Succession planning is all about creating a business that can operate without its current owner. It will lead to an owners managed exit from his or her business in a way that suits personal needs and maximises the value of the business. However, succession planning is not just for those thinking of retiring or moving on to another venture. It is also about reducing business risk and it seems that businesses that have a succession plan experience superior growth and reduced failures.
At Nairn Fisher we value a lot of businesses. One issue that will usually impact negatively on business value is a high reliance on one person – usually the owner whose industry, business knowledge and contacts are a key component of the business success. That’s because without that reliant owner the cash flows and certainty of those cash flows is likely to be diminished. So creating a business that is sustainable and competitive without the owner is important.
Succession planning also includes setting up the right structures because in many cases succession planning can involve family members. If transition to family is an issue and has not been tackled reason succession planning can be sensitive and complicated. In these cases we usually advise at least two if not three meetings with the second and or third meetings used to bring wider family into the process.
There is no right time to start a succession plan but we would advise thinking about a plan from an early stage. We have some clients who actively identify good staff and bring them into the fold. We have done a number of minority shareholding valuations for this reason.
If you are thinking of leaving your business and don’t have a plan then you may need two to five years to get the business in shape. Two years if it already has a good strategic plan that is being executed and up to five years if the business is complicated, depends on the owners’ knowledge and family successors need to be recruited and trained.
Having said that often there isn’t much time to exit the business because of illness or financial distress so the plan and execution needs to take place earlier.
The basic succession process should at least include your accountant, lawyer and banker and typically involves
- Setting the owners personal goals
- Considering family interests
- Setting up the appropriate business and tax structures
- Taking stock of the business current value (typically with a quick business valuation).
This process will identify, in particular, business weaknesses that reduce the businesses value
- Preparing a business plan
- Executing the business plan – identifying opportunities and threats and building on strengths and addressing weaknesses
- If the business is in financial distress taking control of the business and cash flows
Partner at Nairn Fisher Accountants and Advisors