âA leaderâs lasting value is measured by succession.â (John C. Maxwell)Â
Succession planning is preparing for the future of your business, ensuring the people and resources are available for its ongoing success beyond the lifetime of the current key players. It is especially critical in small businesses where the loss of a key person can bring the business to a sudden halt.
A formal succession plan details exactly what happens if the owner or a partner or another key individual in the business is no longer there, for both expected and unexpected reasons. These reasons range from the sudden or unexpected death or disablement to a planned and expected exit, for example, due to retirement.
Some of the options for succession include grooming the ownersâ children and heirs to take over the reins; training loyal employees to take over key roles; bringing in high level expertise from outside the company; or selling the stake in the business to family, to the other partners, to a loyal employee or a group of employees, or to an outside buyer.Â
Why is succession planning so important?
Succession planning is crucial to ensure the viability of the company over the long term, and to unlock many benefits in the short term.Â
A good succession plan can secure a business ownerâs legacy, and their retirement or their familyâs well-being, instead of the business simply becoming one of the estimated 70% of inherited businesses that donât survive.
It also ensures that what happens after the loss of a key person is planned and structured, rather than forced on the business by circumstance or by the courts.
A clear and fair succession plan can also:
- Prevent confusion and uncertainty after a sudden and unexpected loss
- Avoid family disharmony and conflict between heirs and employees
- Allow for continuity and a smoother transition, reducing the impact on the business and its stakeholders
- Ensure that successors, whether a promoted employee, a newly appointed manager, or a son or daughter or another family member, or a buyer, are qualified, skilled, and groomed to take overÂ
- Provide opportunities for employee career growth internallyÂ
- Ensure you can get fair value if selling the business or a stake in it Â
- Prevent the forced sale of assets to settle the estate.Â
How to planÂ
Succession planning involves a combination of financial planning, estate planning and wealth planning and therefore requires the expertise of qualified advisors including your accountant.
The details of a succession plan depend on a range of issues, such as the ownership structure of the business, whether succession involves handing over to the next generation or an employee or an outside buyer, and the unique financial and legal aspects of the business.
As just one example, many businesses are sold to family or staff who may not have cash up front, and this requires special planning, for example, staggered payments over time and a slower transition.
However, here are a few common characteristics of a successful succession plan:
- All stakeholders are included in the planning and decision-making process
- Suitable, practical and gives the best outcome from a family and business perspectiveÂ
- Documents and puts in place formal mechanisms and clear procedures for governance, conflict, and dispute resolution Â
- Contains a short-term emergency plan for each key positionÂ
- Details a full long-term succession plan for each key positionÂ
- Considers the financial, estate duty and tax implications of the decisionsÂ
- Takes into account legal compliance and commercial and practical considerationsÂ
- Ensures continuity by providing essential liquidity through, for example, key man insurance, life insurance for the partners and contingency policiesÂ
- Creates a viable and sustainable business operation now and for the future through modernised business systems, clearly documented and automated processes, fully trained people, and accurate up-to-date financial data â all of which will add immense value to the business now and in future.Â
If you consider for a moment what your death or retirement could do to the businessâ success and to your familyâs livelihood, you will realise how important it is to put in place a well-structured succession plan.
It will ensure that your time, effort and investment to grow a business in South Africa is not lost in a statistic, but rather that your legacy lives on, surviving beyond the current key players into the next generation.
Disclaimer: The information provided herein should not be used or relied on as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your professional adviser for specific and detailed advice.
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