A succession plan will help to determine your business’ capital value, worth and market price to ensure a smooth transition out of your business. Early planning can help to maximise the value of your business and is also useful if unexpected events, such as illness or death occur.
Succession planning is not necessarily about planning for retirement, instead it ensures the continuity of a business beyond its current management. Poor succession planning can destroy the value of your business and damage long-term wealth.
However, careful planning can prevent complications and prepare potential successors with the capabilities to lead your business. When developing your succession plan, consider accounting for the following:
1. Decide on a successor
Choosing a family member as a successor can be a headache for some business owners, with the fear of impacting family relationships. Business owners should make evaluations based on the skills and passions of potential successors rather than the presumed entitlements of family members. In some circumstances, it may be more appropriate to choose a non-family member such as a business partner takeover the business. The selection of a successor should occur early, to plan for different potential scenarios.
2. Develop the successor’s capabilities
Training the successor is fundamental to prepare him or her for leadership. Identify key skills that form a core part of your business and start teaching your successor how to draw on these skills. Set expectations and values up front to establish a clear framework for the potential successor. Regular feedback can help to provide support and confidence whilst preparing them for the tougher challenges they may face in the future. Consider incorporating formal education and encourage the successor to gain experience outside the family business to broaden their knowledge and develop a range of skills.
3. Create a succession plan
A succession plan should commence in the early stages of your business and include financial, operational and legal strategies to pass over the business. Some operational issues to cover include a timeline for the transfer of responsibilities and ownership, the appointed successor(s) and their responsibilities, and training and development for successor(s). Also, ensuring employee contracts and work agreements are up to date and informing key suppliers and customers about the succession is in good practice.
Financial and legal strategies may include:
- whether you are planning to gift or sell the business
- the market value of the business
- whether a trust needs to be set up as part of the succession
- the insurance policies regarding death, disability or injury you currently hold
- how much income you will need to leave the business
- the taxation implications of succession such as CGT implications of transferring an interest in the business
- if a change in legal structure will be needed
- if you need to change or transfer any registrations, licences etc.
- if a legal document that dictates the terms of succession is required
Your succession plan will need to be reviewed regularly to ensure it reflects changes in the business and meets the proposed successor’s needs and aspirations. A regular review will help with implementation of the plan and will confirm all generations are in harmony with the proposed succession.