It’s inevitable that eventually, you’re going to have to leave your business. Having built that business from scratch, however, you want to ensure that even without you, it’s able to continue on and grow. And that’s why you need a succession plan.
A succession plan is different from a will. They might be for similar reasons (i.e. you want to make sure your spouse or child is able to take over your business after you pass away), but a will only cover the transfer of ownership to the next person. A succession plan should also transfer over all the knowledge that the next person will need to take over the business.
What is succession planning?
Succession planning should commence well before you’ve left the organization so that the transition to the next owner can be seamless and confident. Ideally, the succession plan should take into account the following key objectives:
– To ensure that the organization can continue to operate in the way it has following the transfer of ownership.
– To make sure that the person taking over the organization is in alignment with the company vision and direction for the future.
– That the new owner maintains the same commitment to staff and organizational structure.
It’s important that the successor, therefore, has access to the following information:
– Who in the organization is leaving or likely to leave – where will there be skills gaps in the new future?
– All the key business papers and information (ABN and ACN registration, insurance papers, lease papers, the market evaluation of the business, any contractual obligations, and so on)
– A full summary of the finances of the business, and the five and ten-year plans.
In addition to having full documentation of all of this, it’s a good idea to have the successor shadow you for a couple of weeks, to get a feel for how you operate the business and pick up on all the small details that simply wouldn’t be thought of in conventional documentation. Just as you wouldn’t expect a new recruit to simply step into a role without supervision and guidance, so too do you want to prepare your successor to take on your role.
How succession can go wrong
Succession is one of the trickiest things to get right in business and needs careful and ongoing planning. Some of the common pitfalls that can make a succession fail to deliver the smooth transition include:
1) Poor valuation of the company
If your succession plans involve someone purchasing the company, having an inaccurate or old valuation can cause the arrangement to fall down. Even if you had the company valued when first setting the succession plans, it’s important that you get it revalued by an accountant with proper valuation credentials when pulling the trigger.
2) Keep the succession plan up to date
Ideally, you should have a succession plan in place well ahead of when you actually plan on moving on from the business. That way is something sudden should happen, the business is still catered for. The last thing you would want is for your spouse to look up the succession plan, only to find out its 10 years old, and the business no longer looks anything like what is listed in the plan!
You should make a habit of revisiting the plan every six months or so, just to tweak it and keep it current.
3) Finding the right person for the job
Finding the right person to take over your business can be a surprisingly difficult process. We all have certain expectations and biases that can cloud our judgment, and many businesses have come undone when an owner has a “pet project” or family member take over the business, only to lack the skillset and expertise to continue the owner’s work.
The best solution here is to write down a list of criteria based on how you work and make sure that any prospective successor is able to check off all of these criteria before handing them the reins.
4) A lack of clarity
Finally, succession can be highly disruptive if the plan isn’t clear. If all staff in an organization don’t understand what their roles will be under the new organizational structure (particularly if the succession goes to an existing staff member that is “promoted”), then the business can grind to a halt as the new team tries to work through it.
You need to consult with specialists in creating your business succession plan – professionals in the space will be able to identify ambiguities and gaps that can potentially cause confusion. Once completed, however, the plan of succession, in conjunction with your will, will be enough to ensure the security of your business passes on to the next generation.