Why succession planning is important for all businesses

For businesses of all sizes, from early-stage startups to multinational organisations, there are a number of advantages of effective succession planning for leadership roles and other critical positions. Why is succession planning so important? Read on to find out.

The importance of succession planning for growing businesses

According to research by Deloitte, 86% of business leaders view succession planning as an urgent priority, yet just 14% believe they do it effectively. Similarly, McKinsey found that four in five global leaders believe they’re unprepared for their new roles. 

Lacking a strong succession plan can have a detrimental effect on business performance—more than half of executives reportedly fail within 18 months of being placed in new leadership positions due to lack of preparation. Developing potential successors over time, through structured training and mentoring opportunities, should lead to better outcomes. But the benefits of succession planning aren’t limited to executive performance. 

At the organisational level, the benefits of formal succession planning include:

• Risk management

Succession planning can help your business mitigate risks associated with the departure of key leaders. In case of sudden, unforeseen events such as illness or dismissal, an effective succession plan can help minimise business disruption, customer dissatisfaction and potential financial losses.

• Strengthen talent benches

Long-term workforce planning can be a great support to your human resources (HR) team. It can help avoid talent shortages and fill vacancies for business-critical roles faster, by preparing potential candidates in advance. This minimises any impact on product delivery or customer service, without rushing the hiring process, so that you can appoint the best people for the job.

• Build stakeholder trust

Business continuity planning can help make your business more agile during uncertain times. Increasing stability will build trust between business owners and shareholders, senior management, your board of directors, and current employees.  

• Prepare to exit

Effective succession planning signals to potential buyers that your business is well-prepared for the future, with a strong pipeline of leadership. This can increase your company’s valuation, and also reduce some of the stress and uncertainty associated with an exit event, by ensuring a smooth handover. 

• Achieve EDI goals

Succession planning also provides an opportunity to incorporate your equality, diversity and inclusion (EDI) strategy into your hiring processes. It may help you improve diversity among c-suite and senior leaders, and in other key positions across the business.

• Create costs efficiencies 

Succession planning gives you the opportunity to streamline your talent development process, and reduce recruitment, onboarding and training costs, by sourcing internal candidates for key roles.

Meanwhile, for employees, an effective succession plan can:

• Increase engagement

Having clearly defined career development plans, goals and incentives for high-potential employees helps motivate them in their day-to-day tasks. Investing in their progression also helps them to feel valued by the company, increasing overall job satisfaction. 

• Foster strong working relationships 

Including your team in strategic planning and being transparent throughout the succession planning process can increase trust within your team. Certain stages of the process, such as training and mentorship, will also help build stronger relationships between senior executives and key employees.

• Build confidence

By giving team members sufficient time to prepare, learn from mistakes, and take part in leadership development programmes, they will feel more confident and perform better in their future roles. They’re also more likely to bring fresh perspectives and ideas, fostering a culture of innovation and growth.

Each of these benefits to employees will also have a knock-on effect for the business. This may increase productivity, reduce staff turnover, and improve wider company culture and morale.

Benefits of succession planning for startups

The cost savings associated with effective succession planning will be an attractive proposition for small businesses. On top of this, SMEs will also benefit from:

• Recruiting and retaining top talent

Most startups won’t be able to compete with the salaries and employee benefits offered by larger organisations. But fast progression and strong career development plans can help SMEs attract ambitious and high-performing applicants. It will also help nurture their talent pools and improve retention, which is particularly important for those with relatively young teams (that typically have higher churn rates).

• Improving internal processes

Succession planning provides a good opportunity for startups to formalise their hiring and onboarding processes, and to improve any existing talent management strategies. Developing a succession planning strategy will also provide the chance to review your business objectives and determine the roles you see as being critical to future operations.

• Skills development

By focusing professional development programmes on multidisciplinary training and your long-term business objectives, future leaders can broaden their skill sets and competencies. This again reduces business risk, by making your startup more agile.

Benefits of succession planning for family-run businesses

In 2018, it was reported that more than half of family-run businesses in the UK had no kind of succession plan in place. Whilst many founders of family businesses have informal plans to pass their companies onto their children, it’s important to establish a clear process for doing so. A lack of preparedness when leadership changes arise won’t just affect family members, but also your employees, customers, and other key stakeholders.

Why is succession planning important for family-run businesses in particular? Having a formal succession plan enables current leaders to retire or take a step back one day, without the uncertainty of what will happen to the business. It’s also a good opportunity to resolve any conflict around who will take over, and gives the next generation time to learn and determine whether it’s the right career path for them. Meanwhile, a tax-efficient succession plan that takes inheritance tax and capital gains tax into consideration can help to protect family wealth.

The information contained in this article is for general information and use. It does not constitute any form of advice and is not intended to be relied upon in making any investment decision. Independent advice should always be sought as to whether a particular transaction is suitable having regard to your personal and financial circumstances.