5 Steps to Planning for Internal Successors in a Small Business Environment

Journal of Financial Planning: August 2013


As the baby boomer generation nears retirement, sole proprietors and managing equity partners are beginning to focus on an exit strategy for their small businesses. In general, the available exit strategies are to (1) sell the business to an internal successor; (2) sell the business to an external party; or (3) merge with a complementary business and sell to an internal successor or external party at a later date.

Among family owned businesses, 52 percent plan to transfer ownership and management to family members, although 50 percent express concern about whether their successor has the “drive and aptitude to steward the business into the future,” according to Pricewaterhouse Coopers’ 2012 Family Business Survey. Specifically among financial advisers, two-thirds would like to pass the practice on to junior advisers, although 71 percent have not identified a successor.1

Much has been written about succession planning for large organizations, from successors to the CEO and the organization’s executive team, to the development of general internal talent pools. Can the same methods be employed in a small business environment? I believe the answer is “yes,” with some modifications. In fact, “[s]uccession management is more critical to the viability of a small company than to a large company because every position counts more.”2

In what follows, I will describe some of the more critical pathways to succession planning in small organizations with a focus on firms offering financial planning services.

Some Definitions

In his 2010 book Effective Succession Planning, William Rothwell, Ph.D., who is renowned for his academic and consulting work in succession planning, defines succession planning as a “deliberate and systematic effort by an organization to ensure leadership continuity in key positions, retain and develop intellectual and knowledge capital for the future, and encourage individual advancement.” Core to this definition is that leadership continuity requires an intentional and thoughtful process that has payoffs for the organization in terms of retaining key employees, along with their intellectual and business acumen.

Succession planning programs often differ in many details, but essentially, the major steps in developing a succession plan are:

  1. Identify high-potential candidates.
  2. Define the knowledge, skills, and abilities of a capable successor.
  3. Assess candidate strengths and weaknesses.
  4. Identify developmental opportunities.
  5. Monitor, support, and evaluate progress.

The definition of “small business” varies by author and industry. The U.S. Small Business Administration (SBA) uses a standard that looks to the number of employees or average annual receipts, resulting in various industry-related definitions of “small.” For firms falling under NAICS Code 523930, Investment Advice, the firm is considered small if its average annual receipts are $7 million or less, according to the SBA.

When the SBA looks to the number of employees, many businesses are considered small if they employ between 100 and 500 employees. According to demographic information reported by FPA, 46 percent of FPA members are in a practice of five or fewer employees—considerably less than 100. Instead of using size as the determinant of whether a firm can practice succession planning, a more important factor is whether the small firm can identify one or more high-potential candidates.

Step 1: Identifying High-Potential Candidates

Emphasizing that succession planning in large organizations involves developing high-potential candidates for executive jobs, the authors of the book Grow Your Own Leaders: How to Identify, Develop, and Retain Leadership Talent contend that developing internal candidates for specific executive positions constitutes replacement planning, i.e., “They are looking for people to do the same things they are doing in their current jobs.”3

I would argue that in a small business environment, the succession effort falls somewhere in between replacement planning and succession planning. Sole proprietors (often the founder and acting CEO/president) and managing equity partners (possibly holding the title of COO or CIO) decide whether there are candidates who could potentially advance to one of their positions. However, the executive team is attempting to develop successors, not replicas.

Because the goal of a succession program is to develop latent talent, it is not expected that the high-potential individuals would have all the knowledge, skills, and abilities (also known as KSAs) necessary to immediately assume these executive positions. The objective in stage one of the succession planning process is to identify candidates who meet a minimum set of criteria such that is it worth the firm’s time and effort to groom these individuals for more senior positions.

Although the minimum criteria may vary from firm to firm, examples for a financial advisory firm might include:

  • An education requirement and certain certifications
  • Performance requirements, such as manages a certain amount of client assets or excels at client interactions
  • Minimum time with the firm
  • Developed an industry network
  • Exhibits some leadership competencies, for example, takes initiative
  • Eager to learn and highly motivated
  • Could potentially raise financing for an acquisition

These criteria represent an initial hurdle and should be carefully developed and consistently applied. It is as important to include potential candidates who may not come first to mind (perhaps an introverted individual is a strategic thinker) and to exclude certain candidates (a very affable person who has a 9-to-5 attitude). The executive team should be able to state, for example, why some members of the firm (or, with some sensitivity, family members) were not identified as high-potential candidates.

When there are no individuals who meet the minimum criteria, the firm may want to change its criteria for hiring going forward. Even if the small firm can identify high-potential candidates, there may be insufficient time to develop these individuals before an executive departure. In these cases, the firm probably should focus on an external exit strategy, such as a merger or an external buyer.

In succession programs for larger organizations, there is a great deal of debate about whether high-potential candidates should or should not be told they have been selected for an accelerated development program. There are pros, such as letting the candidate know that they are valued, and cons, such as possible over-confidence and complacency. According to Rothwell’s Effective Succession Planning, most U.S. firms do not tell people they are in an accelerated development program.

