At a glance
- Choosing an internal successor can have many benefits, including shoring up staff motivation and strengthening business continuity – which can be vital in uncertain economic times.
- It’s in your business’s interest to train employees to be leaders, as this offers a return on investment in staff training and retains experience in the organisation.
- Take a long-term view: mentor your successor by building the competencies they need into their personal development plan. Look at soft skills like emotional intelligence as well technical skills.
When the time comes to step back from running your firm, appointing an internal successor can allow you the opportunity to plan the transition and make sure it’s as smooth as possible – for you, the new leadership and the wider business.
Your employees will already be well versed in your firm’s culture and operations, and selecting one of them as a successor gives you time to identify and develop candidates.
An internal appointment offers you another advantage: you’ll be able to hand over operational leadership while retaining a stake in the business.
You can therefore keep generating an income from the company, while maintaining stability and some control over strategy. This can also help your exit from the business, in emotional terms, to be smooth and gradual rather than fretful and abrupt.
If you think internal succession could work for you, the earlier you recognise and develop future leaders the better.
Early planning encourages loyalty and motivation from your team. Developing internal staff preserves your culture as successors have already shown they understand and are on board with it.
It also helps improve your return on investment in staff training. Keeping all those years of experience in house is in everybody’s interest.
Retaining a stake in your business
Maintaining some influence in strategic decisions could be critical to a trouble-free transition, given your deep industry knowledge, market insights and understanding of the company’s strengths.
Handing over operational leadership can also free you to work more on the business instead of in it, building a big-picture strategic view.
So a partial handover can be good for the whole organisation as well as your continued development. Plus, it adds stability if trading conditions get tricky, with your experience on hand to guide and support the firm rather than the new leadership feeling abandoned.
How to develop leader talent
Coaching an internal candidate into a leader requires a long-term, strategic approach, so start by recruiting ambitiously.
“Too many small and medium-sized enterprises think they’re so small that great people won’t work for them,” says Andrew Shepperd, co-founder of consultancy Entrepreneurs Hub. “But many talented professionals actively want to work in a business that size.”
Offer internships via local universities and schools to create a rich talent pipeline – you never know which of them could be a future leader. Use whatever tools you can to spot the stars early. Psychometric tests can help here.
Identify qualities that would make a good successor – such as good communication, initiative and problem solving – before candidates even walk through the door. Then provide training and mentorship to bolster their skills.
Meanwhile, identify existing employees with potential leadership skills – and provide them with everything they need to develop such as training, mentoring, experience and incentives.
Consider using a leadership competency framework to identify these future leaders. Andrew recommends the nine-box grid matrix, an analysis tool for assessing employee performance and potential. Focus on developing and promoting those with high scores for both.
Ensure you have solid appraisal and development processes, so your talented employees know their ambitions and motivations are recognised and supported.
Set a training-and-development budget specifically for potential leaders; encourage them to take on roles and projects that stretch their abilities.
Mentor your successor
Gradually start delegating your role to your successor before the transition. Involving them in decisions will create a confident rather than reliant leader. If you’re planning to transition in three to five years, think now about how to bring them to that point.
“Leaders need a broad range of competencies,” says Andrew. “Write all the specific ones your successors need into their development plan, including milestones. For example, set a timeline for them to understand the company’s finances, HR, technology and operations, and for them be experienced enough to run board meetings and important external meetings – including ones with major customers and suppliers.”
“They may need to focus on one area such as operational experience. For example, if it’s an engineering business, they may need some core engineering discipline so they understand what’s happening on the shop floor. But they also need broader skills such as emotional intelligence, a lack of which is one of the main reasons leaders fail.”
SME owners sometimes overlook the communication aspects of transition, so make your succession plans and processes transparent and communicate them well. Let the internal candidate know you would like to support them towards succession. Get their buy-in, or you could be wasting time and effort.
One challenge with internal succession can be ensuring your successor has the finances to buy you out if that’s what you need to exit.
So plan such a deal well in advance. For example, if you want your successor to buy shares from you, agree how this will happen and make sure the proposed financial aspects work for all concerned. Avoid overburdening future owners, as this could affect the business.
Consulting your legal financial advisers to ensure all aspects of the succession plan align with your personal goals.
Document all processes to help ensure knowledge and procedures transfer easily to your successor; and review and adapt your plan often, as succession planning is dynamic.
How we can help
Many SME owners spend a long time planning to exit their business, but it can often be a longer and more complicated process than expected. Speak to us and we can help make sure all your plans fit together and match your personal life objectives, including tax and investment planning.
Planning your exit? To make sure you’re on the right path to meet your goals, get in touch today.
Exit planning may include the referral to a service that is separate and distinct to those offered by St. James’s Place.
Where the opinions of third parties are offered, these may not necessarily reflect those of St. James’s Place.
SJP Approved 31/10/2023