This is a thought leadership article by North American member firm Smith Schafer & Associates discussing the mistakes to avoid when succession planning.
Succession is inevitable in a business. When the time comes to start thinking about retiring or transferring ownership, it is essential to understand common issues related to the process. When a closely-held business owner is asked about their succession plan, it is often a topic that receives little thought due to the amount of time consumed with day-to-day operations. Every business owner has an emotional and financial investment in their company and often is reliant on the proceeds from their investment to fund retirement. The earlier an owner can design a succession plan in their career, the smoother it will transition and maximize the financial rewards. To help understand the common issues faced in succession planning, Smith Schafer has provided a comprehensive summary of the common succession planning problems we see on a regular basis.
1. Mixed Emotions
For a majority of business owners, it can be hard to set a day to retire. It makes it even harder when the person’s current position is owning and operating a business they have built from the ground up. A significant reason to create a succession plan is to circumvent mixed emotions during the succession.
Uncertainty by the owner raises the chance for risk to occur in the succession process. The owner may find themselves hesitant to develop a plan because it outlines the inevitable end to their role in a business. To eliminate fear and indecision later in the process, it is essential to develop a plan promptly.
Developing a timeline could be the largest problem a business owner may have when they approach succession planning. Preparing a business succession plan forces the owner to think about their own mortality and even business competency as they progress in life. It may be an uncomfortable conversation to have, but it will be vital in determining a business's livelihood when resignation, death, retirement, or disability occurs.
Recommendation: Become active in developing a succession plan. Think of the alternative, where there is nothing in place at all. If something happens to the owner or another key person, the business structure is open to dissolve quickly. Succession planning becomes a device to mitigate risk and provide the foundation for the future.
3. Identifying a Successor
When thinking about a successor, not every business owner is fortunate enough to have a competent son or daughter that can quickly fill a management role. If that option is not the case, here are steps to take when searching for a successor:
- Identify characteristics and skills – Many business owners try to look for a “me-type” of owner. This person often shares many qualities similar to that of the current owner. It is important to think of the characteristics and skills of a person as a whole. Find qualities that make an owner successful. This person may be different in many ways but contains appropriate abilities to help continue business success.
- Promote from within – A successful business is rarely ran by one individual alone. Identify standouts in management and throughout the company that may interest in expanding their role. There is a great benefit to having someone take over who understands how the business operates, its culture, and its keys to success.
- Transferring responsibilities - Once a successor is identified, it is essential to have a succession plan assigning different roles and decision-making power. However, in our experience, owners tend to pass on specific responsibilities while not giving up actual control. It is beneficial to adhere to the succession plan set in place and allow for a successor to flourish in their role.
4. Succession Plan Design
Like any good business plan or budget, it is important to be realistic and set attainable expectations. Start by developing goals. These goals should create value for the business. Ensure every part of the succession plan lends itself to this goal. Identify benchmarks or a timeline for when things will occur. In many cases, this will be associated with the age the owner expects to retire. Without clear benchmarks, it is hard to know if a plan is on track or being executed effectively. Confirming the plan is being performed piece by piece will make the transition easier.
Communicate the plan with management, family members, or advisors. This makes it easier for an owner to be accountable for each step. An outside view of a succession plan may lend additional opinions and help ensure the plan is realistic.Lastly, be active in the transition. When employees, management, or family members see an owner pass on certain responsibilities or control in the business, it lets others know the succession plan is being taken seriously. Once a succession plan is finished, it must be updated every few years. Changes in employees, industry, or market conditions all contribute to plan revisions. Even if there are no significant changes, there may still be improvements every time the succession plan is revisited.
Part of developing a succession plan may be acquiring a business valuation. Some may think, if the actual succession is not for several years, there is no value in obtaining a valuation. Realistically, it may be challenging to make decisions regarding the succession plan without understanding the business's current value. A business's value does change over time, but a business valuation provides a benchmark for planning purposes. Having a company professionally valued creates a reliable number that can be communicated to potential buyers.
Smith Schafer & Associates, Ltd.
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