Succession Planning – Why Is It Necessary?

Why talk about succession planning?
Well-managed businesses plan and budget for sales, expenses, cash flow and growth. At the same time they should also plan for and anticipate the various changes that occur to a family business which are caused through death, disability or retirement of a key person or any other event that may cause problems within the business.

It is estimated that the vast majority of family owned businesses do not have a formal succession plan in place. Ignoring considerations as to the financial arrangements and rearrangements that will be necessary in a family or business in the event of the death, disablement or retirement of family members, can dramatically affect the value of a business. The worse case scenario - the business itself could collapse and the family would be left with immense problems.

What would happen if ............?. Is a good question to start with.

What would happen if..... ?
All persons operating family businesses should give consideration to these questions.

• What would happen if s/he was unable to perform his/her normal duties?
• What would happen if s/he was run over by the “proverbial bus”?
• Who would take over the business?
• Who knows the secrets of the business?
• How would the bills be paid?
• Would the bank call up the loan?
• How would the principal’s family survive?

Key questions to be answered include:

• Has the principal written out a set of instructions on what should happen to the business if something should happen to him/her?
• Has this list been given to a solicitor or placed somewhere safe where it will be found if something happens to the principal?
• Has adequate insurance been effected on the life of the principal and on the life of any partners in the business?
• If it is a partnership or a company with other shareholders, has a formal “buy/sell agreement” been entered into?
• Have the secrets of the business been written down, so that they are available in the event of the demise of the principal?

Key to prosperity
The benefits of an effective succession plan cannot be underestimated. Good team members and accumulated knowledge and experience are retained, loyalty and moral are enhanced and the direction of the organisation is more certain. The need to identify, develop and encourage team members with potential is particularly important. Establishing and monitoring a succession plan also provides excellent ongoing opportunities for reviewing an organisation’s aspirations and strategies.

Who’s going to be the boss?
Deciding who is going to take over from the boss when he/her has gone is the biggest concern facing many small business owners.
Not everyone in the family can be the boss. Too often family members are chosen to manage a business simply because they happen to be family members, rather than because they have demonstrated any particular management skills while notching up a few years in the business.

Often it is appropriate to have the proposed family member independently assessed for suitability in the same way as assessing an external applicant for the position. This allows the owners to assess a potential manager in relation to the real market. Many organisations are now recognising that it is sometimes better to bring in new management from the market place.

Select the correct person
The role of a person in a small to medium enterprise is often more important to that enterprise than the role of any single person in a larger organisation. One bad egg in a small to medium enterprise can do a lot of damage. Yet so many of such businesses devote few resources to selecting the right people.
Succession planning must begin whilst the founder is in charge
It is important that succession planning commences whilst the Founder and current Chief Executive Officer is still in charge of the business. It’s no use leaving it until the current occupant wants to retire.

Don’t delay abdication
Delayed abdications can cause bitterness and in the long term hurt the business’ performance. If there has been a proper plan implemented and appropriate training undertaken, then at a given time, the founder or current chief executive officer of a business should be able to stand aside and enter into a well earned retirement period.

Planning for succession is essential
The vast majority of Australian businesses do not reach the second or third generation. In most cases the reason for this is that there has been improper planning and the reluctance to accept the inevitable that all business people must retire and die at some stage. The market place evidence indicates that only businesses that have properly nurtured and developed the obvious successors within their business, both family and non-family, are likely to defy the statistics and succeed into the second and third generation.

Check list for succession to the next generation
The Founder or current Chief Executive Officer of the business should commence succession planning early in the life of the business and not when the person is within sight of retirement.• Encourage family involvement and debate.

• Family meetings once or twice a year should be encouraged to review the operations of the business.
• A properly funded superannuation scheme should be implemented so as to enable the founder or current chief executive officer to retire “in the manner in which he is accustomed”.
• The successor should be selected as early as possible in the succession planning process and then appropriately trained, developed and introduced to other key business people.
• It is important to obtain family acceptance of the person selected as the leader for the next generation.
• It is important that the founder or current chief executive officer ensures that there is a current detailed list of all of the business’s secrets and proprietary knowledge, including intellectual property, trade secrets, comments on competitors, agreements with suppliers, agreements with key team members etc.

Professional assistance
Succession planning in a family business is not easy and most families will require the assistance of a skilled accountant and solicitor and/or a business mentor to assist in the logical planning of family succession issues.

The involvement of this professional group could be on an ongoing basis over many years as the development of the family members who are going to lead the business in the future are chosen and trained.

In conclusion, the development and implementation of a solid and workable succession plan is vital to the future of any business and if actioned correctly can see your business continue to thrive long after you have handed over the reins.

If you would like to talk to us about your succession planning needs, please contact either Tom Borsky on tborsky@nexiaasr.com.au or 03 9608 0100 or Harry Rosenberg on hrosenberg@nexiaasr.com.au or 03 9608 0103. Nexia ASR is well versed in all areas of succession planning as we have extensive experience in succession planning behind us.

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