How important is succession planning in an organisation?

How important is succession planning in an organisation?

Succession planning is an infamously touchy subject – for those who've invested a lifetime into building a business, the thought of stepping away can be daunting. However, that doesn’t mean ignoring it is the best way to protect your legacy – quite the opposite. Uncertainty and lack of preparation can lead to a rushed process that misses out on the best interests of owners, staff and customers.

The best way to safeguard the future of your business is to consider your options well in advance of your departure, when you still have the control and time to build a plan that aligns with your goals.

Hassan Behcet explores the complex task of planning for a future that doesn’t involve you, and how the right measures can ensure a legacy that you’ll be proud of.

How to start thinking about succession planning

When you've poured your heart and soul into your enterprise, the idea of stepping away or retiring might seem forever a distant possibility. In practice, however, there are a wide range of scenarios that could lead to a change in leadership. Founders often serve as a driving force behind client relationships, strategy and operations, so the task of filling your own shoes can be a big one.

Succession planning is not a one-size-fits-all process and the plan will largely depend on your unique circumstances and reasons for exiting the business. Key scenarios include:

• Retirement: This is the most common – and, ideally, happiest, scenario for most business owners. The main considerations here include the timing of your retirement, whether you wish to retain any role or control in the business, and if you want to pass the business to a family member or sell it to a third party, as well as your financial requirements post-retirement.
• Unexpected health issues: While nobody likes to think about it, unexpected health issues can arise at any time, which might make it impossible for you to continue leading the business. A solid succession plan in place can help mitigate the impact of such a situation, ensuring business continuity without you, whether temporarily or long term.
• Acquisition: While it’s tempting to think you’d never sell, the reality is that if a great offer comes your way, you may want to be in a position to take it. This means having a business that's ready to sell, with a strong leadership team in place and clean financial records for due diligence, as well as appropriate safeguards for the rest of your staff.

In all these scenarios, the earlier you start planning, the better prepared you'll be when the time comes to step away from your business.

What are the most common forms of succession plan?

When it's time to pass on the torch, there is a mix of pragmatism and idealism to consider. Founding owner-managers may dream of building a legacy that will be passed down through their family for generations, but in practice this requires that the next generation not only has the will, but also the skills, reliability and trust within the business to do so. In practice, your options will be shaped by what’s possible, including market factors, financial flexibility and timelines.

• Family succession: Particularly in family-run businesses, passing the business onto the next generation is often straightforward, passing on to a known quantity. Given the complex dynamics involved in family businesses, however, it’s still crucial to have formal plans and agreements in place to govern the practical side of the handover and guarantee the long term interests of the business and your family.
• Management buyout (MBO): If your children or family aren't interested or prepared to take over, your management team could be the next best choice. With a strong management team and share option schemes in place, an MBO can provide a beneficial and smooth transition, though this will often involve additional financing arrangements.
• External trade sale: If the internal team is not ready or lacks the financial means to buy the business, an external trade sale could be the only solution. This can be a complex and time consuming process, involving valuation, marketing, negotiation, due diligence and team buy-in, meaning it’s not often the first choice for founders.

Why advance planning matters

Just like building a business, a well-executed succession plan takes time to organise. The earlier you begin the process, the more options you will have, from augmenting your management team, to training up and preparing the next generation. With clients looking to ensure a smooth transition, I normally advise to start planning 3-5 years in advance of your intended exit.

• Compliance: Making sure all legal and regulatory requirements are met, from employment contracts to business permits, takes time. Ensuring everything is in order well ahead of your planned exit will help avoid unnecessary complications or delays.
• Tax management: The transfer or sale of a business comes with its own tax implications. Strategic planning can help manage these obligations effectively, possibly reducing your tax burden and ensuring a smoother transition.
• Increasing the business's value: A business with robust operational systems, strong financial performance, and a well-developed team is more attractive to buyers or successors. Time spent improving these aspects will likely increase the business's value and make your exit more profitable.
• Team preparation: Whether you're considering an internal or family succession or a sale to an external party, identifying potential leaders, providing necessary training, and building a supportive culture is crucial for ensuring that the business can function without your direct involvement.

Getting the right support

Just as starting a business is a unique journey, so is stepping away. That’s why the Haines Watts approach focuses on understanding your long-term objectives to prepare your business for its next chapter and ensure your succession plan meets your needs and those of your business.

With the right planning and support, you can step back knowing that your business's future, and your legacy, are moving in a direction that you can be proud of.

Succession planning can be a moving target – businesses change, teams evolve, and so your exit strategy should reflect these dynamics to keep you on the best track for a happy retirement, with the assurance that your business is secure. When working with clients day-to-day, we build long term strategy into our conversations, to ensure the decisions you make today align with your goals for tomorrow.

Whatever route you choose, we can support you with advice, financial and tax planning, compliance and due diligence to keep you in control of your legacy.

Get in touch with one of our team to find out how we can help you plan for the future on your terms.