Succession Planning

Succession Planning -2

Businesses of all sizes and within all industries often suffer from poor planning. Therefore, succession planning for ownership and management is a critical area that needs consideration.

IT IS THE RESPONSIBILITY OF EVERY BUSINESS OWNER TO PLAN FOR THE DAY WHEN THEY WILL NO LONGER BE INVOLVED IN THEIR BUSINESS ON A FULL-TIME BASIS.

Often, we hear of small to medium-sized businesses built primarily on the drive and enthusiasm of a critical individual, only to falter when that person is no longer there. Similarly, larger public companies can experience great turmoil if their management and ownership criteria are not clearly defined and allowed to develop correctly.

We are not simply talking about small businesses or personal financial planning within succession planning. We are looking for a company to be planning for its future success – and for that success to be facilitated by a transfer of ownership and management responsibility to successors who are ready and prepared for the duties involved.

CONSIDER THESE QUESTIONS TO HELP YOU WITH SUCCESSION PLANNING:

Does anyone else really want this business (or position)?

Succession planning requires you to be quite honest with yourself as to just what style of business you have, whether it has value to outsiders, and whether it can be made more valuable. Much of your other work without addressing this question may be pointless.

Can the business survive without me?

One of the keys to good management is to enable a business or position to operate without you. Here we are talking about the functions and processes that you or the company might undertake, not necessarily the visions and ideas that you might have.

To facilitate your business operating without you, you will need to consider business and operation plans, financial factors, staff selection and assessment procedures, training, the systematisation of processes and the maintenance of a management environment that encourages others to participate within the business.

Are there clear lines of separation between ownership and management?

While one individual might happen to be both the owner and CEO of a business, there is no reason why that needs to continue. Instead, you should identify the roles required of the owners and managers of the company and deal with each of those.

In terms of looking at succession, three general questions should be asked for both ownership and management. They are:

Who, When and How?

– Who is the appropriate or proper person to take over your responsibilities?

– When is the appropriate time for them to assume those responsibilities?

– And how will that change-over be implemented?

Are your business structures appropriate to allow for change?

Start considering the legal structures within which you operate. For example, are the business assets adequately located in eligible entities to allow for future changes between ownership and management of the business? What operating systems can be changed to facilitate succession? What arrangements can be made with partners and fellow shareholders to protect them without jeopardising your interests? Are your business partners prepared for the changes involved?

Have you planned personally for a change in role?

Very often, successful business people cannot fully let go and have no arrangements to occupy themselves once they step back from complete business activities. This is often one of the critical causes of the failure of succession – the old management group fails to let go.

Have you adequately planned for your own retirement and lifestyle needs?

This involves consideration of financial requirements and investment decisions. These matters cannot be fixed with short notice. Instead, they require you to consider what action you can take to make the future more controllable.

Have you adequately allowed your family’s needs through retirement and estate planning?

Consider the disposition of assets under your Will. Your family should know how the business works and how your investments are held. When major family businesses are involved, proper wealth creation and estate planning techniques must be considered so different assets can be left to other family members without jeopardising the company.

Are you prepared to do something now?

The longer you have to implement different strategies, the more likely you will be comfortable with the results.

While succession planning is usually not an urgent issue facing a company, it is essential. The longer an owner or CEO waits to begin the planning process, the more acute the problem becomes.

A closely held corporation needs a succession plan just as much as any other type of business. Stockholders and executives of a closely held corporation are usually the same. Unlike a partnership, when a shareholder dies, the company continues its independent legal existence. The deceased stockholder’s shares are passed to his/hers estate or heirs. If no plans have been made for the sale of stock or a management change, the death or retirement of a stockholder could cause a host of problems for the business, the surviving shareholders, and the heirs.

If the surviving shareholders own a majority of the stock, control of the business will not be affected. However, the company may sustain financial losses when the expertise of a key manager is lost. In addition, the heirs of a minority stockholder may complicate business affairs since heirs have the right to vote and demand information about the management and finances of the company.

These are just some possibilities a company may face if it is stranded without leadership in the major functional areas. Consequences are severe, so any business must have a succession plan.

Your decision about who will take over your business when you leave will be one of the most important decisions of your career. It could mean the difference between the collapse of your business or its continuing success after you retire. This is a decision that calls for careful planning. You will need to make decisions about insurance, buy-sell agreement, your will, and other matters that affect how your business will continue.

The family-owned business is an increasingly attractive career choice for the children of business owners, even when more than one child joins the firm. Consequently, more families than ever intend to pass on their company’s leadership to many offspring.

The first step in determining a child’s interest in the firm is to ASK. Ask if they would be interested in running your business after you retire. You could then plan to leave the majority interest in your company to this child in your will, as suggested by an attorney who handles family business cases. Other tangible assets like real estate could be left to your other children.

If you want to pass on your business to your child, you must be as objective as possible about their abilities to manage the business successfully. If the child seems to lack the competence to run the business, consider hiring a professional manager either permanently or on an interim basis while your child prepares for the top job

Find both family members and others as potential successors. Be as objective when you hire and promote relatives as you are when you manage and engage others. Use written job descriptions to guide your thinking when considering the talents and limitations of possible successors. Give positions and salaries to family members according to the company’s needs and your relative’s abilities. Try to avoid preferential decisions and wages that favour relatives over other employees. Performance still needs to be the main criterion for success in your business.

Cultivate your heirs. They can work up the company ladder and be promoted on their merits and performances.

In a family-run business, the owner generally “wears” many hats, including those of the general manager, chief financial officer and even the cleaner. Decision-making is centralised through the group of executives. Top management bears most of the responsibility and may have difficulty delegating authority. Moreover, because “working Managing Directors/Owners” often link their identity and self-esteem to the business, they find it hard to think of retiring and relinquishing control.

You need time to train your successor and strengthen your management team and operations; you need to start now and prepare a plan before a crisis.

Planning for management changes is an essential part of your SUCCESSFUL future. First, it is getting the old boy out. “The Old Boy” is the owner or founder of the business and is unwilling to retire because his life is centred on the firm. Perpetuating a family business is the ultimate management challenge. You can increase your chances of success if you believe that succession is a process that may take years to complete.

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Category: Succession Planning