Planning Your Departure From The Business

Facing up to the issue of succession planning can generate real anxiety - even fear - in the hearts of many business owners, but failure to properly plan the changeover can undo much of the good work in building the business.

Understanding succession planning

Succession refers to the transfer of the management and/or the control of a business. It can be more definitively explained as ownership succession and management succession. Ownership succession focuses on who will own the business, when and how that will happen; and management succession focuses on who will run the business, what changes will occur, when will they be accountable for results and how will results be realised. Succession planning can be unsuccessful if these two processes are not coordinated, or at least both are addressed together.

A well planned succession strategy, developed sooner rather than later, is the blueprint for ensuring the continuity and future success of a business. It's not only a prudent management measure to protect the lifetime of a business well beyond its current operation and ownership structure; it is about taking control of the inevitable. Exiting the business is not a question of ‘if' but ‘when', and planning for the eventuality helps provide you with some say in how the future unfolds.

Well-executed internal succession planning creates an environment which ensures that the best people have been chosen wisely and groomed appropriately, to lead the business into the future. 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.

Why so important?

Your inevitable exit from the management and/or ownership of your business will occur either by choice or through unexpected events. You may decide to divest the business concurrently with a management succession or much later, depending on the succession plan you have developed. No matter which exit strategy you have chosen, the process should be seamless, effortless and orderly.

Done properly, succession planning will see you exiting the business easily and (most often) profitably. An internal succession plan outlines how the critical roles in your business will be filled in the future; or what to do if there is an unexpected skills and experience loss. To make the best of your internal succession plan, you must also look at your business' future goals and the skills that may be needed to secure its longevity.

Effective internal succession planning is continuous. Effective ownership succession plans will usually have a minimum timeframe of two years - and will often continue for five years or more. Not having a well-considered succession plan in place exposes even the most successful business to a crisis. If you don't have a succession planning strategy consider:

What would happen to your business if you, or a key member of your staff, was not able to return to work for a long period, or worse still, never?
How can you assure a continuing sequence of qualified people to move up and take over when the current generation of managers and key people retire or move on?
How can you plan for the future of the company without some assurance that the key posts will be filled with people able to carry on and excel?
How do you protect the value of the business if you can't demonstrate a clearly defined viable future?

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.

To prepare you should:

Have a clear vision for the business - without this you won'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 professional valuation will provide you with a solid insight into how much, or little, needs to be done to bring the business to the price you have set for it
Understand your industry dynamics and ensure the business is sustainable against these volatilities
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
Enlist professional help where needed
Link your business strategy, both current and future plans, to talent requirements
Involve your top executives 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, and
Have a contingency plan in case the unforeseen happens and your intended successor declines the role or is unexpectedly unavailable

Determining a successor

Owners often wrestle with the task of grooming a successor. The following are important considerations. 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 this is built into your planning schedule
If you decide to recruit from the outside you will need to spend time integrating that new person into the culture and agendas of the business. This is essential to the newcomer's ability to gain respect, trust and confidence amongst 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, and
Are you clear about what authority you might give your successor and what authority if any, you want to retain yourself?

Keeping it in the family

It may be your dream to keep your business in the family. However is that commercially sensible? It's important to balance your emotions with hard reality. Is family succession the right option for your business? If you are considering internal family succession to maintain family ownership and management, you should consider 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 all family members?
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 that can be applied in all situations.

The benefits of planning

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, will always be more likely to succeed and have more long term value than one that is simply allowed to grow without a plan. It will:

Enable you to establish and progressively build up equity in your business
Help you to attract and retain the best staff who are committed to the business; this in turn should result in increased productivity and loyalty
Ensure a smooth transition with less likelihood of disruption to operations
Clarify authority and decision-making
Maintain accountability and ensure the health and stability of the business
Maximise the value of your business and enable it to meet future needs
Set you on your way to building a nonprincipal dependent practice increasing the capital value and the attractiveness of your business to potential buyers, and
Enable you to handle short-term emergencies if a key member of staff leaves or is ill

The basics of a good succession plan

There is no ‘one-size-fits all' template for succession planning. However the following considerations form the backbone of an effective, well thought through plan. It should identify:

The owner's proposed time-horizon for exit
How issues such as the estate, tax, financial and personal planning by the owner for his/her life after business will be dealt with
The potential to increase the economic value of the business
Any potential barriers to a successful outcome
The influence of ‘bit players and smiling assassins'
The talent pool within the business
The transactional options: sale; MBO; etc, and
The financing options for a transaction: does the business have a value which is appealing to the private equity market? Does it make sense to have a share plan? Is vendor finance an option?

NSW Business Chamber and Bill Hovey, succession expert and the CEO of the Linchpin Group Australia and MD of Linchpin Succession Management. Bill is one of Australia's leading practitioners in succession management and leads the succession, exit and business transition practice for the group. Contact him on bill.hovey@linchpingroupaustralia.com or phone: +61 2 9016 2824. NSW Business Chamber has set-up a free online diagnostic at www.australianbusiness.com.au/succession. You will receive information relevant to your situation and will be mailed a business succession handbook on completion. Reprinted with permission of NSW Business Chamber. For more information about this article or NSW Business Chamber, its products, services and membership, please call 13 26 96 or visit the web site: www.nswbusinesschamber.com.au
First published: 21 May 2007.
Last updated: 21 May 2007.