Ask us how: Succession Planning

Posted by Michael Derin
Published on October 16, 2013 under NSW Business Chamber Partnership

The preparation to replace one leader with another is one of the most difficult challenges associations face in this era of organisational management. Few events in the life of an association are as critical, visible, or stressful as when the leader leaves.

As an owner of a business, succession planning is always on the back of your mind, yet very few have a plan in place that will allow for them to leave and for another to take over.

Whether it is a relative, an employee, a sale or a merger of your business, it is so important to have in place your vision for leaving the organisation.

There are different options for succession planning and how you can go about putting the wheels in motion that allow for your eventual departure.

IMPORTANCE OF SUCCESSION PLANNING

Many businesses owners neglect succession planning because they get too bogged down with the immediate aspects of the business. They tend to get involved ‘in’ their business, ensuring that it’s successful and making a profit that they do not plan for how they will eventually exit the business.

Succession planning is part of the overall business plan. Just as you put in place plans to build and run your business, you should also put in plans on what you want to achieve and how you will eventually exit the business.

Putting in place a succession plan for the eventual transfer of management and or control of the business is critical to the long term success of the business because as it will give the business direction.

OPTIONS FOR SUCCSSION PLANNING

There a number of options for succession planning but deciding which is best will depend on the overall plans for the business and the business owner.

Some common options include merging with another business particularly one that is a good fit with your own.

Another option can be to sell the business. What’s most difficult about selling is determining the value of the business. You want to set the highest price the market will accept so that you’re rewarded for the years of hard work you’ve put in, while buyers want the highest future profitability for the lowest price.

A business owner can also consider having a family member, employee or business partner take over the business so that they can either sell off their interests in the business or become a retired silent partner.

And lastly a business owner may choose to publically list the company. This would dilute the owner’s equity in the business and reduce their control while still retaining a financial interest in the business. 

PLANNING FOR THE FUTURE

Business owners should start early on to plan for how they will eventually leave the business and how they go about it will really depend on what their goals are.

Succession planning should be part of the overall business plan and tie into where you want the business to go and how long will it take you to get there. A business owner’s personal goals also have an impact as these are usually tied to the business goals. For instance it could be that they want to retire by the age of 40.

The business plan should include the strategies for how the business owner will exit the business to ensure minimal disruption to the running of the business and so the business doesn’t suffer by the exit of a key team member.

To be successful a succession plan should be realistic, workable and developed with input from groups and individuals who have an interest or share in the business. You should also talk to your business advisors such as your accountant, lawyer and financial advisor.

IMPACT OF AGING WORKFORCE IN BUSINESSES

In Australia half a million business owners are over the age of 50, and this is growing by 10 per cent every year. This means that more than ever these businesses will need to have in place a succession plan that is tied into the overall business goals.

So with potentially many business owners exiting over the coming years, it will present challenges in how they manage their successions. This is because there will be a lack of senior talent to recruit and more businesses looking to sell. It is the businesses that have adequate planning in place that will be the ones that will handle it the best.

The other consideration with an ageing workforce is the loss of knowledge and experience from the retiring workforce. In most small businesses, the business is dependent on the owner in order to function. A succession plan needs to take into consideration the transfer of skills and knowledge from the business owner to the senior management so that the business can continue to function and doesn’t suffer from a lack of expertise.

BENEFITS OF SUCCESSION PLANNING FOR BUSINESS OWNERS

The benefits of putting in place a succession plan depend on the individual business owner and what their goals are. But generally speaking the overall benefit is ensuring your business continues successfully as well as the associated monetary benefits.

A benefit of establishing a succession plan early, particularly if you plan to hand over the business to a family member, employee or business partner is their ongoing commitment to the business where you both work together in the long term to ensure the success of the business.

The other benefits are that the entire organisation understands where the business is heading and what’s in it for them. Employees know if there are advancement opportunities and it means there is less uncertainty as the business owner approaches retirement. This will result in a more stable and productive business.