One of the most common traits among the numerous entrepreneurs and business owners JDC have met over the years, is that they are primarily focused on growing the business. Therefore, planning their succession is often left until the last minute. Unfortunately, this approach often leads to decisions being made which, in the short-term, may enhance profits, but in the long-term can either detract from capital value or reduce the potential for owners to achieve their exit on the most desirable terms.
Having one eye on succession planning at the outset, as part of the strategy for both the company and the shareholders, is therefore prudent advice, ensuring the widest range of succession and exit options remain available. Succession can encompass a number of events: the sale of the entire company to a trade party; a management buy-out of the founder shareholders by the management team via debt or private equity funding; or just simply the shareholders stepping back from full-time director duties and allowing the management team or the next generation to step up and take on more responsibilities.
Based on our experience of witnessing the implementation of numerous succession plans (some more successful than others!), we have summarised what we believe are the key considerations to take on board when planning and executing this event to ensure it is as successful as possible for all concerned.
1. Start Preparing Today
To implement a successful succession plan requires time and careful forward planning and therefore it makes sense that you assess all of the options as early as possible and understand how to realise each.
The final route taken in succession planning is often completely different to the one that the owners initially envisaged. Changes can happen at short notice due to circumstances out of the parties’ control (such as recession or ill health). Understanding the full range of succession options and what is required for each to be achieved, is invaluable in case the unexpected occurs.
2. Accept That You Will Not Be Around Forever
Particularly with a family business, it can be difficult to comprehend a time when you are no longer the owner, or that your business has not been passed onto the next generation of your family. However, it is becoming more and more common for entrepreneurs and business owners to run a number of companies at different times during their working career — partly driven by the 24/7 culture that technology has created, leading to burn out — along with a noticeable shift in recent years toward meeting the desired work / life balance.
Coupled with this is the noticeable change in approach by the next generation, with it increasingly becoming more common and acceptable for children to explore different career paths, rather than follow in the family footsteps. Adopting the view of the business as a separate standalone entity, rather than a family asset, ensures that sentimental ties and decisions are kept to a minimum and enhances an owner’s ability to objectively and independently assess and execute all of the potential options.
3. Recruit Your Successor
Regardless of the chosen succession route, a key constant in a business’ value is its ability to be able to operate without the day-to-day input of the owners. Often it can take a while for a business owner to see the difference between ‘profits’ and ‘capital value’ and it can be difficult for them to become comfortable with their company providing them with lower profits in the short-term (due to increased investment in new staff), which ultimately enhances capital value over the long-term.
Recruitment at senior levels can be a difficult and resource-consuming task, with the ability to identify a suitable candidate, either internally or externally, far from an exact science and with no guarantees that the first, second or even third person you appoint will be a success. In the vast majority of business sectors, value is heavily linked to people and therefore having a team in place that you trust to run the business as you take a step back, or that can be presented to a potential buyer as the day-to-day management team, can often be the factor which enhances value and opens up the full range of succession options.
4. Take It Seriously
The constant pressures of running a business can make finding the time to plan an effective succession strategy a difficult act to master. However, by incorporating this as part of the wider strategy within a longer term business plan, it can help to ensure it remains a constant on the agenda.
External advisers can assist in this regard, providing market knowledge on M&A levels and activity in your sector and, more widely, helping the shareholders and directors to regularly keep abreast of the potential options and allow for informed decisions to be made at the appropriate time.
5. Evaluate All of the Options
One of the most important pieces of advice you can get is to keep an open mind about how succession could work. Often owners assume that they will simply appoint their successor from within and gradually exit over a period of time. However, not all employees are able to make this difficult step up and the wide-ranging skill set it requires to be a successful CEO or MD can be challenging to find internally. Recruiting experienced executives can be the solution, but this can often be costly in the short-term, with the departing owners sometimes guilty of struggling to ‘let go of the reins’ as the incoming executive looks to make their mark and run the business as they see best.
Selling to a rival trade party can be the solution and may be most likely to deliver the highest capital return (particularly if there are obvious synergies); however, running a confidential and well-managed process is of paramount importance in order to achieve this and timing here again can be the decisive factor in whether or not it will be successful.
Ultimately, it is important for business owners to appreciate that their succession plan does not have to be carved in stone. By understanding all of the options from the outset, they will be able to make informed choices as and when it becomes pertinent. As with nearly every other aspect of running a business, having a clear, well-defined strategy will ultimately pay dividends and ensuring you also adopt this mind-set to succession planning can prove invaluable.