Generation next

Good communication, sound business practices and the right people waiting in the wings are all vital parts of a succession plan, writes Simon Hoyle.

You've put years of blood, sweat and tears into making your business the success it is today. You've ridden your luck when your luck's been in. You've suffered some setbacks, but you've battled on. You've persevered when the situation seemed dire and when others told you it was hopeless. You've taken some risks – and you've reaped the rewards.

It's inconceivable, after all that time and effort, that you'd willingly watch the whole enterprise fall apart by not planning well enough for succession. But that's precisely what can happen if you do not think about and plan for succession early, or effectively, enough.

Succession planning is about the transfer of business management or the transfer of business ownership – in full or in part – from its current owner to a new owner.

George Frazis, Executive General Manager, Business and Private Banking for National Australia Bank, says getting ready for succession, even many years before you intend to hand over ownership and/or control, does not indicate that your devotion to the business is waning. "It means exactly the opposite," says Frazis. "It means you take the business's future very seriously indeed – in fact, it's a greater indictment of your commitment if you do not have a good succession plan in place."

It's all in the detail

Succession as a concept isn't overly complicated, but like with many things in business, the devil is in the detail. It does require careful planning and a clear idea of what you want to achieve from the process.

For example, you might want to be succeeded by existing employees, people who have helped build the business. Or you might be more attracted to a trade sale – selling to a competitor, or to a newcomer to your industry. For some, selling to a venture capital investor, or undertaking an initial public offering – a sharemarket float – may be the more attractive option.

Chris Dionne, global director of consulting firm Shirlaw's, says the course you choose is a personal decision, and each path has its own requirements. However, he adds there are two elements in all comprehensive succession plans. One is "functional succession", which means handing over management of the business to someone else, and the other is "ownership succession", which, as the name suggests, is transferring ownership to another party.

The two types of succession need not necessarily go together; they may be separated. For example, functional succession may precede ownership succession, so you can be sure the business is in good hands before you relinquish ownership.

Smooth transition

The aim of every succession plan should be to "obtain a smooth transition for all parties", Dionne says. But there are some common errors that people make – and the first one is not starting to plan early enough.

"It's a critical process or business decision that needs to be considered long before it occurs," Dionne says. "But people start the process way too late. It's not a top-of-mind thing. They do not put enough thought into what they need to do.

"I think you need to start at least three years – probably three to five years ahead. But it must be run in tandem with what I call getting your business streamlined and operationally efficient. You can run your succession strategy, and start all those preparations, but there needs to be some other things in place so the business risks that are there today are not there at succession."

Frazis says succession in a business has to happen not only when you're ready, but when the people in line to succeed you are ready, too. "The people who succeed you must have the skill and experience to manage the business once you hand it over," says Frazis. "And they must be able to afford to take over, so your financial objectives from the succession plan can be met."

He says a comprehensive succession plan has to take all these factors into account, and yet remain flexible enough to deal with the inevitable delays and unforeseen events that crop up along the way.

"If you have a clear idea of what you want to achieve from a succession plan – what you want to get from it yourself, what your successor will get out of it, and the sort of business you want to leave behind – then most of the pitfalls and potential disappointments can be avoided,"
says Frazis.

Dionne adds that it is vitally important to have clear goals before you put any succession plan in motion. "You have to sit down with them and work out or get them to think back to why they started the business," he says.

"They have to work out what they want to achieve through this process. Some people want to leave a legacy. Some people want to sell to someone they really like. Some don't care.

"Some people just want to get out, because they are stressed and they are not enjoying it, and they have lost all their energy.

"But the key in all these cases is making sure you prepare all the parties for the succession strategy – particularly the clients. That's often not done very well at all. And the other key group is the staff."

Planning for succession

It takes time

Succession planning takes longer than most people imagine. You might have a specific target date in mind, but you won't always have the luxury of sticking to a strict timetable, so it pays to be ready for whenever the opportunity arises. You must also be prepared to delay the succession, if the time isn't right.

Good disciplines, good practices

Your business will be more valuable to a potential buyer, and the succession process will run more smoothly, if you have good business practices in place and you're running a disciplined and well-managed operation. The quicker a potential buyer can get its head around how your business works, and how well it's tracking, the greater your chance of maximising its sale value and achieving a painless transition.

Managing business risk

Are your customers, clients and suppliers aware of your plans? Particularly in businesses built on personal relationships, it can be as big a jolt to customers as to staff when the founder leaves. Losing customers is obviously a major risk to any business, but a risk that can be minimised with proper communication.

Internal or external?

Selling the business to an arm's length third party might be your preference, but you have to consider the impact it will have on the people who remain in the business. They have their own aspirations and hopes, which might include one day owning and running the business they work in. Their disappointment will have to be managed if you opt for a different style of succession.

Show me the money

If you're planning for existing employees to succeed you, where is the money going to come from? They may have access to funding, or you may need to set up systems and procedures to help them finance the transaction.

Transition

Succession is inevitably transitional – there will be a period of time when the old and new owners are working in the business together. You need to be aware this is likely to happen, make sure the new owners are aware this is going to happen, and discuss it openly so problems can be avoided before they arise.

Simon Hoyle is a personal finance and investment writer for The Sydney Morning Herald.