Succession is an inevitable bridge that needs to be crossed for all businesses. For some, the decision is made in a millisecond – whereas for others, it can be an all-consuming dilemma. This article is to help those struggling with this dilemma.
It is important to recognize that succession can be a very difficult and sensitive issue for the business owners to confront. Regardless of whether they founded the business or succeeded into the business themselves – the notion of handing over the reins to someone else can raise all manner of concerns.
Confronting the issue of needing to plan for succession is a great place to commence the discussion. Business owners have a finite life, whether this is driven by health or interest – so establishing this point provides the foundation for the question of – then what?
The sudden unplanned exit of an owner can be incredibly damaging to a business, so having no plan is not a great place to be. Unfortunately, it is often those held most dear by the business owner who bear the brunt of this (family, key staff etc), as suddenly they find the business…. which they have relied upon for so many years (for employment or income etc)…. can no longer support them.
Assuming that the current owners want the business to continue in its current form with new owners/managers, then the rest of this note focuses on what sort of elements a succession plan should include.
Business owner succession is a big issue for a business, so it deserves appropriate planning and consideration. It should be handled like a formal project with all of the normal project protocols in place. The formality of this will vary depending on the size of the business, but by handling it as a project (with its milestones, responsbilities and actions), there is less chance that critical details will fall through the cracks.
There are a number of stakeholders to take into account, including (but not limited to); the current owners/managers, the proposed or new owners/managers, key clients, key suppliers, Bankers, Lawyers, Accountants and the employees of the business. Each of these stakeholders are important and require specific consideration to ensure the “succession” does not have an adverse impact on the business.
Depending on the starting position, succession can take anywhere from 3 months to 5 years to implement. Typically, transitions happen in the 6-18month range, but in saying this every business situation is unique. The critical point however is that succession will not simply happen overnight.
Can be one of the toughest issues, with appointments generally falling into one of two categories – generational V new introduction. Generational appointments (a family member or trusted employee), tend to have an intimate knowledge of the business but sometimes lack the required management/leadership expertise. New introductions are generally recruited for their expertise, but need to accumulate knowledge of the business. There is no “right or wrong” and no “best or worst” choice here, as I have seen both options work and fail in equal proportion.
With a change in the ownership of the business, a strike price for the business or its enterprise value needs to be established. I suggest that this be handled by a suitably qualified valuer, but factors that come into this include; historical financial performance, the quality of the operations and systems, stock and asset values. Quality financial data and accurate records assist this process.
Just because a candidate has been identified as the suitable successor, does not mean that they have the necessary financial means to purchase ownership. I have seen many instances where a progressive change of ownership needs to be considered if the current owner wants the best dollar. Equally however, if the owner wants a clean break – then they may need to consider giving a cash discount to take a single lump sum.
The period between the current and the new owners/managers can be difficult, as you tend to find a blend of different views and styles – which in some ways can be competing. Tabling this as a clear issue up front will enable planning to mitigate this risk. Clear and regular communication to the staff is also vital at this point, as confusion will cost efficiency and can extend to the loss of key staff.
Can be the tripping point for the best planned succession. This issue is impossible to cover in a few lines, but it is something that should be assessed at a business level. The culture of some businesses has been so opposed to change, that the practicality of having ownership succession is simply not there. An outside set of eyes can often help in assessing if culture is an issue.
Succession is a clearly a complex and sensitive matter with the above points merely the format to commence a quality conversation. Above all else, the point to take away is that succession is inevitable – and the real question is – whether the current business owner wants to be part of the change process, (or not!)