The What, Why, When and How of Succession Planning
Succession Planning was never heard of 10 years ago. However, business owners now understand that business succession planning is a significant aspect of the success of their business.
Steven Covey’s habit number two is Begin with the End in Mind. Covey says, ‘If you want to have a successful enterprise, you clearly define what you’re trying to accomplish. The extent to which you begin with the end in mind often determines whether or not you are able to create a successful enterprise.’ So,
What is Succession Planning?
Succession planning covers all aspects of the business, but importantly focuses all attention on the end outcome – What are we actually trying to build within our business? Is it something to fund our retirement? To list on a stock market? To raise further capital and grow? To pass on the members of the family?
Strategic succession planning means we have a detailed and documented plan covering every aspect of our business that continually moves us closer to our ultimate exit outcome. Most business owners are so caught up in running the business at a day to day level they do not have time, effort and attention focused on the end outcome.
Why succession planning?
In Australia more than 50% of business exits are currently a failure i.e. bankruptcy, liquidation, death or serious illness, divorce or simply walking away and closing the doors. This is largely because no succession planning has been undertaken by the business owner.
When is succession planning needed?
In my view, strategic planning is all about time. The simplest analogy is to ask whether you would consider approaching a real estate today with a view to selling your property this Saturday. Most real estate agents could actually achieve this, though without any time to market, prepare the property and review their buyers database, the price they achieve will not be the real value of the property. Most of the businesses I work with require a minimum of five years to maximise the value and prepare themselves to extract that value successfully.
How to implement succession planning successfully?
Our unique 21-step process is a holistic process of preparing your business for succession. It begins with simply reviewing your position today. By undertaking due diligence, benchmarking, structural review and valuation, we can determine what exists in the business today and where there are opportunities and challenges which may affect the ultimate exit strategy. On most occasions business owners do not have an exit strategy and are not aware of all the options, and so our strategic planning process identifies which option/s is most suitable and what we need to do to maximise the opportunity.
In many cases there are several areas within the business, both financial and non-financial, that need to be addressed prior to any exit plan being implemented. We have had considerable success with implementing a Management Buy-in (MBI) where key people within the business are retained and incentivised with a vehicle in place (Peak Performance Trust) to purchase shares based on a profit share arrangement, with those funds being reinvested into the equity of the business rather than taken at as cash payment. This plan operates over an extended period and has the added benefit of attracting, retaining and motivating key staff within the business who now have a vested financial interest in maximising the value, as does the owner. This may not be suitable for all business owners but has had considerable success with some of our clients.
In all cases business owners must be prepared to make every decision considering whether it brings them closer to or further away from their ultimate exit strategy.
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"Investing the time to develop a strategic succession plan is one of the most important financial decisions a business owner may ever make. Without one, the value in the business will retire when they do."Click to Tweet
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