When owners sell a business, they often wrestle with the task of grooming a successor. If you are a business owner, you probably have expectations of what your lifestyle is going to be like after you leave your business.
However, if you intend to fund your lifestyle from the sale of your business and don’t have a well-considered succession plan in place now, you may be disappointed with the opportunities and financial options available to you when the time for retirement comes.
The earlier you develop your business succession strategy the better – it is never too early, but it can definitely be too late.
Planning for this eventuality helps give you some control over how the future unfolds for both you and the business.
The benefits of a well-considered succession plan
Developing a good succession plan should be a key part of your business' growth strategy and the risk management process. A well-structured succession plan, created well in advance, is always more likely to succeed and is likely to have more long-term value than one that is simply allowed to grow without a plan.
Having a succession plan in place:
- enables you to establish and progressively build up equity in your business
- helps you to attract and retain the best staff who are committed to the business, which in turn should result in increased productivity and loyalty
- ensures a smooth transition with less likelihood of disruption to operations
- clarifies authority and decision making
- maintains accountability and ensures the health and stability of the business
- maximises the value of your business and enables it to meet future needs
- sets you on your way to building a non-principal dependent practice, thus increasing the capital value and the attractiveness of your business to potential buyers
- enables you to handle short-term emergencies when a key member of staff leaves or is ill.
These benefits are so important to any business owner who has conceivably put tens of thousands of hours of dedicated effort into developing and growing the business.
Effective succession planning enables you to enjoy the fruits of your labour.
Business succession explained
Explained simply, succession is best described as the transfer of both management and control within a business. It does not necessarily mean a complete exit from ownership, but it does mean an exit from management.
Succession can be described more definitively as having three dimensions:
- ownership succession
- management succession
- internal succession.
focuses on who will own the business, and when and how that will happen. The ownership succession plan enables the business to be 'groomed' attractively to ensure it is seen in the best possible light and gets the best price if you plan on selling.
focuses on who will run the business, what changes will occur, when they will be accountable for results and how results will be realised.
is a disciplined means of nurturing, developing and retaining talent as a platform for an owner’s eventual transition from management and, in many instances, from ownership. A well-executed internal succession planning process creates an environment that ensures the best people have been chosen wisely and groomed appropriately to lead the business into the future.
How well prepared are you?
Skilled people are short on the ground and it is already extremely difficult for employers to attract and retain good staff. This situation will become more difficult as the predicted exit of the baby boomers over the next 15 years, accompanied by the loss of many years of skills, knowledge and experience, means owners will be vying for talent to succeed the boomers.
Not having a well-considered succession plan in place exposes even the most successful business to a crisis.
Try this simple test
Test yourself simply by asking yourself these questions and if you can respond yes to all of them you are well prepared:
- Do you have a strategy in place should you, or a key staff member, be unable to return to work for a long period, or never?
- Is this strategy documented and has it been communicated effectively to the business?
- Do you have a process in place that ensures qualified and appropriately trained people are able to take over competently when the current generation of managers and key people retire or move on?
- Has this strategy been documented and communicated to the key people involved?
- Do you have a 'vision' for your business? Does it link easily to the 'values' of the business and the behaviours of the people within the business?
- Has your 'vision' been well articulated and communicated with the people in the business?
- Are you able to demonstrate your business plans for a clearly-defined viable future?
- Have these plans been clearly articulated, documented and communicated to the key people within your organisation?
Preparing for succession
The value of a business is directly impacted by risk, both existing operational risk and potential risk associated with disruption to the business through a change in ownership and/or management. A well-crafted succession strategy identifies and mitigates these risks.
It is in your interests to do this regardless of whether you decide to sell the business outright, or retain equity and continue to receive a share of the profits after withdrawing from management.
There are eight main steps involved in succession planning:
- Determine the strategy
- Benchmark the business
- Risk analysis
- Option analysis
- Ownership and structure
- Personal planning
- Mentoring and support
Putting succession planning into practice
In order to put these steps into practice, include the following in your preparation:
- Have a clear vision for the business. Unless you have a vision, you can’t know what kind of leaders to identify and develop.
- Strengthen the business model and focus on sustainable profit.
- Make yourself redundant. Delegate and allow others to make decisions.
- Have your business valued and draw a line in the sand. A 'proper' valuation can provide you with a solid insight into how much, or little, needs to be done to bring the business to the 'aspirational' price you have set for it.
- Understand your industry dynamics and ensure the business is sustainable against these volatilities. Take into account workplace and industry trends and predictions.
- Consider who needs to be involved in the development of your succession plan.
