as well as how technology, such as Acumatica’s cloud ERP software, can help.
Still have questions about Acumatica’s complete business management software? Schedule a demonstration with our experts today.