Succession planning

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Did you know businesses that have a succession plan experience higher growth and have a higher survival rate? If you want to protect the long-term future of your business, now is the time to start thinking about creating your own succession plan.

Mind Control

Succession planning not only helps protect your business financially but gives you a way to leave your business or reduce your responsibility further down the track. This is essential if you eventually want to sell, move on to another venture, or retire.

What is succession planning?

Succession planning is the process of ensuring your business is successful without you. This is essential if you’re considering selling or taking on a more passive role in the future.

Succession planning is important because businesses that are not reliant on one person or a departing owner’s knowledge, reputation and industry contracts are generally better equipped for sale and to deal with inevitable changes.

Succession planning can be complicated and emotionally difficult, but the benefits include:

  • Increased chance of business growth.
  • Increased resilience to challenges and higher survival rate.
  • Retaining relationships within families and between business partners.
  • Setting up for the retirement the owner envisaged.

When to start

Planning for succession or a future sale is an important part of being in business. Generally, the earlier you tackle your succession plan, the better. Some business advisers suggest considering your succession plan when you start your business, as part of a wider plan to ensure your business is always ready for transition. In reality, most business owners are too busy with the day-to-day running of the business to spend time planning for an event that they don’t expect to occur for many years.

Assuming you haven’t started the process, how much time should you allow before you want to leave the business? The answer depends on your individual circumstances and the state of your business, but here is an approximate guide.

  • 2 years: Well-prepared business owner with a strategic plan, business in good shape.
  • 3 to 4 years: Family business owner looking to pass on to professional management.
  • 3 to 5 years: Knowledge-based business owner (need to pass on knowledge to managers or successor).
  • 5 years plus: Family business owner looking to pass on to the next generation.

In the event of an emergency such as a health issue, the process can be accelerated, although this may lead to you achieving a lower value for your business on transition than if a full plan was in place, or having restricted exit options.

What’s involved?

  1. Goal setting. Allow up to three months to set out your goals, involving your spouse and children if applicable.
  2. Family. Allow one to two months to work out how to best cater for the interests of your family.
  3. Wealth accounting. Allow one to two months to identify assets and liabilities, and to consider allocation.
  4. The business. Allow two months if your business is in good general shape. Otherwise allow:
    • Three months to prepare a strategic plan.
    • Twelve to 18 months to restructure a failing business.
    • One to two years to recruit and train professional management (especially handing over relationships).
    • Two to three years to recruit and train professional management where the business depends on the knowledge and experience of the owner.
    • Three years or more to prepare family successors.
  5. Your legacy. Allow one month to consider the footprint you want to leave.
  6. Consulting professional advice. Allow one month to appoint a team that may include a lead adviser, lawyer, accountant, financial adviser, banker, insurance adviser and family counsellor.
  7. Your plan. Allow one month for your options to be documented and your plans to be finalised.
  8. Review. On an ongoing basis, review your plan to determine if any changes are required to meet your current circumstances (on an annual basis at a minimum).

The length of time for each process will vary depending on the complexity of your situation and the extent to which you are already prepared.

Common difficulties

Many small business owners simply wind down their business when they’re ready to shut up shop or sell. According to a Harvard and Wharton Business School study, only 47% of business owners had any kind of exit plan and few of those were formal ones. Most owners said they didn’t have a plan because:

  • It’s too early to think about it.
  • There’s never enough time.
  • I don’t know where to start.

Some of the reluctance to discuss a plan could also be attributed to:

  • Having to leave a business that an owner is connected to.
  • Worrying about losing your status.
  • In family-owned businesses, there might be more than one generation involved who have different aspirations and life expectations.

All these elements make it difficult to sit down and start building a succession plan.

Getting professional help

Having an objective board of professionals or independent directors in your governance structure can make the discussion and planning process easier. A board helps to:

  • Take the emotion out of the process.
  • Ask and address the right questions.
  • Involve the right people.
  • Communicate effectively to those who will be affected.
  • Be fair.
  • Put a realistic value on the business.
  • Commit adequate resources.
  • Set an achievable time frame for the plan.
  • Have credibility with buyers and other key stakeholders.
  • Make the vision a reality.
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