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Over the last few years, the topic of succession planning has become more relevant. One big reason for this is boomers looking to exit. Another is COVID-19.
During the pandemic, people stepped back and thought more about where they were in business, whether they still wanted to be in business, what happens when there’s an unplanned event, and potential growth opportunities.
In other words, uncertainty made people want to be more certain. More than ever, they wanted to clearly understand where they were and where they were going.
To start with a simple definition, succession planning simply means planning to exit your business.
As much as we’ve worked hard to get where we are, the time will come when (out of want or need) we say goodbye to what you’ve built and (hopefully) leave it in good hands.
In large companies, a formal succession planning program typically involves identifying future leaders and developing an internal talent pipeline that can take over to ensure the business continues to operate successfully.
But, for small to medium businesses, the succession planning process involves preparing for the transfer of ownership and leadership together.
There are two types of succession planning: planned succession and unplanned succession.
When considering planned succession, we most often think about retirement planning, selling the business for more than it’s really worth, and potentially sailing off into the sunset to enjoy life after business!
While this is possible, it doesn’t happen easily. A lot of planning is required to get to that point. A normal time period to get a business sale ready is 3-5 years. Basically, a review of everything about the business is undertaken to identify areas that could be improved to provide you with maximum value.
Statistics say 55% of small businesses aren’t sold; therefore, planning your planned succession is critical.
As the word suggests, unplanned succession results from an unplanned event.
The most common unplanned event would be the death or illness of the owner. Other unplanned events can include a major financial obstacle that was unforeseen (e.g. bad debts) or an event that may be beyond your control (e.g. the pandemic).
We believe that considering what you would do if an unplanned event occurred is an essential piece of the strategic planning puzzle. Do you have the right plans and contingencies in place, and how will they be funded?
An unplanned succession is a major threat to your business and deserves attention to minimise that threat.
While selling due to retirement is the most common planned succession that springs to mind, there are actually several ways you can plan to exit your business:
Each of these exit strategies has its own implications in terms of taxes, legal requirements and financial considerations.
For example, most of the above have capital gains tax (CGT) implications. If your business is a partnership or company, there may be specific legal requirements or procedures that need to be followed when transferring ownership.
It's important to seek professional advice to determine the best exit strategy for your particular situation.
Here are two example scenarios: one of planned the other of unplanned succession:
Sarah owns a marketing agency and is planning to retire. She has a strong management team that has been with the company for many years and is familiar with the operations and clients. Emily decides to sell the business to the management team, allowing them to take over.
As part of the sale, Emily and the management team negotiate the terms of the sale, including the purchase price, payment terms, and transition plan. The management team may seek financing to fund the purchase or use their savings to buy the business.
After the sale is completed, the management team takes over the business's day-to-day operations. Emily may stay on for a period to help with the transition and ensure a smooth handover. The management team is now responsible for the future success and growth of the business.
Mark is the owner of a construction company and is involved in a serious car accident that leaves him unable to work for an extended period. He didn’t have a succession plan in place, and no one in the company was immediately prepared to take over his responsibilities.
In this situation, the management team and employees must unite to keep the business running in Mark's absence. They may need to make temporary changes to business operations, such as redistributing responsibilities or hiring temporary help to cover key positions.
The company may also need outside assistance, such as legal or financial advisors, to help navigate the challenges of an unplanned succession. Ultimately, the goal is to keep the business operational and preserve its value until a more permanent solution can be found.
Succession planning makes sense for many reasons, from ensuring a smooth transition of leadership and ownership to preserving and maximising value, minimising operational disruption, maintaining stakeholder relationships and remaining compliant.
Together, these benefits of succession planning ensure long-term sustainability and success. By preparing for planned and unplanned exit, you can minimise the risks and boost the rewards.
Do you have solid business succession plans in place? Reach out to your Maxim Advisor or contact our team to arrange an initial chat with one of our experts.
