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Succession Planning: A Comprehensive Guide in 2024

Succession Planning

Succession Planning: A Comprehensive Guide in 2024

By , December 14, 2023
Inside view of an office building with blurred motion

What is Succession Planning?

Business succession planning is a crucial aspect of any organization. It revolves around ensuring that the business is prepared for a transition or succession event, the financials are ready, and the people involved are prepared for a succession or exit event. When these three things are done right, it results in the best possible outcome while ensuring that the business and owners can achieve their succession goals. Coordination is key when it comes to business succession planning since all three aspects need to be in sync with each other to achieve success. Therefore, it is essential to plan carefully and work closely with all parties involved to ensure a smooth transition and exit event.

What is the purpose of a Succession Plan?

As a business owner, you need to plan for the future and have a clear strategy in place for succession. This means outlining your plan to all stakeholders – including owners, employees, customers, and suppliers – to ensure a smooth transition when you eventually leave the business.

It’s important to understand that there are two separate processes to consider when planning for your exit: ownership succession and management succession. Many owners make the mistake of thinking these two processes need to be done together at the same time, but it’s actually best to manage them separately as two distinct projects. This will lead to a better outcome in the end.

It’s worth noting that succession planning is not just an event, but a process that can take several years to implement properly. So, it’s important to start planning early to ensure a successful transition for everyone involved.

What should a Succession Plan include?

Succession planning involves two key categories: management succession and ownership succession. Each category requires a documented plan.

Ownership succession requires a clear outline of the goals from an ownership perspective. Are we planning to sell the business, pass it on to family members, implement an employee share ownership plan (ESOP), or opt for a management buyout? The plan should also cover the details of the transition such as the timing, date, and price, as well as how it will be funded.

Management succession is often left until the last minute, and the amount of work and effort required is usually underestimated. We advise a five-year process to transition management in a privately held midmarket business.

First, successors should be identified, and then a skills, education or experience gap analysis should be done. If there is a gap, it should be resolved prior to the transition taking place. In some cases, successors may need further training, education, or accreditation. Most commonly, there is a gap in experience, and therefore the successor needs to attend meetings, join workshops and participate in planning and strategy sessions to be well equipped to ensure the business is successful going forward.

Unplanned Events

Even with the best of planning, unforeseen events can occur, often referred to as the proverbial ‘bus’. Therefore, it is crucial to have a contingency plan in place. Business owners should always have a plan B, which should include details in the shareholder’s agreement regarding unplanned events, a buy-sell agreement to manage equity, and insurance funding to cover potential risks. This approach is relatively simple to achieve and can provide peace of mind in case of unexpected circumstances.

Who can benefit from Succession Planning?

Based on our experience, having a well-documented and communicated business succession plan can benefit all stakeholders including the business itself, founders, shareholders, employees, suppliers, and customers. When there is a clear pathway towards both ownership and management succession that is well understood by everyone, it eliminates a significant area of uncertainty and fear that many businesses face.

Moreover, having a shared goal such as the succession process, aligns employees, owners, and other stakeholders. It allows the business to actively focus on achieving the succession strategy and work towards a common goal.

Why do Succession Plans fail?

Business succession planning is a crucial process for any organization. Unfortunately, I have witnessed several instances where it has failed, primarily due to two reasons.

Firstly, many businesses begin the process far too late in the cycle, leaving very little time to implement the succession plan. Ideally, it would be best to start the planning process at least three to five years before the actual implementation.

Secondly, even if the owners have a succession or exit strategy in mind, they fail to communicate it outside their group. This lack of communication could leave employees, customers, and suppliers unsure about the future of the business. In extreme cases, some shareholders may force action without proper planning and implementation.

To avoid any uncertainties and ensure the success of the business succession plan, it is essential to start early and communicate the plan with all relevant stakeholders.

What is the difference between Succession Planning & Exit Planning?

Succession planning is often associated with the transition of a family business from one generation to the next. However, it is important to understand that succession and exit plans are actually a coordinated process. The exit of a founder, family member or owner/shareholder is accompanied by the entry of a new party, whether that be a family member or an external individual. This is considered a succession event. It is crucial to remember that succession refers to both the ownership and management transition, which can be separate processes undertaken at different times, or combined into one.

An exit strategy, on the other hand, typically refers to an external sale. This can include a trade sale, a sale to a strategic buyer or private equity firm, or even an IPO or listing on a public exchange. A business succession and exit plan should coordinate all aspects and be implemented over a period of three to five years for maximum success.

How does Succession Planning work?

Business succession planning is a comprehensive and ongoing process that typically spans three to five years. It’s not a one-time event or transaction, and therefore, we utilize a 21-step process, which is implemented with business owners over five stages to ensure we can identify the value in the business, protect that value in case of any unplanned events, work with the owner to maximize and grow the value before being able to extract that value, and manage the wealth created following the succession event.

What industries can benefit from succession planning?

It’s crucial for every business owner to have a well thought-out succession and exit strategy in place. Every owner will eventually exit the ownership and management of their business, but the key question is whether you want to do it on your own terms or have it happen to you involuntarily. All businesses, regardless of the industry they operate in, can benefit from having a succession and exit plan. Professional services firms, in particular, which rely heavily on key personnel, can use such a plan to retain their top performers and ensure their involvement in the transition process, resulting in a smoother and more successful outcome for everyone involved.

Craig West

Craig West

Executive Chairman | Succession Plus

Craig West is a strategic accountant with over 20 years of experience advising business owners. His background as a CPA in public practice has provided invaluable experience in the key issues of concern to business owners.

In March 2014, Craig was appointed Executive Chairman of the SME Association of Australia, Australia’s largest small business organisation representing over 300,000 business owners.

In October 2014, he was awarded the Exit Planner of the Year at the Exit Planning Institute Annual Conference in Texas, USA, due to his innovative development of an exit planning process to help business owners maximise business value and achieve a successful exit.

Craig’s proprietary structure - a Peak Performance Trust - has won the Australia-wide award for the Employee Share Ownership Plan of the year twice in four years.

In November 2018, Craig launched SME Experts in partnership with Mark Bouris’ Mentored on Podcast One and quickly grew the monthly podcast audience to over 26,500 downloads; in October 2019, he released a new podcast focused on medium-sized businesses - Mid-Market Matters.

In July 2021, Craig joined the NSW Committee for STEP (Society of Trust & Estate Practitioners) – focusing on advising families across generations.

Craig has also launched a SaaS platform, Capitaliz (which captures the 21-step process), to assist other advisers internationally deliver advisory services at scale.

In November 2021, Craig was appointed Executive Chairman of NSW Leaders, a business mentoring group for leading NSW businesses.

In July 2022, Craig West received the award of Doctor of Business Administration for his research thesis titled “Examination of the key factors driving business exit options in Australian Small and Medium Enterprises.”

Craig is passionate about encouraging business owners to think strategically, maximise the value of their business and achieve a successful exit.

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