CEO turnover rates are at their highest levels since 2005, and within the next ten years, 60 percent of small business owners plan to retire.

The need for effective succession planning is glaringly obvious. Unfortunately, it doesn’t always – or even often – keep up with the rate of change in key positions. How does succession planning differ in large companies versus small and medium enterprises (SMEs), and how can you start to prepare tomorrow’s leaders today?

Large vs. Small: A Big Difference in Planning

Typically, professionally managed enterprises do an efficient job of succession planning. According to Gary L. Neilson, senior partner with Booz & Company, “Planned turnovers are at the highest rate ever, and insider CEOs make up the majority of new CEOs, indicating companies are taking a more thoughtful approach to ensure the right leaders are in place.”

Larger organizations understand the business is still going to be owned and operated as it has but with someone else at the reins. They are more likely than their smaller counterparts to identify high-potential individuals and have talent management and development programs in place – not only for the “top job” but also for every critical role throughout the organization.

Often, there is a gap between this approach and that taken by small and medium enterprises – which too often tends to be “do nothing and hope it will work out.” Note: One of my favorite phrases… HOPE IS NOT A STRATEGY! SME owners and leaders are usually too busy devoting their time and energy into the running of the business. That works as long as there is no crisis. If there is a death, a sudden departure, or other significant leadership change, then those businesses have to scramble to close the gap and maintain stability.

Recall Patrick Ungashick’s Exit Options

Another key difference: typically, the successor to a small business owner is another owner. The succession IS the exit. Recall Patrick Ungashick‘s “Innies, outties, passers and squeezers.” What if the owner selects the “passer” option, passing control to a family member? The successor might be the owner’s son or daughter.

They will successfully “pass” the business, and there will be a transfer of wealth, control and value of the organization. “Innies” (those who opt to pass control to someone inside the company, but not family) can be a successor; “Outies,”(those who sell to an external party) may or may not. Whether these successors are prepared to handle the leadership role can be a whole different story.

What happens frequently is when small and medium businesses are sold, a management contract is put in place for the owner. Why? Because there is not a comfortable successor in place!! The management contract is a way of saying to the owner, “If we could tell you to hit the road, we would. We don’t trust you have a successor in place, and we need you until we figure it out.”

Grooming A Successor

From a development perspective, small businesses rarely groom successors. It becomes a priority when businesses are larger and professionally managed. The stakes, though, are just as high for small businesses. Less than one-third of family and closely-held businesses survive past the first generation; 12% make it to the third generation, and just 3% to the fourth generation and beyond.

Mario Marconi of USB Wealth Management says, “Planning succession is not a one-off exercise, but an ongoing process…[Y]ou should start early and start pragmatically and learn as you go on.” Depending on the size of the organization, grooming a successor could involve:

  • Identifying and evaluating high-potential individuals.
  • Mentoring on a one-on-one basis.
  • Providing leadership education and training.
  • Membership in a peer advisory group, such as Vistage

One important activity is the creation of a personal development plan. What skills and capabilities does this person need to have for the role? What does the current leader do well, and what gaps might the successor need to be able to fill? What does he or she have to know about the industry? The plan should address, at minimum, these components and prepare the candidate for the position.

Organizations, regardless of size, need to think about succession and the ongoing stability of their companies. Change is inevitable; a good plan ensures you are ready for it.