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Succession Planning: A Comprehensive Guide in 2021


Succession Planning: A Comprehensive Guide in 2021

By , May 26, 2021
Inside view of an office building with blurred motion

What is Succession Planning?

Business succession planning is about getting three things right at the same time – the business needs to be prepared for a transition or succession event, the financials need to be ready (both the financials of the business and those of the owner’s family or shareholders) and the people involved, the owners, need to be prepared for a succession or exit event.

All this needs to be coordinated to occur at the same time to get the best possible outcome and ensure the business and owners can achieve their succession goals.



What is the purpose of a Succession Plan?

A succession plan should clearly articulate, to all stakeholders; owners, employees, customers, suppliers etc. the strategy for succession within a business.

All business owners need to exit at some point in time and the succession plan needs to cover both exit from an ownership point of view and exit from a management point of view – these are separately called ownership succession and management succession.

Many owners confuse the two or believe they need to be done together at the same time – this is not the case and in fact managing them separately as two separate projects will produce a far better result. Importantly whilst they are events, they are actually a process and each can take several years to implement correctly.


What should a Succession Plan include?

There are two key categories of succession that we are dealing with here; management succession and ownership succession. Each needs to have a documented plan.

Ownership Succession

The plan for each should clearly outline the goals we are seeking to achieve from an ownership point of view – are we looking to sell the business externally, pass it onto family members, implement an employee share ownership plan (ESOP) or a management buyout, or bringing external investment from a private equity firm?

The plan also needs to get into the details of how this transition will occur – at what time or date, and what price or value, how will the transition be funded.

Management Succession

This aspect is always left until too late and the amount of work and effort required is always underestimated. We normally recommend a five-year process to transition management in a privately held midmarket business.

Successors (those looking to take over management of the firm after the founder or owner exists) need to be first identified and then analysis done on a skills, education or experience gap. There is normally a gap and this is only a problem if not enough time is allowed to resolve that gap prior to the transition taking place.

In some cases, successors need to undertake further training or education or perhaps acquire an accreditation or qualification that’s needed to be the licensee for the business for example in most cases the gap is around experience and so the successor needs to attend meetings, join in workshops and participate in planning and strategy sessions they previously were not involved in – all as preparation to “takeover” at a future date – well equipped to ensure the business is successful going forward.

Unplanned Events

All of the planning in the world cannot prevent something from going wrong, the proverbial ‘bus’, and this should be a part of the plan. The business and owners should have a plan B – what happens if?

This is fairly simple to achieve and would include details in the shareholder’s agreement as to unplanned events, a buy-sell agreement (to cover the management of equity) and potentially insurance funding.


Who can benefit from Succession Planning?

In our experience, all stakeholders (the business itself, the founders, other shareholders, employees, suppliers and customers) can all benefit from a well-documented and communicated business succession plan.

Having a clear pathway towards both ownership and management succession which is well understood by all of those involved will clearly eliminate a large area of uncertainty (and fear) for many businesses.

Additionally, having a shared goal (the succession process) will align employees owners and other stakeholders and allow the business to actively focus on achieving the succession strategy.


Why do Succession Plans fail?

Unfortunately, I have seen several very bad examples where business succession planning has failed – typically, they fail for two major reasons.

Firstly, they begin the process far too late in the cycle leaving only three or six months to implement the succession plan itself. Most succession plans take between three and five years to fully document and implement throughout the business.

Secondly, whilst businesses may have a succession or exit strategy in mind and perhaps it is well known to the owners, they did not communicate the succession plan outside of that group – in other words, employees have no idea what is going to happen, customers & suppliers are unclear as to the future of the business and in extreme cases, some shareholders may not be prepared to wait and force action without proper planning and implementation.


What is the difference between Succession Planning & Exit Planning?

Typically in the literature, succession planning speaks to family transition or passing the business from one generation to the next and this is certainly true, however, succession and exit plans are actually a coordinated process.

Typically, the exit of a founder, family generation or owner/shareholder is accompanied by the entry of another party, whether that is within the family or externally, it is still an entry of a new shareholder (a succession event). Remembering that succession refers to both ownership succession and management succession is important as the two are probably separate processes undertaken at separate times (they can sometimes be combined).

An exit strategy typically refers to an external sale. Either a trade sale, a sale to a strategic buyer or private equity firm or perhaps even an IPO or listing on a public exchange. A business succession and exit plan should coordinate all aspects and be implemented over a 3 to 5 year period for maximum success.


How does Succession Planning work?

Business Succession Planning is a process and typically takes between three and five years.

It is not a one-off event or transaction and so we utilise a 21 step process implemented with business owners over five stages to make sure we can identify the value in the business, protect that value in case of any unplanned events, work with the owner to maximise and grow the value prior to being able to extract that value and manage the wealth created following the succession event.


What industries can benefit from succession planning?

Every business owner should have a succession and exit plan.

The reality is every owner will exit both ownership and management of their business – the key issue is whether you wish to do that under your control and management or have it “done to you”.

Businesses in any industry benefit from a business succession and exit plan, most particularly professional services firms, who are heavily reliant on key people, can use a succession plan to lock in key people and ensure they are part of the transition to ensure maximum success for all involved.


Get started on your succession plan with expert help

Over the last ten years, we’ve helped over 600 business owners maximise the value of their business and achieve a successful exit. To get started on your succession plan, get in touch today.

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