When you say the word Succession, most people will think of the award-winning series ‘Succession’. However, today we are talking about real-life businesses and not Logan Roy and Waystar RoyCo.
Having a plan for your business after you are gone is vital to how long your business will last. When you are still building your business, you are focused on other things like payroll, funding, operations and profits. During this time. you don’t really think about who will run it when you’re gone.
Succession planning is the term used to describe the strategy used by businesses to pass leadership roles down to another employee or someone else, especially when life forces you to. This can be in the case of illness, death or changing life goals.
In this article, we look at business succession and how you can prepare your business for when you’re gone.
Types of Succession Planning
Here are the different types of succession plans you can choose from when the time comes.
1. Passing Your Business to Your Heir
Passing your business to your heir is the most common succession plan. Typically the owner will choose one of their children to take over the business. Before handing over to your heir, you will need to go through the proper legal processes.
Pros
The most important benefit of choosing your heir is that it keeps the business in the family. This will keep your company within its core values and original ideas and give you confidence for the future.
Additionally, passing the business to an heir will help your family establish generational wealth. If the business continues to grow and perform well, it can be passed on from generation to generation.
Cons
Sometimes handing over your business to one child (if you have many) can cause conflicts. In some cases, these conflicts lead to costly legal battles which can cause long-lasting family division. In other cases, your only child might not be interested in pursuing your business goals for their future.
2. Sell to Your Partner
If your business has multiple owners, you can sell your ownership to your co-owners. This is typically done when a co-owner passes away, retires or decides to step back from the business. In this case, you will need to determine the value of each ownership portion to determine how much it will cost to purchase.
Pros
The benefits of selling to a co-owner is that the business and your legacy will continue in the hands of someone who has the right knowledge. This is a great option for you if you don’t have any heirs or don’t want your business to stay in your family.
Cons
The disadvantage of selling to a co-owner is that you will no longer have any control over business operations. This means you can’t do anything if the co-owner decides to sell the business to an outside party.
3. Succession Plan with Existing Employee
This type of succession plan involves naming a successor from a group of qualified employees. This is a solid option if you want to leave your company to someone who knows the business and can manage it well.
If you choose an employee, you need to start with training. This will ensure the chosen employee will have the right skills and capabilities to lead the company.
Pros
Choosing a qualified employee will allow a seamless transition in ownership changes and signals stability to board members or other stakeholders. This route allows you to directly work with your successor and increase confidence in other employees and stakeholders.
Cons
The main disadvantage of choosing an employee is that it can fall apart if you don’t have strong internal infrastructure within the company. You must ensure there are protocols in place to train and mentor potential candidates.
4. Selling to an Outside Party
The last option in succession planning is selling to an outside party. This involves selling to an investor, competitor, management firm or any other interested party. Selling your business to an outside party should be something you do if you want to completely walk away from it.
Pros
When selling to an outside party, you have the added advantage of making profit as you walk away. Besides the financial gain, selling to an outside party can also be a way for the business to grow in the future. A third-party buyer could have the capital necessary to expand the business and further grow your legacy.
Cons
When selling to an outside party you need to come to terms with the fact that the future of the company may not be what you have in mind. As a former owner, it can be hard to watch your business move forward without you or your vision.
5. Buy/sell Agreement
The last option on our list is to get into a buy/sell agreement. The first way to do this is to allow your co-owners to purchase your shares. The other way involves the business taking out a life insurance policy and naming itself as policyholder and beneficiary. If you die, the proceeds from the policy will be used to purchase your share.
Pros
An advantage of a buy/sell agreement is that it ensures there are enough funds to purchase other shares in the company. Additionally, if you have multiple owners, it makes it easier to ensure the business operations continue and the shares are sold back to the business.
Cons
A disadvantage of this agreement is disparities between co-owners. For example, if you own 65% and your co-owner has 35% the cost of the life insurance policies will vary greatly. In this case, you should consider an entity purchase agreement.
Also, if your business has many co-owners and various ownership shares, some owners may not be on board with the possibility of being bought out with the life insurance proceeds.
Common Mistakes to Avoid
Here are some things you should definitely avoid when it’s time for succession planning.
Tip 1: Choose your Successor Wisely
Whether you want to leave your business to your family or sell to an outside party, it has to be the right person. When looking at successors, focus on what skills they have and their leadership qualities.
Additionally, consider their experience, competencies, leadership style, fit with the company culture, creativity and innovation.
Tip 2: Consider What They Can Do, Not Seniority (or Favouritism)
Picking someone who has many years of experience or is a senior, does not guarantee effective leadership. You should consider people outside of top management to ensure you find a suitable successor.
Tip 3: Be Transparent and Communicate
When you are drafting your succession plan, make sure everyone understands the process, the criteria for successors and their roles in the planning process. This will ensure the process is transparent to everyone and nobody feels slighted.
Tip 4: Always Consider Your Business Strategy
Your business strategy is there to guide you as the business grows. Your succession plan needs to align with your strategy. This will ensure you choose a successor who can lead effectively and contribute to the overall growth and success of the business.
Tip 5: Continuous Evaluation
A succession plan is not just a one-time task. You need to regularly monitor and evaluate its effectiveness and adjust where needed. Much like other strategies in your business, your succession plan needs to be optimised to fit the future of your business, not the now.
If you delay your succession plan you might find yourself in a tricky situation. By starting today, you give assurance to your clients, employees, family and stakeholders that the business will continue even when you are not around.
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