Business successor wanted: Introduction to succession planning

Effective succession planning is about taking decisive steps to ensure the long-term value of your business. This long-term value hinges on two key elements: continuity and longevity.

Without a clear succession plan, you cannot realistically expect your business to establish either continuity or longevity.

In this article, we will:

• explain business succession planning
• highlight its benefits
• specify the succession planning process
• consider potential challenges and obstacles
• explore how to implement it successfully.

If you do not leave a will, you have no control over what happens to your estate and who benefits from it. Succession planning is similar – without putting measures in place before you sell, you relinquish any control over what happens to your business in the future.

Understanding succession planning

A big part of succession planning is about leadership – the knowledge and expertise essential to running a business once its owner is no longer leading it. This provides the continuity the company needs.

When you do not have a succession plan, you face several key challenges and risks:

• loss of continuity and expertise
• leadership gaps
• damage to client and stakeholder relationships
• recruiting fresh talent
• missing knowledge and experience
• uncertainty for staff and low morale.

Given these challenges and risks, business owners and leaders must prioritise succession planning as early as possible – this de-risks your business. Plus, it provides stability and cements your vision for the future.

Benefits of succession planning

There is one essential aspect of succession planning that gets overlooked: it's not just about your business in the future. It's also about your business here and now.

Good succession planning builds resilience in a company. It ensures the correct structural elements are in place, based on a solid understanding of how the company currently operates – its opportunities and challenges and its resources and objectives.

The key benefits of succession planning are:

• establishing continuity
• ensuring stability
• enabling growth.

Continuity is critical for a company. It has a core importance. Continuity means minimising disruption. Selling a business is potentially disruptive and therefore damaging to the confidence of customers, stakeholders, investors and employees. Succession planning preserves and demonstrates continuity to bolster confidence, morale and trust.

Stability requires implementing practical measures to keep things running smoothly during your company’s transition. This covers central issues such as leadership, key roles, accessing data and understanding processes and procedures.

Creating conditions for continuing growth makes a company investible as a long-term prospect. Building these conditions into a business succession plan sends out clear signals to potential buyers that the company offers a promising ROI.

When you buy something, you want to make sure you know it will work before you commit. The same applies to a business. The knowledge of how it operates, and that it will continue to do so, is an essential part of its value to a buyer.

The succession planning process

The major parts of the succession planning process are:

• assessment and preparation
• establishing the succession timeline
• creating a succession plan
• legal and financial considerations.

Assessment and preparation involve looking at your business objectively, identifying relevant strengths, weaknesses, opportunities and threats and considering how best to optimise it for succession.

There will be key roles to consider and the knowledge and experience that goes with them. Are there gaps in your leadership and management expertise? Do your current processes cover all your essential transactions and operations? How will you retain and protect your company’s accumulated knowledge? Basically, what will your business look like without you in it?

Succession timelines are individual to each business. The information from assessment and preparation will largely determine the timeline, but there may be external factors, such as potential buyers’ needs, to consider.

The succession plan should set out clearly and comprehensively what will happen and when. It is the business owner’s roadmap to exit and the structural blueprint for the company to provide a potential buyer with confidence.

Legal and financial considerations in the succession planning process can be complex. There may be several options for transforming the company’s legal structure, such as sole ownership, partnership, a limited liability company (LLC) or corporation.

Financially, the valuation of the business can impact its succession plan. Financial issues cover such complexities as retirement plans, estate taxes, compensation, shareholder agreements and financial strategies.

Succession planning challenges

The most pressing succession planning challenge is finding the right successor. So much depends on this. If you choose the wrong successor, this can undermine the success of the entire process. This person will occupy a principal role, with the skills and talents to take over the company and take it forward.

Other challenges arise from the process – gathering detailed and objective information, keeping a long-term perspective and managing personalities.

This latter aspect is pivotal. It’s difficult to take the emotion out of business succession. Individuals feel invested, whether they’re owners preparing to sell or leadership teams preparing for the transition to new ownership.

Therefore, a major challenge is establishing and maintaining trust throughout the process. If the trust goes, the risk is the talent, expertise and investment in a company goes with it, draining the business of value.

There are practical challenges concerning employee morale, keeping the plan up to date and measuring outcomes as it progresses.

You must also consider external challenges. Markets can shift and economic conditions become volatile. These factors put enormous pressure on owners looking to exit their companies, with the potential to drive values down or put off buyers altogether.

Implementing your succession plan

Once again, you cannot underestimate the importance of confidence in ensuring a successful business succession.

Keeping everyone on track and on-side requires transparency, openness and clear communication to all stakeholders throughout the process.

While planning is critical for success, so are flexibility and adaptability. Conditions and circumstances can change, which means plans must evolve. Practically, this requires constant and detailed measurement and assessment of your succession plan as it progresses.

Find your perfect business successor with Marktlink

As specialist M&A advisors for SMEs, applying our broad market knowledge, we will help you find the ideal business successor, guiding you through the business succession process. We are 100% independent with a proven track record of over 1,200 successful deals.

We are characterised by our personal approach, which focuses on the wishes of entrepreneurs and spurs us on to facilitate the best possible deal.

Let’s find your successor together. Complete our contact form today.