Why Succession Planning is Important
Plan Now to Hand Over the Reins
Whether you're new to business or you've been operating for some time, odds are you put a lot of time into setting up your business. Probably the last thing on your mind was thinking how you were going to sell your business, or pass it on to the next generation, in the future. In fact, the best time to start succession planning, or planning to sell, is at the very beginning of the life of the business.
You need to plan for selling or succession with the same attention and thought that you put into your business, marketing and financial planning. It's critical to the ongoing success of your business.
Yet it is estimated the vast majority of family-owned businesses do not have a formal succession plan in place. Losing a key person in the business with no obvious successor can do serious damage to the value of the business. As well, there will be financial arrangements and rearrangements to be made in the even of the death, disablement or retirement of a family member which, unless planned for, can have drastic consequences.
In the worse case scenario, the business itself could collapse and the family would be left with immense problems.
Sadly, the vast majority of New Zealand businesses do not reach the second or third generation, in most cases because of improper planning. Evidence indicates that only businesses that have nurtured and developed obvious successors within their business, both family and non-family, are likely to defy the statistics and continue to succeed.
It's the same rationale for non-family businesses. One day you will need to sell your business, and, however distant that may be, you still need a succession plan in place right from the beginning. Your business needs to stand alone, without being too reliant on you. You need to create that culture at the start and continue to make it a part of your business.
Start Planning While You're Still at the Helm
Planning for succession in a family business is a long term process so it's important to start while you're still running the business. You need to think about whether:
- There is a suitable family member who can take over the leadership.
- You need to employ someone as a coach or mentor for younger family members.
- External management should be hired as an interim measure until a potential leader in the family emerges.
Succession planning in a family business is not always easy. Quite apart from the breadth of issues to take into account, succession planning can and does result in family disagreements. Most families find it helpful to get assistance from an adviser such as ourselves who is skilled in the logical planning of family succession issues. The advisor can also help facilitate family meetings.
What would happen if…?
Have you ever stopped to ponder what the family business would do if something suddenly happened to the key person?
- What would happen if the key person was unable to perform his or her normal duties?
- What would happen if that person was run over by the "proverbial bus"?
- Who would take over the business?
- Who knows the secrets of the business?
- Who knows the secret formula, recipes or deals that have been done with suppliers?
- How would the bills be paid?
- Would the bank call up the loan?
- How would the principal's family survive?
Key questions to be answered include:
- Has the principal written out a set of instructions on what should happen to the business if something should happen to him or her?
- Has this list been given to a solicitor or places somewhere safe where it will be found if something happens to the principal?
- Has adequate insurance been effected on the life of the principal and on the life of any partners in the business?
- If a partnership or a company has outside shareholders, has a formal "Buy/Sell Agreement" been entered into?
- Have the secrets of the business been written down, so that they are available in the event of the demise of the principal?
Next Steps – Check the Succession Plan Checklist
Keep in mind the key points to succession planning listed above. But before you embark on your plan make sure you discuss with your adviser what issues the family needs to agree on, what needs to be included in the succession plan, and the best way to implement it.
- Start succession planning early in the life of the business not when the key person – founder or CEO – is within sight of retirement.
- Encourage family involvement and debate.
- Review the operation of the business at regular family meetings.
- Document the agreed management succession process and training programs and continue to check that all aspects of the plan are being implemented.
- Set a retirement date for the founder and work toward it.
- Implement a properly funded superannuation scheme to enable the founder or current CEO to retire with dignity.
- Select a successor as early as possible to allow time for training and development.
- Get family acceptance of the person selected as the leader for the next generation.
List all the business's secrets and proprietary knowledge, including intellectual property, trade secrets, comments on competitors, agreements with suppliers, agreements with key staff, etc.