What is succession planning all about?

May 3, 2017
minute read

Succession planning is one of the more important safety nets for a business owner who wants to build their business with the end goal of selling their business for the maximum value, be it in one, five or 10 years’ time.

Yet, as important as this is, many businesses fail to implement a successful exit strategy for their eventual transfer of ownership.

The reality is that every business owner will need to exit at some stage.

Who needs exit planning?

All business owners, regardless of what stage of their business they are at.  Over the next 10 years, at much as 70% of owners of small and medium businesses will seek to exit their business. Very few are adequately prepared to attract a buyer at a fair price. With so many businesses for sale on the market, many business owners will be unable to exit-or sell for fair value, leaving them with significantly reduced funds in retirement. To unlock the maximum value of what in most cases is their largest asset, owners must ensure their businesses are well prepared and ready for sale

An exit strategy can lend a peace of mind that the rest of your retirement package neglects.

The importance of planning succession

After perhaps many years of nurturing a business and building its financial value, it is irresponsible to neglect the final chapter of its life under your control. Succession planning can provide the confidence and security you and your business deserve at a time when peace of mind is most needed to render the legacy you intend to pass on.

What are the various exit/succession options?

Passing the business to family member(s)

Be careful with the assumption that this is automatically your first and best choice. Are you certain you and the pertinent family members are all in agreement about the desirability of this? Especially with this option, it is crucial to start early with succession planning, so everyone is clearly on-board with the plan as it is being developed, and no one is surprised with their function at the time of the transaction.

Are you going to remain on the payroll temporarily to guide the transition? Are all parties in agreement that this is the best policy to pursue, or is a “clean break” more like what some envision as the correct approach? Are family members adequately trained to deal with their new leadership roles?

Selling to existing business partners or to employees

The people who have been operating your business with you are the most knowledgeable about your business. Training will be less of a factor for almost all positions. However, just as with selling to family members, the plan should be made very early. Frequently, employees as well as family members are not financially equipped to buy out a business on short notice. Years of planning for this option should be considered.

To get around this problem, you may be able to set up the purchase through future profits rather than the employees’ own available capital. Another alternative might be to set up an Employee Share Ownership Plan (ESOP).

Selling to third parties

Third parties come in two types: financial and strategic. Financial buyers are looking for high return on investment (ROI), while strategic buyers are seeking objectives such as the end of your competition with them, or their expansion into new territory, either geographic or product related.

Simply terminating the business

In some instances when no buyers show interest or other factors lead to the decision that the business has no future of its own, this option is worth considering. But it is not a panacea for problems. Taxation considerations will still have to be addressed and any other legal obligations will have to be dealt with.

Put off exit planning and do nothing

This is clearly the worst option for business owners to adopt. Anything that can go wrong, probably will. Make sure you formulate an exit strategy with a trusted business advisor and professional. Your business succession plan can give you and your family the security and confidence they need facing significant changes to lifestyle.

If you'd like more information or advice regarding succession planning, chat to us, we're happy to have a chat about your circumstances in an initial, obligation free meeting.

Featured resource

Article by

Find out what’s possible.

Simply provide your name and number, and one of our specialists will be in touch as soon as possible.