Succession planning is a prudent management measure to protect the lifetime of a business well beyond its operations and ownership structure. It is also a useful exercise to protect a business against unexpected illness or loss of owner or senior management's time.
Yet surprisingly, many medium-sized business owners of the "baby boomers" era have not prepared for this event. Recent research* indicates that baby boomer owners will start to exit their businesses in significant numbers over the next ten to fifteen years, and that identifying a successor or documenting a succession plan is often left until late in this cycle.
This mass exodus of retiring business owners will coincide with social change that is seeing relatives less interested than in the past in working for the family business.
This exodus will offer an unprecedented opportunity for the remaining mid-sized businesses to take huge strides in growth through mergers, acquisitions and agglomeration.
Fortuitously for the acquirers, selling the business, rather than winding it down or giving it to the next generation as a gift, remains historically the favoured exit route of family business owners.
Unfortunately if you plan to sell your business in the next ten to fifteen years, you may well find there are a glut of businesses on the market. Therefore careful planning and consideration as to what you want to happen when retirement comes around is essential.
Kevin MacDonald, the General Manager Sales and Marketing of Australian Business Limited, who talks with member companies regularly, agrees that two emerging issues of concern are the ageing population and lack of skilled workers. MacDonald says "Another issue is that a lot of small businesses regard their business as their superannuation.
And as proprietors get older they are wanting to get out of their business and are looking for a large financial partner to buy them out."
MacDonald adds "Owners making lifestyle changes - moving to the coast or the mountains - is also impacting on how businesses continue to run and be managed. Some may manage from a distance in the short term but inevitably they will be looking to attract people with the knowledge of the industry and appropriate skills to run the business."
Your business’ Achilles heel If you own or lead a company which depends on the leadership, knowledge and expertise of yourself, or your key staff, you should have a succession plan in place. At the very least, if you are a family business owner you should have a properly prepared and up-to-date will. When deciding inheritance, your business may best be served by passing ownership to family members who play an active role in the company, while different assets can be set aside for others.
A succession plan is critical if you are planning on retiring in the next ten to fifteen years and expect to fund your retirement by selling your business. A lack of early planning and shifts in market forces could well see your hard-earned wealth diminished by being one of a surplus of businesses on the market at the same time.
MacDonald says "Business owners should consider share plans, buy out plans and share purchase agreements. Over a five year period they can attract the right person into a management role and give them a percentage stake in the company. Then over time they can sell their stake to the new person from either cash flow or funding from a bank. There are a number of accountancy firms and legal firms that can assist businesses with succession planning," says MacDonald.
"Small businesses and family businesses should consider joining a small business association which can offers family business improvement opportunities to help them achieve their family, business and personal goals."
The benefits of succession planning, however, are definitely not restricted to those business owners or managers who plan on retiring in the near future.
Succession planning enables employees to be groomed for new leadership roles as the need arises, and also prepares for current employees to step up to the position when someone leaves. It also provides for a standby successor so the business will outlast its owner if the unexpected happens.
A good succession plan should be documented, regularly reviewed and updated. It should revolve around:
- understanding your organisation's long-term goals and objectives
- identifying the workforce's developmental needs
- determining workforce trends and predictions
Never assume that the company will trade as effectively without a strong leadership presence. Inappropriate leadership can quickly destroy the most successful business.
Some tips for sensible succession planning - Consider family members as successors
Identify the family member(s), discuss the succession plan, share a common understanding, get their agreement and involvement, and clearly clarify the anticipated roles, responsibilities and opportunities.
Before you make a decision about a family member automatically taking over the reins of the business you should also take into consideration your responses to the following questions:
- Do family values conflict with commercial decisions?
For example, avoid family employment being based on seniority rather than ability; and children with different business abilities being treated identically.
- Does the family appreciate the business?
Membership of the family business should be a privilege, not a right. It is important to have high entry standards for family members and to carry out regular performance evaluation.
- Is the family business managed professionally?
The family business must adopt sound commercial principles. It should have a written business and strategic plan, a robust management structure, regular and effective management meetings and comprehensive reporting systems.
Consider setting up formal mechanisms, such as family councils, to resolve business strategy and other conflicts between family owners.
- Will the family business fund growth and retirement?
Family business owners should ensure they have a rigorous budgeting and cash flow reporting system, a plan to fund growth and a strategy to ensure funds are set aside for retirement.
- When considering successors
- Assess their skills and identify any weaknesses.
- Build extensive profiles of potential employee and outsider successors and make evaluation multi-dimensional.
- Consider emotional and standard intelligence measures.
- Consider past performance and future leadership potential.
- Consider how well potential successors’ behaviour and values match the business.
- Combine assessment for succession with a two to three year development plan.
Include evaluation of potential successors as part of the regular business, human resource review and performance management processes.
- Develop a risk management plan that:
- describes who in the organisation will take over senior roles in the event of an emergency or a disaster
- incorporates an action plan that details steps to follow in an emergency
- ensures the senior management team is able to work effectively
- identifies any gaps in skills and expertise and arrange training where necessary
- incorporates contingency plans for the company to follow if something happens to any of these executives