5 Tips for Succession Planning
These 5 tips for succession planning will save you many headaches as you look to exit your business.
One of the most common traits among the numerous entrepreneurs and business owners whom I have met over the years, is that they are focused on crystallizing the various growth opportunities they have identified. Therefore, planning their succession is often left until the last minute. Unfortunately, this approach often leads to decisions being made which, in the short-term, may enhance profits, but in the long-term can either detract from capital value or reduce the potential for owners to achieve their exit on the most desirable terms.
Having one eye on succession planning at the outset, as part of the strategy for both the company and the shareholders, is therefore prudent advice, ensuring the widest range of succession and exit options remain available. Succession can encompass a number of events: The sale of the entire company to a trade party; a management buyout of the founder shareholders by the management team via debt or private equity funding; or just simply the shareholders stepping back from full-time director duties and allowing the management team or the next generation to step up and take on more responsibilities.
Based on my experience of witnessing the implementation of numerous succession plans (some more successful than others!), I have extracted what I believe are the key considerations to take on board when planning and executing this event to ensure it is as successful as possible for all concerned.
My top tips on making your succession plan a success are:
1. Start Preparing Today
To implement a successful succession plan requires time. However, it's still highly likely that your company will deliver you with the highest capital return within your lifetime, and therefore it makes sense that you assess all of the options as early as possible and understand how to realize each.
The final route taken in succession planning is often completely different to the one that the owners initially envisaged. Changes happen on short notice due to circumstances out of the parties' control (such as recession or ill health). Understanding the full range of succession options, and what is required for each to be achieved, is invaluable in case the unexpected occurs.
2. Accept that You Won’t be Around Forever
Particularly with a family business, it can be difficult to comprehend a time when you are no longer the owner or that your business won’t be passed onto the next generation of your family. However, it is becoming more and more common for entrepreneurs and business owners to run a number of companies at different times during their working career — partly driven by the 24/7 culture that technology has created, leading to burn out — along with a noticeable shift in recent years toward meeting the desired work/life balance.
Coupled with this is the noticeable change in approach by the next generation, with it increasingly becoming more common and acceptable for children to seek to explore different career paths, rather than follow in the family footsteps. Adopting the view of the business as a separate standalone entity, rather than a family asset, ensures that sentimental ties and decisions are kept to a minimum and enhances an owner’s ability to independently assess and execute all of the potential options.
3. Recruit your successor
Regardless of the chosen succession route, a key constant in a business’ value is its ability to be able to operate without the day-to-day input of the owners. Often it can take a while for a business owner to see the difference between ‘profits’ and ‘capital value’, and it can be difficult for them to become comfortable with their company providing them with lower profits in the short-term (due to increased investment in new staff), which ultimately enhances capital value over the long-term.
Recruitment at senior levels can be a difficult and resource-consuming task, with the ability to identify a suitable candidate, either internally or externally, far from an exact science, and with no guarantees that the first, second or even third person you appoint will be a success. In the vast majority of business sectors, value is heavily linked to people, and therefore having a team in place that you trust to run the business as you take a step back, or that can be presented to a potential buyer as the day-to-day management team, can often be the factor which enhances value and opens up the full range of succession options.
4. Take it seriously
The constant pressures of running a business can make finding the time to plan an effective succession strategy a difficult act to master. However, by incorporating this as part of the wider strategy within a longer term business plan, it can help to ensure it remains a constant on the agenda.
External advisors can assist in this regard, feeding back-market knowledge on M&A levels and activity in your sector and, more widely, helping the shareholders and directors to regularly keep abreast of the potential options and allow for educated decisions to be made at the appropriate time.
5. Evaluate all of the options
One of the most important pieces of advice you can get is to keep an open mind about how succession could work. Often owners assume that they will simply appoint their successor from within, and gradually exit over a period of time. However, not all employees are able to take this difficult step up, and the wide-ranging skill set it requires to be a successful CEO or MD can be challenging to find internally. Recruiting experienced executives can be the solution, but this can often be costly in the short-term, with the departing owners sometimes guilty of struggling to ‘let go of the reins’ as the incoming executive looks to make their mark and run the business as they see best.
Selling to a rival trade party can be the solution, and it is most likely to deliver the highest capital return (particularly if there are obvious synergies); however, running a confidential and well-managed process is of paramount importance in order to achieve this, and timing here again can be the decisive factor in whether or not it will be successful.
Ultimately, it is important for business owners to appreciate that their succession plan doesn’t have to be carved in stone. By understanding all of the options from the outset, they will be able to make informed choices as and when it becomes pertinent. As with nearly every other aspect of business, having a clear, well-defined strategy will ultimately pay dividends, and ensuring you adopt wthis mind-set to succession planning as well can prove invaluable.
Written by Adam Croft
Adam has been a lead advisor in the UK for M&A for over 10 years. His insights and advice come from a successful history of the due diligence involved in solid valuations to complete successful mergers and acquisitions.