Succession Planning for Business Success
‘Begin with the end in mind’, might not be the first thing you thought when you set up your new business, but according to the Exit Planning Institute it should be at the top of the list for all new business start-ups.
Even if it wasn’t on your to-do list when you started out, it’s never too late to start succession planning and there are steps established businesses can take to secure the continuity, growth, and maximum value of their business at any stage in its lifecycle.
What is Succession Planning?
Succession planning is about deciding who will succeed you in owning and managing your business when you either choose to sell up, take a back seat, or you are suddenly no longer able to run it yourself.
It’s about putting in place a strategy that will ensure a smooth transition at the point of handover both for suppliers, customer and employees alike.
It’s also about defining the extent and nature of your continued involvement when you are no longer at the helm, and working out how that fits in with, for example, your plans for retirement.
The Benefits of Succession Planning
In simple terms the single most beneficial aspect of succession planning is maximising the value of your business.
By systematically working your way through the successive steps you will be able to identify what your business is currently worth, what you think it should be worth, and how you can close that gap.
But succession planning is more than that, and at its heart are the reasons why you want to maximise the value of your business.
Who’s going to run it when you’re gone?
Succession planning not only helps you identify the available options but by maximising the value of your business it will also give you more confidence in choosing those options.
Deciding whether the best option is to sell to a third party, transfer to other members of your family, sell to current management, or liquidate your assets, means being confident that:
• the business is attractive to potential buyers, or
• family members have the business knowledge they need to take over, or
• the current management team is competent, or
• any inventory is accurately valued and insured
And that’s before even deciding which one of these is the best option to achieve your objectives once you are no longer running the business.
It will also protect your future personal financial security whether it’s a pension, a buyout package, or compensation in the form of an insurance policy.
Will they want to run it when you’re gone?
Regardless of whose safe hands you decide to leave your business in, maximising its value is the best way to make sure they will want to run it when you no longer can or do.
Most new businesses start life supported by a pretty comprehensive business plan but the realities of actually running the business mean keeping it up to date can soon take a back seat.
Annual updates can often take a short term view or are built on a simplistic premise such as ‘last year plus 5%’ for revenue growth, or ‘last year minus 5%’ for cost cutting.
Succession planning is more complex and can involve among other things:
• Taking stock of where your financial position, customer base, management and staff
including skills gaps, and key individuals you want to retain in the business
• Analysing revenue and identifying for example risks from over dependence on too few customers
• Identifying growth opportunities and risks from external economic factors now and in the future
• Identifying how customers perceive your business and any potential risks to your business
reputation that need to be addressed.
But succession planning also takes account of other factors that might impact the future value of your business including:
• Determining the best corporate structure
• Taxation, specifically minimising exposure to Capital Gains Tax
• The need for specialist financial advisers to support succession planning
• Your personal goals and objectives post-succession
Effective succession planning takes account of both the personal and the professional when it comes to moving on from your business.
The Steps to Succession Planning
Identify
There are two things you need to identify at the outset:
1. Personal goals
This will include when you intend to retire or step back from the business, the lifestyle you want, and any income you might need from the business to support that.
2. Business value
You then need to identify the existing value of your business, and determine an action plan to close any gaps between the current value and where you need the business to be at the time of succession to support your future goals.
There are a number of common business valuation models and choosing the right method for your business will depend on its size, your industry, and whether for example there have been recent sales of similar businesses.
It’s also important at this stage to identify who should be involved in this process. Whether it’s limited to existing shareholders and immediate family, or includes key employees, customers and suppliers, and the wider community.
This is also a critical time for putting in place independent professional advisers who are qualified to support you throughout the succession planning process.
Prepare
The next step is to prepare an action plan. Document in detail the steps you need to maximise the value of your business by the time you are transitioning control.
It might seem premature if your proposed exit is some years off but expanding your customer base, building revenue, revising your corporate structure, tax planning, and training staff can take years, so planning early is key.
Next communicate your action plan to key stakeholders. It’s unlikely you’ll achieve everything you want to without their input and effort so get them on board as early as possible.
Put in place a timeline with milestones and organise regular catch ups to review progress, both with key internal stakeholders an external advisers.
Exit
It’s likely your initial timeline will change as your proposed succession date approaches.
Just putting in place steps to maximise the value of your business could lead you to decide you don’t want to step back when you originally thought you did.
You only leave your business once and the process can take months, but eventually that time will come and a succession plan will give you more options to decide from when it arrives.
It’s worth engaging a project manager to ensure any pre transaction due diligence is completed and all the strands of the transition plan are coordinated effectively.
This is also the time to revisit your proposed post succession involvement to see if it still aligns with your original objectives.
Succession planning is not a stand-alone concept, it’s a fundamental part of an effective business plan.
Doing it well will let you avoid common pitfalls such as undervaluing your company, losing control of the nature of your exit from the business, paying too much tax or failing to achieve your personal goals.
It’s never too late to start thinking about succession planning. At Wilson Teis our qualified exit planning advisory team can help. Call today for a free informal discussion on how we can develop a succession plan with you.
