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The Ultimate Succession Planning Guide

Wednesday 17 September, 2008
A well thought through succession plan is essential to every business no matter what the intention is for the future. It should be a key part of your business' growth strategy and risk management process.

The benefits

A structured succession strategy, planned well in advance, will enable you to leave behind a legacy of a profitable and sustainable business, a strong brand, solid strategic positioning, an untarnished reputation, a committed team and a good work culture. This legacy will get you a premium price for your business and attract the right successors. Such a legacy is built on the foundations of a sound succession plan.

A well-structured succession plan:

  • Attracts and retains suitable staff through development and nurturing strategies
  • Ensures a continuing sequence of qualified people to move up and take over when the current generation of managers and key people retire or move on
  • Ensures the business' value is protected and maximised by demonstrating a clearly defined viable future
  • Establishes and progressively builds-up equity
  • Ensures a smooth transition with less likelihood of disruption to operations
  • Clarifies authority and decision-making roles
  • Maintains accountability and ensures stability
  • Can build a non-principal dependent practice, increasing the capital value and the attractiveness of your business to potential buyers

Some serious considerations for the business owner

Skilled people are short on the ground and it is already extremely difficult for employers to attract and retain good staff. Imagine how much more difficult this situation will become as the predicted exit of the Baby Boomers over the next 15 years is accompanied by the loss of many years of skills, knowledge and experience - and owners vie for talent to succeed the Boomers.

Not having a well considered succession plan in place exposes even the most successful business to a crisis.

If you don't have a succession planning strategy consider:

  • What would happen to your business if you, or a key member of your staff, was not able to return to work for a long period, or worse still, never?
  • How can you assure a continuing sequence of qualified people to move up and take over when the current generation of managers and key people retire or move on?
  • How can you plan for the future of the company without some assurance that the key posts will be filled with people able to carry on and excel?
  • How do you protect the value of the business if you can't demonstrate a clearly defined viable future?

Procrastination or failure to plan for orderly business succession can result in monetary losses, and even loss of the business itself through:

  • Degradation of the brand
  • Failure to keep pace with the competition by adopting a ‘head in the sand approach'
  • Loss of customers, sales etc.
  • Staff attrition and loss of key talent
  • Fracturing of stakeholder relationships and goodwill
  • A gradual decline in the value of the business

Why is it critical for a business to have a plan in place NOW?

The life-cycle of a business inevitably changes. In the beginning, as the founder, the business couldn't operate without you. But as your business has matured the dependency on you should have lessened. Key staff may hold pivotal roles now. Without them and/or you in these key roles the business would be in serious trouble.

The concept of succession planning however is fraught with misconceptions. Many business owners think of a succession plan as something they only need if they plan to pass the management of the business on to someone else. Others think of succession planning as applying only to family owned companies or large conglomerates. And many fail to see that it's not all about the owner - key people may exit your business unexpectedly, leaving huge holes in your capabilities.

There are a number of ways a business owner can exit the business. You can sell, arrange a management buy-out or buy-in, pass the reins over to a family or employee successor, raise capital by introducing new people to the ownership, merge, franchise, sell-off the assets or close the doors.

An internal succession plan outlines how the critical roles in your business will be filled in the future; or if there is an unexpected skills and experience loss. To make the best of your internal succession plan, you must also look at your business' future goals and the skills that may be needed to secure its longevity.

The key is to have time on your side. How long? Effective internal succession planning is continuous. Effective ownership succession plans will usually have a minimum time frame of two years - and will often continue for five years or more.

The basics of a good succession plan

The plan itself needs to be clearly thought out, documented, regularly reviewed and attainable. You must set a realistic timetable with measurable milestones along the way and stick to them.

You need to identify your:

  • Organisation's long-term goals and objectives
  • Staff developmental needs
  • Successors, who must be willing, able and prepared to take over

Consider:

  • Workforce trends
  • Three stages of transition, termination and exit

Ensure:

  • Continued strong leadership
  • Required funding is in place as early as possible

Preparing for succession

The value of a business is directly impacted by risk, both existing operational risk and potential risk associated with disruption to the business through a change in ownership and/or management. A well-crafted succession strategy identifies and mitigates these risks.

It is in your interests to do this regardless of whether you decide to sell the business outright, or retain equity and continue to receive a share of the profits after withdrawing from management.

To prepare you should:

  • Have a clear vision for the business

    Unless you have a vision, you won't know what kind of leaders to identify and develop
  • Strengthen the business model

    And focus on sustainable profit
  • Make yourself redundant

    Delegate and allow others make decisions
  • Have your business valued and draw a line in the sand

    A ‘proper' valuation will provide you with a solid insight into how much, or little, needs to be done to bring the business to the ‘aspirational' price you have set for it
  • Understand your industry dynamics

    And ensure the business is sustainable against these volatilities. Take into account workplace and industry trends and predictions
  • Consider who needs to be involved

    In the development of your succession plan
  • Identify the skills

    Currently held by people in key positions
  • Identify successors

    People who are ready, willing and able to take over in full or part
  • Enlist professional help

    Where needed
  • Link your business strategy

    Both current and future plans, to talent requirements
  • Involve your top executives

    And gain their commitment to growing talent for the business
  • Identify the talent in your business

    And invest in those people
  • Plan for continuity

    In the transition period and for when you exit the business
  • Have a contingency plan

    In case the unforeseen happens and your intended successor declines the role

Determining a successor

Owners often wrestle with the task of grooming a successor. 

Some important considerations:  

  • Your son, daughter or family member may not be the best person to lead the company strongly into the future. Evaluate their suitability objectively
  • Don't assume that your son, daughter or family member would want to head up the business, even if they work in the business.  Ask them!
  • Good internal succession outcomes start with your recruiting strategies
  • It is important that you allow your internal successor an adequate training period and this is built into your planning schedule
  • If you decide to recruit from the outside you will need to spend time integrating that new person into the culture and agendas of the business. This is essential to the newcomer's ability to gain respect, trust and confidence amongst the rest of the staff
  • Your successor should not be your clone. Different skills and experiences may assist the business to grow in other dimensions
  • Your successor must demonstrate a commitment to the same values on which you built your company and the behaviours to support those values
  • Mentor your successor
  • Establishing a sense of continuity during succession is important, and maintaining key relationships is paramount. Can the potential successor work effectively and collaboratively with your management team, your other stakeholders, your bank, your accounting firm, your legal team, your customers, and with you?
  • Are you clear about what authority you might give your successor and what authority if any, you want to retain yourself? 

Will your company survive your departure? The answer depends almost entirely on how well you choose and nurture your managers and on how well they in turn nurture others. A poor succession choice can undo in months what you have built over many years.

Letting go of the steering wheel

Develop a business transfer plan. In it, develop a timeline for starting the transfer of ownership and management to others. Decide when your successor will:

  • Start assuming some of your responsibilities
  • Take on a major portion of the responsibilities
  • Take on the responsibility for day-to-day operations; and
  • Be formally introduced to the rest of the business as ‘in charge'

Importantly you need to ‘let go', not just when you exit the business, but from the word go. Choose your people wisely. Have the confidence to delegate and engage them. Reward them for their performance and their behaviours.

Author Credits

Charisse Gray ( www.writingbusiness.com.au) on behalf of Bill Hovey, Linchpin Group. Bill Hovey, author and CEO of the Linchpin Group Australia and Practice Executive Director of Linchpin Succession Management, has amassed more than ten years advising and counselling business in all aspects of business succession. For further information Ph: +61 2 94680 180 or visit the web sites: www.linchpingroupaustralia.com or www.successionmanagement.com.au
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