2016-06-17

The ultimate guide to succession planning

Drake Editorial Team

Entrepreneurs need plenty of self-assurance to succeed in their chosen industry. Unfortunately, entrepreneurs are often guilty of focusing on building the business around themselves and forgetting to consider what happens to the business after they are gone. If you spent time creating a successful business, you should definitely spend time on planning for its future once you leave, whether due to retirement or something more unthinkable such as illness or death.


This guide will help you understand what succession planning is, its importance, and options available for entrepreneurs.


What is succession planning?A good succession plan is essentially the roadmap for continuing the business after its owner has left. The plan deals with different aspects of changing ownerships, after either retirement or death/disability. It ensures that business operations continue as normally as possible, while the ownership changes hand. Succession plans can deal with leaving the business to family members or selling it to someone else.


Why should an entrepreneur have a succession plan? Life can be unpredictable, and planning for different outcomes is essential for business success. Too many business owners don’t have a succession plan in place — nearly 66% according to a US Trust Insights on a Wealth and Worth Survey, most of them not understanding the consequences of not having one.


But the benefits of having a proper succession plan are enormous. A proper succession plan:

  • Provides financial benefits: It helps you avoid unnecessary costs of handing over your business and ensures you take advantage of available tax benefits.
  • Makes the succession process smoother and quicker: It limits the disruption of changing ownership to your business. It also eases the emotional burden on the family in case something bad happens to you, guaranteeing they need not worry about the business during a difficult time in their lives.
  • Ensures you avoid panic decisions: With a solid plan in place, you won’t need to make decisions quickly, avoiding rash ones, which are hardly ever good or cost effective.
  • Secures your retirement: You need not lose financially from handing over the business, and you’ll be able to enjoy a smoother emotional transition from a busy business owner to a retired person.
  • Helps you carry on your vision: You’ve spent time and money getting your business to where it is and you shouldn’t see your vision disappear when you retire or are incapable of running the business.


When do you start planning? Entrepreneurs should start planning for the handing over process as soon as they set up the business. Succession planning isn’t just about retirement; it's also needed in case of unthinkable events, such as illness, injury, or death.


What are your options?


The most common options are handing over the business, selling the business, or liquidating the business voluntarily.

 

Handing over the business to a successor

In handing over the business to a successor, you can keep the business in the family or find a non-family successor within the company or outside.

 

Keeping it in the family

Family businesses were traditionally passed on from one generation to the next, but this is now quite rare. In the US, the Family Business Institute reported in 2013 that only 30% of family-run businesses succeed into the next generation, and under 13% into the third generation. This was partly due to lack of proper succession planning.


If you run a business, you need to carefully consider whether you’d like a family member to continue your work and whether they are willing to do so. You don’t want to force anyone to run the business, but you should also not assume your family members wouldn’t be interested.


The key is to ensure the decision benefits the business. Your succession planning shouldn’t be influenced by emotions or expectations. Even if you are passionate about leaving the business to a family member, you need to guarantee the person has the right skills to run it.


Keeping the business in the family is naturally beneficial in ensuring your vision remains at the centre of running it. Creating a family business is a great way to keep your legacy going strong from one generation to the next. It’s often easier than finding an outsider, and mentoring opportunities are not just tied to the work hours. On the other hand, the conflict between family and work can become too evident, so be clear it is the best option for your business and for your family.

 

Transferring it outside the family

You could hand over your business to a non-family member to ensure it continues to pursue your passion and possibly even take it to the next level. This candidate could be someone working in the business:

  • It’s a great way of rewarding hardworking individuals within the organization.
  • The person is already aware of many of the day-to-day operations of the business.
  • The person can start working alongside you, which means you have good mentoring opportunities.
  • But you may have a limited amount of good candidates to choose from.


Or the candidate could be an outsider:

  • You have a larger pool to choose from, so finding a professionally suitable candidate might not be hard.
  • You’ll not be guaranteed the business succeeds or the person continues your vision.
  • Mentoring the person won’t be as easy, since they’ll be tied to their current job position.


Finding a non-family successor can sometimes be a costlier option to family succession. You also need to start the vetting process early to ensure you find the right candidate.

