When business owners begin planning an exit from their companies, they face the same essential dilemma for most other hiring decisions, but on a much larger scale: Should they build or buy? In other words, should they build on what they already have and choose an internal candidate? Or should they “buy” by going outside the company in search of an external hire?
If you’re facing this decision now—or you know it’s not far down the road—then you already understand. And while your natural instinct might be to look to your immediate reports for a successor, it may not be the best approach. To help you handle your business succession planning, we’ll outline the pros and cons of both internal and external successors, so you can decide which is best for your company.
The Case For and Against Internal Candidates
PRO: You capitalize on your investment. You’ve invested time and resources in your internal candidate(s) already. They’re as much of a known quantity as you’ll get. This means less ramp-up time before they’re off and running.
PRO: You save money. It’s generally cheaper to hire internally than conduct an executive search.
PRO: They already “fit in.” Finding an external candidate who “gets” your company culture and instinctively fits in is a challenge. But a successful internal candidate will have already mastered this and developed trusting relationships with your other employees that should make their succession transition easier.
PRO: Pressure-testing is easier. External candidates may come with an extensive résumé and glowing recommendations about how they work with others, meet goals and tackle problems. But with internal candidates, you actually get to see them in action. By broadening their responsibilities and challenging them with new, relevant leadership projects, you can learn a lot about how they would respond in your seat.
CON: There is potential for internal conflict. When multiple employees are vying for your job, things can quickly get out of control. If you’re considering more than one internal candidate, take care not to create an unhealthy competition among them. Be open about the process with your potential successors, set clear expectations for your plan, and give everyone an equal chance to shine.
CON: They’re good but might not be a good fit. Many business owners have one stellar employee, but that doesn’t mean they’re the right person to fill your shoes. Try to objectively consider their qualifications—and enlist outside help and insights as needed. Do their skills, knowledge and temperament make them the best match? How do they handle change? How well do they mesh with your team? Ultimately, it’s not about making the job fit the right person; it’s about finding the right person for the job.
CON: Even the right person might not be ready yet. Keep in mind that business succession planning isn’t a process you should rush. Many recommend starting around three to five years before you plan to exit your role. So if you don’t have time to groom an internal candidate, an external search may be in order.
Why Going External Can Be a Good Thing (or Not)
PRO: New ideas and skillsets. Is there a knowledge or skills gap in your company? Or are there skills or leadership abilities that you personally would like to improve upon with your successor? It’s often easier to find a fresh perspective when you look outside your own four walls.
PRO: Real change is needed. If your company needs a strategy makeover or you already foresee big changes coming down the road in your industry, an external candidate without any internal “baggage” may make sense.
CON: Your industry is highly specialized. If finding the right fit requires searching for a candidate with specialized skills that are challenging to find, the logical choice is to look at the talent you’ve already begun to cultivate.
CON: More training is needed. When you’re close to making your exit, will you have (or want to spend) the time necessary to ensure an external candidate has the skills and resources needed to succeed? This may not be a con for you necessarily, but it will likely take a bigger investment on your part to get them up to speed.
Need help with your succession planning process? At Sweet Financial, we’re here to help you and your business succeed and grow. Contact us, and we’ll be happy to assist you.
Sweet Financial Services is an independent firm. Securities offered through Raymond James Financial Services, Inc. Member FINRA/SIPC. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Sweet Financial Services and not necessarily those of Raymond James. Raymond James Financial Services, Inc. and its advisors do not provide advice on tax or legal issues. These matters should be discussed with the appropriate professional.Links are being provided for information purposes only. Raymond James is not affiliated with and does not endorse, authorize or sponsor any of the listed websites or their respective sponsors. Raymond James is not responsible for the content of any website or the collection or use of information regarding any website’s users and/or members.