When your business is chugging along, we may not think what would happen if you suddenly weren't there. This is where succession planning is integral to the smooth running and operation of the business.
Where the leadership leaves the business, succession planning aims to increase the availability of competent and experienced business owners to fill the gaps in the business.
Failing to plan for the longer term through succession planning is a major fault of many SMEs, resulting in vulnerability to businesses that have been meticulously nurtured by previous business owners.
Benefits of Succession Planning
Disaster Proofing your Business
Whether its day to day operations, or the fair assumption that you won't be leaving the business for a considerable period of time, many business owners take for granted their position. For other key players in the business, the loyalty or organisational culture may provide a misleading sense security that it won't change.
However, when change occurs, if a succession plan is not in place, the business can be vulnerable. Succession Planning can be a daunting topic to approach; however, the better you plan, the better you can consolidate your business for the long haul.
Identifying future leadership
The process of succession planning necessitates identifying those positions that are most critical to the company's longevity, identifying internal candidates with the will and skill to be promoted into these positions, and if need be, beginning to pick external candidates who will be able to take care of your business in the future.
Identifying internal candidates can serve as a valuable retention tool. Furthermore, keeping the potential spaces open for succession means that a business can build a consolidated networking pool of top prospects for the job.
Identifying the Competency Gaps
The "competency gap" is the deficiency between competency levels within the positions that you are creating succession for, and the desired competency within that position.
Identifying the competency gaps can guide an organisation in structuring talent or training management programs across all levels of the business. This can improve current processes, as well as planning for the future.
Maintaining an End Goal
Once developed, your succession plan can be changed multiple times up until the point of succession.This can align with other important goals, which may include individual retirement goals, asset protection, estate planning and taxation planning.
Once you have developed a succession plan, and are ready to leave the business, what are the next steps?
There are major financial and legal obligations to transfer to the new owners of the business, as well as discharging your own. Furthermore, if the business exists as a family business, lines can easily be blurred, and agreements can be misconstrued, leading to further complications down the track.
To ensure a smooth transition regardless of your vested interests in the business, it is important to prioritise the business' commercial interests first, and approach any agreements and transition accordingly. Other variables (such as the complication of agreements often associated with transferring family business ownership from one family member to another) can be added once the initial commercial agreements and non-negotiables are set.
Steps in effective Succession
The below steps are based on a scenario where one owner in a business (with multiple owners) passes. Of course, this is not the only circumstance in which an owner may exit the business - however, this model provides an effective list of considerations to make in a business owner's exit.
Leaving the Business
If an owner leaves, the departing owner agrees to give a call option in favour of the continuing owner. This essentially means the continuing owner can call for the sale of the existing owner’s share in the business. At the same time, each owner grants an existing owner a put option by which the continuing owner(s) can be required to buy the existing owner’s share of the business for an agreed sum.
In the event that the departing owner is deceased, a buy sell agreement should include the requirement to take out and maintain insurance to fund the purchase of a deceased owner’s share. The agreement should also stipulate how the insurance premiums are to be paid.
Buy Sell Agreements are important. contracts that permit the transfer of ownership to the remaining owners of a business in the event that one owner passes.
It is vital to set out how an existing owner’s share is to be valued. This will avoid uncertainty at the time of the sale.
The departing owner may be indemnified from the remaining owners(s). It will place a value on the business or a method to determine the value of the business at time of exit. This lets all the partners agree a valuation, so the remaining business partners can buy out the remaining share at a price that is fair to everyone.
By purchasing life insurance on the lives of the business partners for the value of their share, the heirs of the deceased owner can be assured of timely payment for their share of the business.
Life insurance gives you the peace of mind to know that buying out the other share of the business won’t put a strain on your business’ cash flow, or force you to sell off assets.
Fairness and good faith
The beneficiaries of the deceased owner receive a fair price for the business as the price is decided in advance, and they know the deceased business partner had the opportunity to agree to the value of the business while they were alive.
A proper agreement facilitates the settling of the deceased owner’s estate. Without it, many estates can be held up for months or years while the value of the business is determined.
All in all, succession planning can be thought of as an instrument to ensure that your business can be secured for the future.
Approaching succession planning with confidence and candidacy is key to maintaining a business and ensuring its growth over time, independent of the individual owners.