A 10-step guide to succession planning

Succession planning is often the last thing business owners want to think about while they’re busy running their business. However, failing to plan well in advance for that transition can make it difficult to fully enjoy retirement. It’s important to get succession planning right so that owners can achieve a good quality of life in their sunset years.

By following this succession planning guide, business owners can prepare well in advance to ensure their own wellbeing and security, as well as that of their loved ones.

The succession strategy

1. Create a plan

   Successful succession planning requires a proactive plan that’s developed well in advance of the transition. It’s important to determine when to exit the business in terms of personal preference as well as to gain maximum value from a sale. It can be valuable to discuss timing with all the relevant stakeholders to ensure everyone is on the same page.

   Once the timing is set, it’s time to develop a plan that includes:

   • Whether or not to sell the business (versus handing it to a family member as a gift, for example);
   • How to structure the business;
   • Types of sale that might be appropriate;
   • Potential tax consequences of a sale or other type of succession;
   • Potential buyers;
   • Family and non-family succession;
   • Implications for current staff members; 
   • How to engage successors and whether they will require training or mentoring; and
   • How to divide the assets fairly and equitably. 

2. Value the business

   It’s important to seek an independent valuation of the business regardless of whether the owner intends to sell or gift the business. This can help owners manage their plans accordingly, because a higher-than-expected value may be an impetus to sell sooner while a lower value may be a trigger to make changes in the business that could result in a better performance.

   It’s advisable to renew the valuation annually if the owner is three to five years away from transition to maintain a current and accurate picture. The valuation must include not just cashflow and assets but also goodwill, intellectual property, and other intangibles.

3. Decide whether to stay

   It’s important to decide whether stay on for a specified period after selling the business to help the new owners transition, or leave the business immediately. Owners should also determine what capacity they’re willing to stay on in. For example, they may be willing to work a certain number of hours per day or be available for weekly meetings.

   Flexibility is important because it can be difficult to determine in advance how much assistance the new owners will need and how much assistance the owner is willing to provide once the reality of transition hits.

4. Set the management team

   Establish a management team and transition key roles and relationships as appropriate. Consider an incentive structure to retain key managers, especially if they are integral to the business.

5. Document everything

   Many businesses rely on information that resides in people’s brains, which means that a significant portion of the business’s value will disappear when that person leaves. It’s essential to mitigate that risk by documenting all key roles, relationships, and processes required to drive the business forward.

6. Mitigate risks

   Identifying and mitigating business risks or liabilities can improve the business’ value, which could result in a better sale price.

7. Secure customer relationships

   Especially in relationship-driven businesses, it’s essential to bed down important customer relationships and, potentially, renew contracts. It’s valuable to give customers time to get to know the new owners and/or managers and become comfortable with them before the transition is complete.

8. Cement key supplier relationships

   Supplier relationships can be crucial to profit margins, so it’s important to cement key supplier relationships to ensure seamless continuity after the transition.

9. Update financial records

   Make sure all financial records are complete, accurate, and up to date. Engage an auditor if necessary.

10. Review stock levels

    Review stock levels that should be monetised ahead of the business sale.

Following these 10 steps can help business owners maximise the value they and their successors realise from their transition out of the business. It can help ensure that owners reap the rewards of their hard work over the years and enjoy their retirement fully.