Succession Planning For SMEs

7th November, 2014

By Anirudhha Kelkar, Director Atharva Accfin Services Pvt Ltd

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Succession planning performs two key roles in an organisation.

Firstly, it is used as a systematic approach to managing the progression of human capital through the business. Ideally, in a small business, you should be training an employee under the guidance of the person whose position they will eventually fill. This will mean that the skills and experience of your current employee will not be lost as they move up or away from the business and knowledge is managed in a sustainable way.

Secondly, businesses need to have a succession plan to enable a change in ownership or control from one party/person to another.

A succession plan is used when certain voluntary or involuntary events occur within the business.

Voluntary events that require the use of a succession plan include retirement of a business owner or a controlling party selling their interest in the business.

Involuntary events that make use of succession plans are totally out of your control, such as the death or serious injury of a business owner or operator. Often, these types of events occur unexpectedly, so a carefully thought out succession plan will prove to be invaluable to the people in charge of carrying on the business.

SME sector in India has grown significantly since 1985. There are certain socio-economic responsibilities undertaken by the SME entrepreneurs as a significant number of the working population is directly or indirectly employed by them. Therefore, it is always emphasized that it is the back-bone of the Indian economy.

A proper succession plan will help in the smooth transfer of the technical and business know-how developed by the SME entrepreneurs to their successors. An absence of such a plan would actually be a loss to the Indian industry as it would result in the loss of their experience and knowledge.

Progressive entrepreneurs who take up succession planning face several challenges in this endeavour, many of which are unique to SMEs in India. The most common ones are highlighted below:-

GENERATION GAP

Young and upcoming entrepreneurs may have business interests distinct from the existing business of the first-generation entrepreneur. The first generation entrepreneur should explore the business interests of his successors and then encourage them in all respects to develop another business vertical. Alternatively, inducting natural heirs into the business early could provide entrepreneurs with necessary lead time to plan succession, either from within the family or through outside professional managers. This is nothing but a succession plan.

PROFESSIONAL TALENT

SME entrepreneurs are almost always involved hands-on in the day-to-day running of their business, resulting in concentration of decision-making powers. Attracting professional talent at senior management positions becomes a challenge in such a stifling environment, leaving little choice outside the family in the matter of succession planning. Concepts such as clear separation of ownership and management, delegation of decision-making powers, etc., that are still alien to many SME entrepreneurs, are important to attract professional talent, which can be helpful in business continuity, in the absence or unwillingness of the natural heir.

BUSINESS EXIT

Merging & Acquisitions of a running successful business, either as a remunerative exit strategy or in the absence of a clear successor, is an acceptable evolution of a business in many developed markets. However, it is not even considered an acceptable solution among several older generation entrepreneurs in India. However, in the present Indian economic scenario, acquisitions of successful business enterprises are considered a better option by many young upcoming entrepreneurs who are eager to start their own business. This will also ensure a very smooth and fruitful exit for the older generation entrepreneurs.

INSIDER OR OUTSIDER?

A well-orchestrated succession plan should exhibit a lot of thought, planning, and, like all good ideas, execution. There are definitive principles enunciated for the process. Foremost is establishing the basis for identifying the attributes of the successor. The manner and medium of communication of the successor should be well-strategized. A company could potentially risk losing key employees if the same is not articulated properly.

Even large organisations run this risk but they have a reasonable pool of second-rung leaders who could be elevated!

A discussion on succession is definitely bound to evoke passionate debate on whether the successor needs to be an insider or a lateral selection from outside.

An insider would definitely be the choice if the organisation is already on the growth path and just requires good management. On the other hand, if the organisation requires a transformation or a dramatic shift in strategy, an outsider would be a more appropriate choice.

MENTORING THE SUCCESSOR

An effective succession plan would necessarily have to address the need for grooming the identified successor.

Mentoring can be one of the most effective means to bridge the current and future. It does not always require outside facilitators or trainers as it builds on internal strengths.

It gives a new sense of purpose to the older generation, as it lets them know that they are valued. As far as the successor goes, it gives him a great opportunity to use an old horse as a sounding board and take decisions under controlled conditions.

PERIODICAL REVIEWS

Succession planning is a dynamic process. The plan should be reviewed periodically to reflect the current business requirements and the team.

It should also address issues such as identification of other potential internal candidates and, above all, an interim transition plan, particularly where there is no clear internal successor, and a separate emergency crisis management plan. The responsibilities of the team should be defined with appropriate accountability.

Family-run organisations sometime need it more as the seniors find it hard to cut the proverbial umbilical cord. There have been cases of capable successors unable to step into their new shoes for want of clarity — and the damage done before decisions are taken.

Succession planning is a long-term exercise — be it inducting the next generation early, identifying strong professional talent to run or scouting for exit opportunities — that deserves the serious attention of any entrepreneur who has aspirations of leaving a legacy of the business that he has built with passion.

Considering the importance of succession planning to the SME sector, organizations like TSSIA should take up a mentor’s role for the industry.