Succession planning explained
Long-term planning is placed to the side by many business owners because they are busy with the day-to-day management of the business.. Instead, they focus on the short term because that’s what they can see unfolding in front of them.
With the ageing 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.
- What is succession planning?
- Multidisciplinary succession planning process
- How does planning affect the success of a business?
- Six steps involved in succession planning
- What to avoid when creating a succession plan?
- Advantages and disadvantages of succession planning
- Start planning for succession now
- FAQs about succession planning
What is succession planning?
Succession planning identifies successors within a business who can take on the leadership positions in an organisation when it comes time for those leaders to move on/transition from the business, be it selling the business, moving to another company, or retiring.
Succession planning gives business owners the confidence to know there is a reliable plan for ownership and management of their business once they have moved on/transitioned.
A succession plan can be different for every business. It 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 and preserve this value and growth potential to pass on to an effective successor/s.
Multidisciplinary succession planning process
A strategic succession plan is multidisciplinary as it focuses on three categories of crucial components:
Family information and communication
Estate and gift planning
Life insurance analysis
Investment advisory services
Stock transfer technique
Business strategy assessment
Management talent assessment
Current business valuation
How does planning affect the success of a business?
The long-term survival and preservation of wealth depend heavily on getting ahead and making the necessary changes in your succession plan.
A succession plan, much like a strategic plan, helps to set your business up for the future:
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 give you 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.
Having a sound and strategic succession plan in place enables you to:
- Determine what is important for the business to achieve
- Anticipate any problems within the business and how to best manage them
- Create a common purpose for all senior management – driving consistency in decision-making processes
- It provides a framework to refer to – improving the ability to respond to change and any deviations from the plan
Six steps involved in a succession planning process
When formulating a succession plan, it’s vital it fits in with the long-term strategic goals of the business. Hence, the focus needs to be on what’s to come, not what has been.
Here are six succession planning tips to follow:
- Identify key positions and areas within your business
- Identify what the capabilities are for these key positions and areas
- Start the recruiting or training process
- Appoint the successor/s or new organisational structure
- Complete a handover process to the appointed successor/s
- Document and evaluate the effectiveness
The other advantages of planning for succession include:
- 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 well-being of families
Some of the disadvantages that come with succession planning are:
- Appointing the wrong person as a successor could lead to problems that result in poorer company performance and staff morale in the future
- Rushing the succession planning process without adequate due diligence could also lead to poor company performance.
Developing future leaders - start planning for succession now
When it comes to succession planning, it is never too early to start. The earlier you start, the more you can relax knowing that your change in business ownership will be an easy transition.
Having gone through a management buyout process at Ledge and supported many of our clients through succession planning, we understand the process and what is required. We work collectively with professional services firms to provide a holistic approach to succession planning and setting your business up for future growth.
If you would like to know more about succession planning and how you can set your business up for long-term success, get in touch with your Ledge Finance Executive or contact our offices here.
FAQs about succession planning
Here are some frequently asked questions we receive about succession planning.
Succession planning is the process of identifying and developing individuals within an organisation who have the potential to assume key leadership positions in the future. Succession planning aims to ensure that the business has a pool of qualified individuals who are ready and willing to take on leadership roles as they become available.
When it comes to exiting a business, there are several options available to the current business leader:
- Sell the business externally
- List the business on the stock exchange
- Management buyout
- Employee share plan
- Pass the business on to their children
- Pass the business onto their business partner
- 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 business’s structure and the business owner's final goal and is a decision you shouldn’t make lightly. It’s important to speak to a professional who will be able to discuss each available option in detail.
The purpose of a succession plan is to ensure that an organisation has the leadership talent it needs to continue operating effectively into the future. A succession plan typically involves identifying individuals with the potential to be successful leaders, assessing their skills and abilities, and developing them over time to be ready to take on leadership roles when needed.
Common activities involved in succession planning include:
- Talent identification: Talent identification activities, including performance reviews, 360-degree feedback, or aptitude testing, seek to identify individuals with the potential to be successful leaders in the future.
- Assessment: Once you have identified potential leaders, they need to be assessed to determine whether they have the necessary skills and abilities to succeed in a leadership role through simulations, interviews, or case studies.
- Development: Finally, once potential leaders have been identified and assessed, they must be developed, so they are ready to take on leadership roles when needed. This development can occur through mentorship, coaching, or training programs.
There can be tax implications associated with succession planning, particularly if transferring business ownership to family members.Therefore, it is important to consult with a tax advisor to determine what, if any, tax implications may apply in your specific situation.
In principal, there are generally no specific legal obligations associated with succession planning, but there may be legal implications depending on the business structure and the type of transfer taking place. For example, if you are transferring ownership of the business, you will need to ensure all legal matters have been addressed to avoid potential issues down the road. It is always best to consult with a lawyer to ensure all legal requirements are met.
One of the most common mistakes during succession planning is failing to plan for the unexpected. Life can be unpredictable, and it's important to have a backup plan in place in case something happens to the primary successor.