DFK Gooding Partners
September 18, 2023
The decision is done – time to sell your business. You’re in the process of cleaning up the financials and tightening up future forecasts. You’re optimising inventory levels, perhaps you’ve even spoken with a couple of brokers to get the feelers out there. Have you thought about the process and practicalities of your transition out of the business, and how your approach to this will be viewed by your future buyer?
As a business owner or founder looking to sell or exit, understanding and implementing succession planning is critical. While this may be the last part of our four-part series in value improvement, we will cover off why succession planning should really be the very first thing you take into consideration as you prepare your business for sale.
Only 18% of Australian SME owners have a documented succession plan in place
When non-financial risks such as succession planning are ignored, or not well managed, they can quickly affect profitability and growth, and even survival of a business. ASIC Chair James Shipton describes the costs and consequences of poorly handled, non-financial risks as “immense and, at an extreme, catastrophic.” within ASIC’s report on director and officer oversight of non-financial risk. The report demonstrates good management of non-financial risks as essential to the long-term success of a business enterprise.
Australian SME research from over 2,000 SMEs surveyed by BStar indicates succession risk as the highest risk identified, with only 18% of Australian SME owners having documented management and ownership succession plans in place. More than half of those plans (11%) require reviews and updates to ensure they are current.
“
Succession planning stands as a linchpin for business continuity. It’s hard to understate how important it is to ensure businesses have succession plans in place for all positons – from executive roles all the way through to entry level. Yet, amongst the noise of daily operations, we often see its significance underestimated.
WENDY JEFFERY-LONNIE, GPHR
Specialised recruitment data from leading consultancy Robert Half indicates more than a quarter of surveyed business leaders hadn’t made plans to identify a successor for their current role. Not planning to leave in the near future (49%) and being busy with other priorities (42%) were the top reasons given for not having a succession plan in place. Not exactly confidence inspiring responses.
How do your succession planning strategies stack up to the industry data? Are you willing absorb the risks associated with a lack of succession planning?
The crucial role of succession planning in business value improvement
As covered above, succession planning brings a wide range of benefits. For this article we will drill down specifically into the context of why succession planning is so important for a business sale.
Providing a clear roadmap for transition
The succession plan acts as a roadmap for the transition. It outlines the steps, timelines, and key milestones involved in handing over leadership responsibilities to the identified successors.
Preserving stability and continuity
Effective succession planning guarantees that the departure of key personnel doesn’t disrupt the day-to-day operations of your business. This continuity is an essential factor in maintaining and potentially increasing the value of your enterprise.
Ensuring knowledge transfer
A structured succession plan includes knowledge transfer mechanisms. This ensures that critical information, processes, and relationships are passed on to the new leadership team, minimizing disruptions during the transition.
Maximizing employee morale and retention
A well-executed succession plan reassures your team members about their future within the organization. This assurance can lead to higher job satisfaction, increased loyalty, and lower turnover rates, which ultimately contribute to higher business value.
Reducing dependency on the owner
If your business heavily relies on your personal involvement, it could be a red flag for potential buyers. A solid succession plan demonstrates that the business can function effectively without being overly reliant on any one individual.
Maintaining customer and stakeholder confidence
smooth transition of leadership instills confidence in customers, suppliers, and other stakeholders. They see that the business has a clear plan for continuity, which reduces uncertainty and potential disruptions.
Attracting potential buyers or investors
Importantly, a clear, well designed and implemented succession plan will assist with your sale or exit. Potential buyers or investors are drawn to businesses with robust succession plans in place, as these plans provide them with confidence and assurance in business continuity.
I’ve decided to sell my business. When should I start a succession planning strategy?
Ideally, succession planning should be integrated into your overall business strategy well before a sale is being contemplated. However, if you’re looking at succession planning as part of a planned sale, we recommend taking a five year view with the following steps:
Early stage – 5+ years before a sale
Begin identifying potential successors and providing them with the necessary training and development opportunities.
- Develop leadership skills: Focus on developing leadership skills among potential successors. Provide them with opportunities to take on more responsibility and make key decisions.
- Document processes: Start documenting critical business processes, procedures, and knowledge. This knowledge base will be essential for successors during the transition.
Mid-stage (2-4 years before sale)
- Continue skill development: Continue to invest in the development of potential successors. Provide them with exposure to various aspects of the business.
- Identify gaps: Assess if there are any gaps in skills or knowledge among potential successors. Provide training or mentorship to address these gaps.
- Formalize succession plans: Formalize the succession plans and ensure that all stakeholders, including potential successors, are aware of the plan and their roles in it.
Pre-sale stage (1-2 years before sale)
- Finalize succession plans: By this stage, succession plans should be well-established and documented. Fine-tune the plans and ensure that they align with the overall business strategy.
- Transition period planning: Plan for a transition period where the outgoing owner can work alongside the successor(s) to facilitate a smooth handover of responsibilities.
- Legal and financial considerations: Address any legal or financial considerations related to the succession plan. This might involve consulting with legal and financial advisors.
Sale stage (during sale process)
- Include succession plan in sales agreement: Ensure that the succession plan is clearly outlined in the sales agreement. This provides assurance to the buyer that there is a plan in place for a seamless transition.
- Engage with potential buyers: Communicate the succession plan to potential buyers. This demonstrates that there is a plan in place to ensure the continued success of the business.
Post-sale stage (after sale)
- Monitor succession implementation: After the sale, monitor the implementation of the succession plan to ensure it’s proceeding as planned.
- Provide support and guidance: Offer support and guidance to the new leadership team as they take over. Be available for consultation and mentorship if needed.
I can’t wait five years, I’m looking to exit my business as quickly as possible. How can I develop succession planning for this timeframe?
For tighter timeframes or unplanned sales, there are a range of frameworks and planning strategies to facilitate an effective sale, and maximise your sale price. As each business, environmental context and sales objectives are unique, we offer tailored services designed to provide the optimal fit for your requirements.
If you’d like to know more about succession planning for your business situation, we recommend completing our Business Risk Survey. This is a free online survey that can be completed in under 3 minutes and can be found here
Succession planning delivers business value improvements in the present, and the future
Succession planning isn’t just about preparing for the future; it’s also about ensuring the ongoing success and value of your business in the present. Just like the other key areas for value improvement areas we have covered in this series, succession planning offers wider benefits for business owners beyond a sale. It serves as a cornerstone for fostering a workplace culture that prioritizes professional growth, it encourages the exchange of knowledge among current team members, and it empowers leaders to establish frameworks for identifying and nurturing future leaders within the organization.
As you consider your path ahead, how you integrate succession planning into this journey should be at the forefront of your strategic discussions. Doing so will ensure you are best positioned to realise a successful sale should the need come up, while building culture and playing an important part in maximising your current business opportunities.
We hope you have enjoyed this series on business value improvement. If you enjoyed the articles please subscribe to our monthly newsletter below.
Improving Business Value Part 1: Value Improvement Optimisation Factors
Improving Business Value Part 2: Benchmarking, and optimising your business systems
Contact Us
info@dfkgpca.com.au
(08) 9327 1777
