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The Importance of Business Succession Planning

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Desk with post it note with 'succession planning' written on it and arrows pointing through figurinesDid you know that Australia’s family and private businesses occupy almost every segment and industry of our economy?

Contributing over a third of Australia’s entire GDP, it is evident that ensuring the ongoing success of these businesses is crucial to Australia’s prosperity.

Many business owners place long term planning to the side because they are bombarded with day-to-day management of the business. They focus on the short term because that’s what they can see unfolding in front of them.

With the aging demographic of the Australian business community, the uncertain geopolitical world and improving economic conditions in Western Australia, it’s vital that business leaders take the time to assess their organisation’s succession plan.

In this article we explore the importance of setting your business up for the future with a key focus on:


What is succession planning?

Succession planning is used to identify those who can take on the role of current leaders in an organisation if it becomes time for those leaders to sell the business or pass it onto the up and coming leaders – the successor/s. This allows business owners to have the confidence knowing that there is a reliable plan for the ownership and management of their business once they are gone.

A succession plan may be different for every business and could be as simple as passing the business onto a family member or as complex as a complete restructure and/or sale of the business.

The ultimate goal of succession planning is to know the business’ value, preserve this value and growth potential to pass onto an effective successor/s.

Multidisciplinary Planning Process

A strategic succession plan is multidisciplinary as it focuses on three categories of crucial components:

1. Family

      • Goal articulation
      • Family information and communication
      • Estate and gift planning
      • Life insurance analysis
      • Investment advisory services
      • Family offices

2. Shareholder

      • Shareholder agreement
      • Disability planning
      • Compensation planning
      • Stock transfer technique

3. Business

      • Business strategy assessment
      • Management talent assessment
      • Corporate structuring
      • Current business valuation
      • Retirement planning

What options are available when planning an exit?

When it comes to exiting a business there are a number of options available to the current business leader. They may choose to:

      • Sell the business externally
      • List the business on the stock exchange
      • Management buyout
      • Employee share plan
      • Pass the business on to their children
      • Maintain a connection as a silent partner or minority shareholder
      • Move into an executive-only role
      • Cease operations
      • Sell the business’ property or assets to release equity

The chosen exit option will depend on the structure of the business and the final goal of the business owner. It’s a decision that shouldn’t be made lightly and it’s important to speak to a professional who will be able to discuss each available option in detail.


How does planning effect the success of a business?

The long-term survival and preservation of wealth is heavily dependent on getting ahead and making the necessary changes outlined in your succession plan.

A succession plan, much like a strategic plan, helps to set your business up for the future and can prepare you for the following:

      • If you’re selling your business
        • A succession plan opens the market to passive investors i.e. those who don’t want to run the business themselves.
      • If you’re retiring or passing the business onto the next generation in your family
        • A succession plan will provide you with added confidence in knowing that the business will stay on the right track.
      • Lastly, if you have a key staff member who leaves unexpectedly or has health issues
        • It’s important that you have someone who can take on their role to provide continuity in running the business.

In summary, having a sound and strategic succession plan in place enables you to:

      1. Determine what is important for the business to achieve
      2. Anticipate any problems within the business and how to best manage them
      3. Create a common purpose for all senior management – driving consistency in decision making processes
      4. Above all, it provides a framework to refer to – improving the ability to respond to change and any deviations from the plan

6 steps involved in succession planning

When formulating a succession plan it’s vital it fits in with the long-term strategic plans of the business. Hence, the focus needs to be on what’s to come not what has been.

Here are 6 succession planning tips to follow:

      1. Identify key areas and positions within your business
      2. Identify what the capabilities are for these key areas and positions
      3. Start the recruiting or training process
      4. Appoint the successor/s or new organisational structure
      5. Complete a hand over process to the appointed successor/s
      6. Document and evaluate the effectiveness

What to avoid when creating a succession plan

Don’t make assumptions
A lot of the time families assume that their business will automatically pass onto the next generation. This transition is not always as smooth as people think, in fact 70% of wealth transitions fail, with origins lying within families themselves.

Don’t do it all yourself
Whether you are selling the business or passing it onto the next generation, succession planning is a complex process. Working with an accountant, lawyer and other external advisors will ensure an unbiased and strategic future business succession plan is made.

Don’t focus on the past
Make sure your succession plan aligns with the long-term strategy of your business.

Don’t think you have more time
Waiting until the “right time” is never a good way to look at planning for succession. There is no better time than the present to start planning. Failure to acknowledge the reality of the lost opportunities than come with the passage of time can be detrimental to the ongoing success of the business.


What are the advantages and disadvantages of succession planning?

Having a succession plan creates added benefits for businesses because it reduces operational risk and provides certainty for employees, financiers, and customers.

The many other advantages of planning for succession include the following:

      • Smooth ownership transition
      • Continued business growth
      • New capital, new ideas and new jobs
      • Attract and retain the right talent and skills and create new business opportunities
      • Positive impact on the wellbeing of families

There can be some disadvantages that come with succession planning, including:

      • If you appointed the wrong person as the successor, it could lead to many problems that result in poorer company performance
      • If the planning process is rushed or poorly conducted it will once again lead to poor company performance

It is never too early to start planning for succession, in fact the earlier you start the more you can relax knowing that your change in business ownership will be an easy transition.

Having recently gone through a management buyout process at Ledge and have experienced many of our clients go through succession, we understand the process and what is required. We work collectively with a selection of professional services firms to provide a holistic approach to succession planning and setting your business up for future growth.

If this article has sparked any questions, speak to your Ledge Finance Executive today or contact our offices here.

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Please note the information provided here is general in nature and does not constitute financial, tax or other professional advice. You should consider whether the information is appropriate for your needs and seek professional advice prior to making any decisions.

 


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