When your business is going along in its day-to-day travels, it's easy to put off thinking about what would happen if the leadership weren't suddenly there. However, succession planning is integral to the smooth running and operation of the business.
Succession planning aims to increase the availability of competent and experienced business owners to fill the gaps in the business when leadership exits.
Failing to plan for the longer term through succession planning is a major fault of many SMEs, which can cause vulnerability in a business that has always been meticulously nurtured by business owners.
Below we outline the benefits and considerations of effective business succession planning.
Benefits of Succession Planning
> Disaster Proofing your Business
Many business owners take their position for granted. Whether it's trusting in day-to-day operations or the fair assumption that they won't be leaving the business for a considerable period of time.
For other key players in the business, the loyalty to organisational culture may provide a misleading sense of security. However, when a change occurs, if a succession plan is not in place, the business can be suddenly exposed and vulnerable.
For many, 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.
> Identify Future Leadership
The process of succession planning necessitates identifying the positions that are most critical to the company's longevity, determining the 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.
Nurturing internal candidates can serve as a valuable retention tool. Furthermore, keeping potential spaces open for succession means that a business can build a consolidated networking pool of top prospects for the job.
> Identify Competency Gaps
The "competency gap" is the deficiency between the competency levels within the positions for which you are creating succession, and the desired competency within that position.
Knowing the competency gaps can guide an organisation to structure talent or training management programs across all levels of the business. This exercise can improve current processes, as well as assist future planning.
> Flexible Goal Alignment
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.
A Smooth Transition
Once you have developed a succession plan and the leadership is ready to leave the business, it is prudent to know what happens next.
There are major financial and legal obligations to transfer to the new owners of the business, as well as discharging current obligations. Furthermore, if the business is 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 the vested interests in the business, it is important to prioritise the business's 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 addressed once the initial commercial agreements and non-negotiables are set.
Considerations for Effective Succession
The following steps are based on a scenario where one owner in a business (with multiple owners) passes away. 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.
> Leaving the Business
The departing owner can agree 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.
> Insurance
In the event that the departing owner is deceased, an existing 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.
> Valuation
It is vital to predetermine how an existing owner’s share is to be valued, to avoid uncertainty at the time of the sale.
> Indemnity
The departing owner may be indemnified by the remaining owners. There will be an agreed value placed on the business or a method to determine the value of the business at the time of exit. This lets all the partners agree on a valuation, enabling the remaining business partners to buy out the remaining share at a price that is fair to everyone.
> Payment
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.
> Protecting Assets
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 the business’s cash flow or force assets to be sold off at an undervalued price.
> Fairness and Good Faith
The beneficiaries of the deceased owner receive a fair price for the business, as the price is decided in advance. Beneficiairies have peace of mind knowing that the deceased business partner had the opportunity to agree on the value of the business while they were alive.
> Ease of Realisation
A proper and formal 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.
Business Future-Proofing
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 future growth, independent of the individual owners.
Contact MCP
1300 510 816 or your Finance Partner
enquiry@mcpfinancial.com.au