Succession planning for businesses

Succession planning for business continuity usually starts with identifying when you will pass your business on and to who.  If you are approaching retirement or taking a step back from your role then it is worthwhile getting a strategy in place, for handing your business over to its new owners. In fact, even if you’re not planning a change in the short-term, it’s a good idea to put a plan like this in place for the unlikely event of death or disability to ensure that your estate is passed on in the way you intended and to make things easier for those left behind.

Initial questions to be considered when starting your plan are:

• Am I retiring or planning to retire?  And when.
• Do I need or want a business partner?
• Is a management buyout an option?
• Am I wanting to take a step back and free up some assets?
• Am I wanting to relinquish all control over my business
• Am I interested in a consultant or mentor role to the new owner?  Will this be a requirement of the new owner and am I prepared to be locked in for say two years?
• Have I considered what this may mean for the way I run my business while looking for a buyer?
• Is the employment security of my staff a key factor?
• What is the ownership structure of my business?  Do I own outright or are there other stakeholders involved?
• Am I prepared for the process to take some time, possibly a number of years?

These along side who you would ideally like to pass the business on to will help to determine the best selling arrangement. This usually involves an indepth due diligence process, a sales and purchase agreement, clarity around warranties, working capital requirements of the business, and whether the transaction is staged or ‘clean’.

Your plan may involve:

Succession – This can include family within your businesses, or also include key staff or stakeholders involved with your Practice.  This is a great opportunity if you are wanting to maintain some level of involvement in the business or are invested in passing on any specialist skills and/or relationships to your successor.

Sale – to a third party, with whom you are not normally affiliated.  This works best if you don’t want or are unable to continue involvement in the business.  In many cases this involves work out clauses to consult or mentor a new businesses owner into your role.

Mergers and Acquisitions – bringing two businesses together.   There are benefits and drawbacks of this strategy, benefits including achieving economies of scale, downsides including the need to mesh two cultures and operating systems together.

A succession plan will include:

• A timeline dependant on the circumstances.
• Your potential successors
• Standard Operating Procedures (SOPS) so that the transition is more ‘seamless’
• How your succession will be funded

In many cases it is a good idea to seek advise around creating a solid plan for succession. Making business decisions within a family can get messy. Emotions can run high, especially after an untimely death or disability. In businesses where many heirs are involved, and only one will take over, you can simplify future discussions by providing clear instructions on how the structure should look moving forward. This may include a distribution of shares that each can sell. It may also be that your future purchaser (such as an employee) may not have the cash to buy the business outright straight away. You will need to plan for a slower transition and staggered payments.

The biggest challenge around succession planning for most businesses is that they don’t have a plan.  Create one and get advice to ensure it is workable.