- Identify the skills currently held by people in key positions.
- Identify successors (people who are ready, willing and able to take over in full or part) in place.
- Enlist professional help where needed.
- Link your business strategy (both current and future plans) to talent requirements.
- Involve your top executives or managers and gain their commitment to growing talent for the business.
- Identify the talent in your business and invest in those people.
- Plan for continuity in the transition period and for when you exit the business.
- Have a contingency plan (in case the unforeseen happens and your intended successor declines the role).
Determining a successor
Understanding some important considerations
Owners often wrestle with the task of grooming a successor.
- Your son, daughter or family member may not be the best person to lead the company strongly into the future. Evaluate their suitability objectively.
- Don’t assume that your son, daughter or family member would want to head up the business, even if they work in the business. Ask them!
- Good internal succession outcomes start with your recruiting strategies.
- It is important that you allow your internal successor an adequate training period and that this is built into your planning schedule.
- If you decide to recruit from the outside, you need to spend time integrating that newperson into the culture and agendas of the business. This approach is essential to the newcomer's ability to gain respect, trust and confidence among the rest of the staff.
- Your successor should not be your clone. Different skills and experiences may assist the business to grow in other dimensions.
- Your successor must demonstrate a commitment to the same values on which you built your company and the behaviours to support those values.
- Mentor your successor.
- Establishing a sense of continuity during succession is important, and maintaining key relationships is paramount. Can the potential successor work effectively and collaboratively with your management team, your other stakeholders, your bank, your accounting firm, your legal team, your customers and with you?
- Are you clear about what authority you might give your successor and what authority, if any, you want to retain yourself?
Choosing the right successor
To choose the right person confidently, you need to have well-considered recruitment strategies in place. This step is critical because a poor succession choice can undo in months what you have painstakingly built over many years.
These strategies should form part of a plan to have the right leaders in the wings, groomed and prepared to take control and lead the business strongly into the future. This is also a sound risk management strategy for a situation when there is an unexpected emergency.
Keeping it in the family
It may be your dream to keep your business in the family. However, is that commercially sensible? Balancing your emotions with hard reality is important. Is family succession the right option for your business?
Family members must appreciate that any role in the family business is an opportunity – not a birthright. If you are considering internal family succession to maintain family ownership and management you should consider the following carefully:
- Would family values conflict with commercial decisions?
- Does your intended successor possess the right skills, attributes and commitment to the business?
- Does the family member appreciate the business – where it’s been, how it’s got where it is, and where it’s going?
- Does that person have the trust of the first generation and of other members of the second generation?
- Is there someone else in the business, or externally, better placed to take your business forward?
- Will nominating your successor set up conflict in your business?
- Will family succession provide sufficiently for your future?
- If management by a family member is not possible, the option is to maintain control through the board of directors but transition to non-family management. This option requires that the business be mature enough to hire and reward a non-family manager/s and develop a new governance relationship between owners and management that facilitates the continued success of the business.
Family business succession planning – some common issues
- The required successor attributes need to be identified and appropriate processes for selecting and nurturing a suitable successor determined.
- The timing and manner of any handover needs to be matched to the existing circumstances.
- The roles and needs of all the important participants should be acknowledged.
- Future business planning and a family business vision shared by all should be established.
- Ownership and inheritance issues must be addressed.
- Maintaining good relationships and open communication processes is vital.
- The future of the incumbent must be clearly determined and managed.
Grooming your heir apparent
An important aspect of succession planning is to have the right executives in the wings, groomed to take control and lead the business soundly into the future.
You need to create and implement a career management strategy based on both your current and future business requirements.
Your planning needs to consider job roles and competencies as well as to define leadership behaviours. In an ideal world, each key role would have one or two people in the business ready to take over that position at short notice. Having a pool of talent available means that you can be flexible and quick to react to
Tips for grooming your chosen one(s)
- After you have chosen a successor, the future of the incumbent must be clearly determined, communicated, documented and managed
- Ensure they understand clearly and support the vision you have for the business
- Get commitment from them
- Empower them
- Give them wide experience of all aspects of the business
- Give them opportunities to make some big decisions and ensure they learn from the consequences of these decisions
- Give them adequate training, coaching and mentoring where appropriate
- If an outside recruit, integrate them into the workplace culture
- Actively foster and encourage support for them
- Include them in day–to-day decision-making
- Nurture and mentor your 'chosen' staff.
This article originally appeared on the Ask Us How website. NSW Business Chamber Members can access this site, which features hundreds of practical articles and other resources to help you manage and grow your business.