Succession planning: beginning with the end in mind

| June 15, 2016

Most entrepreneurs start their businesses with a vision of creating a product or service offering that others value – and making a profit from it. 

All too often, however, business owners invest a skewed amount of their time in the generation of revenue, not in the extraction of the eventual wealth they build.

This lack of planning can lead to a host of issues down the line, when business owners want to retire or sell off part or all of their ventures.

What is succession planning?

Succession planning is a holistic approach to mapping out any and all end outcomes for your tenure as a business owner.

Entrepreneurs might have a goal of reaching $1 million in profit someday, or holding their initial public offering (IPO) on the stock market -– but these are goals, not succession plans.

The most effective succession plans are those that have realistic strategic outcomes and ‘begin with the end in mind’. They must have been carefully considered over a period of time, consistently and gradually implemented, and regularly monitored.

For many SMEs, the succession planning process can range from several months to several years, depending on the levels of planning and organisation already undertaken by the business owners.

We have identified five stages businesses reach while creating a strategic succession plan: identify value, protect value, maximise value, extract value, and manage value.

Each stage has its own strategic importance and tools to offer a business that wants to realise its maximum value for owners upon exit, and may take several months or years for a business to complete depending on the owners’ personal goals, organisational goals, business readiness or industry.

When to start thinking about succession planning

Many people don’t think about selling their business until it’s almost time to retire. According to research, the average age of family business owners is 58 years. Nearly half of those business owners surveyed saw themselves working in the business beyond 65 years of age, with more than 30% saying they will be relying solely on the sale of their business to fund their retirement.

The baby boomer generation began to turn 65 in 2011, with nearly 4,000 Australians now reaching retirement age every week. Yet incredibly, despite nearly 61% of business owners stating their firms were not ready for sale or succession, less than 50% plan on taking any action to remedy this in the next 12 months.

As a responsible business owner, it makes sense to start succession planning when you are at or near a peak –- when the business is doing well and you and your leadership team have the energy and motivation to make the appropriate changes. You might need to grow your business to make it more attractive to a buyer, or transition relationships to a general manager.

On a financial level, getting an early start on succession planning will not only enable you to potentially extract a higher sale price, but will also allow you to deploy tools that help you minimise tax on the proceeds, such as staged payments, superannuation contributions and other tax concessions.

Finally, if you do have to exit unexpectedly due to health reasons or other emergency, the further along you are with your exit plan, the better the outcome for your loved ones.

A non-existent or poorly-developed succession plan could lead to disputes, poor customer experiences, business decline and financial pressure; certainly not the situation you would want to leave your business in after years of hard work!