What is Succession Planning actually?

One of the most common themes that we see emerging from our discussions with owners of small and medium sized businesses is one relating to the question of succession planning. In many cases, when the conversation is raised with us for the first time, it is too late - the business owner and the business itself, are often so far down the business life cycle that the viable options available for a bespoke and successful succession plan are limited.

Succession planning is essentially the process of identifying and developing potential successors for key positions and stakeholders in an organization, especially family-owned and closely held businesses. Succession planning also helps to prepare the business for a potential sale or exit, by enhancing its attractiveness and readiness for buyers, investors, or funders.

Succession planning is important for small to medium-sized businesses because it helps to ensure that continuity and sustainability of the business is maintained, but perhaps more significantly, that its value and reputation are enhanced as far as possible.

As the single biggest wealth generating asset of the business owner, it is absolutely critical that the business is set up (as best as possible) to realise a meaningful capital return for the business owner. Anything else represents a massive dilution of the value created by the business owner as the primary recipient of his or her energy, time and passion.

What do we look to achieve with Succession Planning?

  • There are numerous spaces where succession planning can potentially find expression, but we generally look to focus on the following key aspects –

    Creating a succession plan that identifies potential successors, defines their roles and responsibilities, and prepares them for the transition.
  • Choosing the right exit strategy that matches your goals, such as family transfer, management buyout, or selling to outside buyers.
  • Creating maximum value for your business – whether by structuring the business optimally for tax and other financial considerations, preparing supporting material, such as financial statements, business plan, customer list, and market analysis or by adopting strategies that limit legal, regulatory or other risk.
  • Planning ahead and starting the process early to avoid last-minute decisions, deal with unforeseen issues, and take advantage of legal and tax considerations.
  • Preserving your vision and legacy by communicating your plans to your stakeholders, ensuring continuity of operations, and transferring trust to the new owners.

In almost every case, the most pressing conversation is expressed to be the need to identify a potential buyer for the business. However, what many business owners fail to grasp is that the ability to secure (successfully or at all) a potential purchaser for the business is almost directly proportional to the level of effort that the business owner has made to develop a business that is capable of being

reliably and successfully sold and transitioned to the new purchaser. A successful and rewarding sale is a consequence of an explicit and deliberate succession strategy. Anything else is, in our view, luck.

Start with the end in mind

If the business owner is single-mindedly focused on building a strategy that that speaks to the key criteria and considerations that the potential buyer will look to when buying a business of this nature, the chances of a meaningful and successful liquidity event are, at the very least, salvaged, and at best, increased exponentially. In many cases, and given that there are only a small number of potential buyers for these businesses, the business will fail to sell simply because it is not optimally set up for these discussions.

Common mistakes made by business owners

Some of the common mistakes that business owners make when planning an exit include -

  • Not starting the process early enough or having a clear vision and strategy for the exit.
  • Not involving key stakeholders such as family members, employees, customers, suppliers, and advisors in the process.
  • Not developing and grooming suitable successors or providing them with adequate training and incentives.
  • Not communicating the succession plan effectively or managing the expectations and emotions of the parties involved.
  • Not evaluating and updating the succession plan regularly or adapting to changing circumstances and opportunities.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.