 

Selling the business

Selling your business will provide you with cash. It also takes planning and won’t guarantee your business continues on the path you’ve taken it. But if you are looking for a retirement bonus, you might find selling the business the most lucrative opportunity.


To make the most of the sale, your business finances must be in order. This will maximize your profit: The more successful your business, the more you are likely to make from it. Investors are not looking for business potential in many instances, so make sure your business is worth the cost.


When it comes to selling, you have a number of routes available:

  • Management buy-out (MBO): A management team within the business gets together to buy the business. It has similar advantages to transferring the business to a person within the business. But in-house management teams might struggle finding the financing for a buyout.
  • Management buy-in (MBI): An external management teams steps in and takes the stake in its equity.
  • Initial public offering (IPO): You float the business on the stock exchange, with a new management team stepping in after share purchase.
  • Sale to private equity: A financial investor purchases the business.
  • Sale to another business: If you are a shareholder in your business, this merger option is often the one that provides the most profit.


Whichever of these sales options seems the best for you, consult a business advisor before the making the final decision. Selling the business is a complex process in terms of sorting out the finances, and you want a professional financial advisor to help you make the most of your sale.

 

Liquidating the business voluntarily

You can always choose to liquidate your business. While stopping your business operations might not sound like something you need to plan for, it is important to create a succession plan even for this.


If you are certain you want to liquidate the business before your retirement, make sure your employees are aware of your plans well before you stop operations. Be aware of contractual requirements and responsibilities to both your clients and your employees.

 

What are the key considerations?

Depending on your chosen route, some of the following points will be more important than others, but it is crucial that you keep all in mind when forming a succession plan.

 

Sort out finances

Financial considerations are among the most important aspects of a succession plan. A succession is never cost free, and you need to have enough cash on hand to ensure a smooth transition. Your business finances should also be in order to make the transition straightforward.


Get a business valuation on which to base your calculations. Make sure you regularly revise the financial plan, especially if you aren’t looking to exit from your business any time soon. Get an independent advisor to look into your evaluation to ensure it’s accurate.

 

Determine which skills the successor must have

If you are handing over the business to a successor, outline the skills needed for the job. What makes a good manager for your business? What qualities do you want from the new business leader? Where do you want to see the business go in a few years? Now you can create a set of skills and qualities you want the successor to have.


Requiring a good set of skills and abilities ensures you limit your choice to the right candidates and guarantees the business has a better chance of success after you are gone. You aren’t looking for someone exactly like you, just someone with the right qualities to continue moving the business in the right direction.


If you are looking for a replacement from within the company, you’ll also need to find someone suitable to fill their old role. Consider all these elements when creating a shortlist of candidates.


The list of skills will help you identify potential candidates and determine whether it is possible to find a successor within the family or the business or if you need to look elsewhere

 

Prepare to share your vision

Unless you choose to sell, pass on your vision for the business to the new management. Start mentoring your successor as soon as you’ve chosen one to ensure they are ready to take on the role well before you make an exit.


If you are handing over to someone who is not a family member or indeed part of the business, building trust will be vital. You want to ensure the person knows your vision for the future.

 

Develop a timeline

To ensure a smooth transition, develop a timeline. This helps you leave enough time for vetting the right candidates, selecting the person, mentoring, and finally transferring the business over to the person.


Even with a sale, you don’t want to find yourself rushing a deal at the last minute. If you are certain you want sell the business, take time to lay the foundations for a successful sale. This will benefit you in financial terms and enhance the future prospects of your business.


You ideally start thinking about the timeline as you set up your business. Leave at least two to five years for planning the succession, but have a plan in place for the unfortunate occasion of something going wrong. You can always change your plans as you get closer to the retirement age if your situation has changed.


Thinking about your retirement as you approach your 30s or even 40s might not sound important, and it’s not easy to consider the worst might happen to you in life. But as an entrepreneur, you need to be aware of these things and plan for the future. The good thing is that there’s plenty of help available. With the options of handing over, selling, or liquidating the business, every entrepreneur can find the right solution. You just need to start planning early.


Reprinted with the permission of Martin Luenendonk. Visit him at www.cleverism.com. The complete article can be found at: https://www.cleverism.com/ultimate-guide-succession-planning-entrepreneurs/

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