Succession will affect every business at some point. It is completely inevitable, and yet so many businesses don’t have adequate plans in place. As our baby boomers reach retirement age and the mass exodus of skilled young workers continues, succession will remain an important issue.
Whether you’re planning an exit or not, succession planning gives you the best chance of being financially independent at your desired retirement age, to carefully pass your clients on to a successor, to prepare for catastrophes and to realise maximum value in all scenarios. If managed properly this is your opportunity to create wealth in your business.
The benefits of succession planning:
- Choose when you wish to retire
- Minimise disruption for your clients
- Maintain continuity of employment for staff
- Maintain suppliers’ credit terms
- Retain the confidence of banks and financiers
- Manage lease and loan liabilities properly
- Reduce the pain of a forced retirement
- Avoid conflict with your partners
- Maximise the value of your business
- Ensure adequate funds for yourself and your family
- Increase the number and quality of potential successors
A succession plan generally consists of two important parts: legal agreements and a business continuity plan.
The business continuity plan should tackle management and ownership plans to ensure your business remains a success and continues to service your clients’ needs. Legal agreements such as a shareholder agreement and buy and sell agreements manage the business dealings and transition of business interests come succession time.
Insurance can be an important factor.
In the event of sudden death or disablement the remaining owners may buy the estate out. Insurance can help fund the purchase upon a forced exit, avoiding the need for the remaining partners to use their own capital.
You need to consider the type of insurance and level of cover you require, also who holds the responsibility for paying the premiums, how to deal with shortfalls and surpluses, policy ownership issues and how you’ll treat the termination of the policy.
Managing succession:
Succession is a management issue that should be addressed 5 – 10 years in advance of implementation. Plan for a number of possible scenarios, to enable the departure of an owner or partner, whether through forced and unexpected events or by retirement. Succession planning is important at the beginning of a business as life is unpredictable!
Often the emotional aspects form the initial barriers to a succession plan, including personal relationships, family concerns, issues of relinquishing control, and beliefs that the owner will keep working beyond retirement. Succession planning can be seen as a threat to security and status.
It can be difficult for partners to suggest to a colleague that it’s time to start thinking about retiring, but transparent and open discussions always result in fairer solutions. If a plan is established well in advance then emotional issues can be reduced.
Key employees need to understand their position throughout the process, so they’re less likely to exit when most needed.
Succession planning: factors to consider
- What, when and how is the plan going to be implemented?
- What is the selection process for finding a successor?
- What development training does the successor require?
- Who will mentor and coach the successor going forward?
The process for succession planning needs to manage both the emotional issues and technical issues to ensure the happiness of all involved and the enduring success of the business.
Succession in family businesses:
Did you know that only 30% of family businesses survive the transition to the second generation? And only 12% survive transition to the third?
It seems failure to recruit and develop the right successors is a big challenge. Other contentious issues and common mistakes are: technical mistakes, planning in a vacuum, leaving the business to the surviving spouse and the challenge of treating children equally.
Business owners need to be critical but constructive: would the chosen successor be a contender if they weren’t a family member?
Whether you’re running a family business or not, now is the time to act. Be proactive, not reactive. Succession planning is a management necessity and vital to minimise risk management issues. It’s something that everyone should plan for and that every team member should be aware of.
We’re happy to discuss your succession plan with you, and if necessary we can point you in the direction of a succession specialist.