However, in a small organization, it is difficult to imagine targeting an individual for an accelerated development program without their knowledge. If this is the case, the executive team should be prepared to engage in a forthright conversation with the high-potential candidate regarding considerations such as:

  • The increased demands that might be required, such as long days, challenging assignments, and whether the individual is sufficiently motivated
  • The possibility that the candidate may plateau, voluntarily remove himself or herself from consideration, or that another candidate could be chosen as the more capable successor

Step 2: KSAs of a Capable Successor

To gauge an individual’s strengths and developmental opportunities relative to an executive role, it is important to have a clear idea of the KSAs required of the intended position. The competencies required of a successful financial planner may be quite different than the competencies required of a successful C-suite executive. For example, the adviser-to-client relationship might require the ability to work independently, while any C-suite position would likely require the ability to build and motivate a team.

In defining the profile of the requisite executive KSAs, the book Grow Your Own Leaders suggests thinking about:

  • Job challenges or preparatory experiences, such as leading a team through personal influence rather than personal power
  • Organizational knowledge, such as a working knowledge of various departments, core business processes and systems, and the firm’s core products and services 
  • Competencies that drive success, such as self-awareness, the ability to persuade others, or leading and motivating a team
  • Personal attributes that facilitate success, such as the ability to deal with a certain degree of ambiguity, and tendencies that can impede success (often referred to as “derailers”)

In defining the profile of the capable successor, the executive team should avoid relying too heavily on their own histories, proficiencies, and experiences. Instead, they should envision and articulate what KSAs might be required of the firm’s executives in the next five to 10 years.

Step 3: Assess Candidate Strengths and Weaknesses

The purpose of systematically assessing high-potential candidates is to confirm their strengths and to ascertain areas for further development. It is usually recommended that several different assessments be conducted, resulting in a rich and more accurate picture of the candidate. Some of the more common workplace assessments are:

Simulations. The candidate is observed and various competencies are assessed during a simulated leadership exercise, such as asking the candidate to work through an in-box of emails.

Multi-rater 360-degree surveys. Various individuals are asked to rate the candidate’s competencies and derailers. The raters usually consist of the candidate’s manager, direct reports, peers, and other relevant groups, such as clients or external people working in the industry.

Behavioral interviews. KSAs are explored by discussing the candidate’s work history or how the candidate might act in various potential situations.

Personality inventories. Identify a candidate’s long-term dispositional tendencies, such as conscientiousness, or potential derailers such as arrogance.

Evaluations. The executive team evaluates the candidate’s strengths and weaknesses associated with job challenges and organizational knowledge.

Often an outside consultant helps select and administer a set of assessments, integrating the executive team’s observations, interpreting the more sensitive and personal assessment results, and delivering feedback to the candidate. This confidential process allows the candidate to learn of their assessment results in a “safe” environment, potentially increasing the candidate’s receptivity to the feedback. The consultant and candidate also may work together to establish near-term stretch assignments and other developmental goals.

Step 4: Identify Developmental Opportunities

Now that a picture of the capable successor has been established and a high-potential candidate has been evaluated using credible assessment tools, a gap analysis can be performed between the hoped-for competency set and the assessed competencies of the candidate. The candidate is now in a position to identify developmental priorities for each of the areas of job challenges, organizational knowledge, leadership competencies, and potential derailers.

For example, an abbreviated list of priorities might include:

Job challenges. Organize and lead a small team charged with producing a plan to reduce the average age of the firm’s client base. Present the plan to the executive team.

Organizational knowledge. Learn more about the firm’s marketing efforts and budget.

Competencies. Develop greater proficiency in developing others. Train a more junior associate to assume a new responsibility. Monitor their performance and provide feedback.

Derailers. The assessment results indicated that you do not often seek feedback from others. After the presentation of the plan to attract younger clients, actively ask for and consider one-to-one feedback from team members and executive management.

If the candidate does well with this job challenge, the firm and the candidate would likely benefit from the developmental objectives—the executive team will have gained a fresh perspective on its near-term strategy, and the candidate will have acquired additional executive-level KSAs.

Step 5: Monitor, Support, and Evaluate Progress

Although the candidate carries the main responsibility for progress, his or her manager and the firm’s executive team should actively support the developmental plan. At the conclusion of this job challenge, the executive team should prepare formal feedback for the candidate regarding what went right and what could have gone better. Some firms like to bring the outside consultant back at this point to gather and deliver feedback regarding some of the more personal goals for change, as well as to find out in what ways the initiative was or was not a success in the candidate’s eyes.

Based on the original assessment data and the gap analysis, another set of developmental priorities would be established and the process would start again. Thus, succession planning is an ongoing process of supporting the development of high-potential candidates.

Succession planning is a systematic process requiring a concerted effort by all involved—and it is all too easy to lose focus along the way. Growth and change require effort and some degree of discomfort. Inertia is certainly easier.

It is also all too easy to allow short-term events to interfere with succession planning—a new trading system, a new product, a new and large client, or an economic downturn each can be allowed to undermine a succession planning program. For these reasons, a resolute and unyielding commitment to the development of internal successors will need to come from the top for a succession planning program to result in highly competent internal successors.

Elisa George, Ph.D., is a Denver-based industrial and organizational psychologist and president of Informed Assessment Solutions Inc. She is the former director of assessment at the College for Financial Planning. Contact her at elisa@informedassessmentsolutions.com.


  1. Allen, Samantha. 2013. “Why Aren’t More Advisors Succession Planning?” Financial Planning (February 28). 
  2. Byham, William C., Aubrey B. Smith, and Matthew J. Paese. 2002. Grow Your Own Leaders: How to Identify, Develop, and Retain Leadership Talent. Upper Saddle River, New Jersey: Financial Times Prentice Hall, 57. 
  3. Ibid., 16.


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