Succession Planning and Why it’s Important to SMEs

Updated on 20 June 2024

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Succession planning is a term used in business to describe the process of preparing for the transfer of ownership and control of a business to a new owner or leader. It can take different forms, depending on whether the business owner wants to sell the business or hand over operational control.

Small and medium enterprises (SMEs) need to understand what succession planning is if they want to take over an existing business from another individual. Similarly, an owner who is looking to retire, considering a different business or who needs to sell their business for whatever reason needs to understand what they need to have in place before the new owner takes over.

Steps in Succession Planning

Developing a succession plan involves identifying and developing potential successors. They can be family members, business partners, employees, or external candidates, and ensure they have the necessary skills and knowledge to take over.

If the business owner wants to sell his or her shareholding in the business, the plan will also include ensuring the business is investment-ready, determining the business’s value and steps to transfer shareholding to new owners. This can include legal and tax implications and planning. The goal is to ensure a smooth transition that maintains the business’s stability and continues its success even after the current owner steps down.

Options for Successors

Selecting a successor is one of the most critical decisions in the succession planning process. The right successor can ensure that the business continues to thrive, while the wrong choice can lead to instability and threaten the business’s long-term success.

There are four main options in choosing a successor.

In a family business, most often a family member is chosen to take over. It is critical to choose the correct person, considering the skills, experience and leadership abilities of the family member.
In a business with multiple partners, a business partner can take over if one or more choose to exit. This works well for continuity and stability as the business partner is already invested in the business’s success.

A business owner may choose to promote his or her successor from within the business. As an existing employee knows the business and its workings, this is an excellent option for continuity and stability during the change of leadership.

The final option is to look for external candidates as potential successors. The benefit of this option is that the business owner can choose from a bigger pool of candidates. However, external candidates will be new to the business and can take time to integrate into the existing team.

Qualities of A Good Successor

When choosing a successor, a business owner must consider the following:

Technical Skills and Experience

The successor must have the technical skills and industry knowledge required to run the business. These skills can include an understanding of the market in which the business operates, the ability to understand technical tasks (for example, a qualified engineer is needed to run a consulting engineering business), and alignment with the business’s vision and mission statement.

Leadership Qualities

A good successor should have strong leadership skills, including the ability to motivate and manage a team, make strategic decisions, and handle the pressures of running a business. This is especially important when the potential successor is an existing employee. Someone may be a stellar employee but will not be a good leader. Leadership ability can be improved, however, through coaching or mentoring.

Interpersonal Skills

Other than leadership qualities, a successor must be a good communicator and possess the interpersonal skills that are essential for managing relationships with employees, customers, suppliers, and other stakeholders. As succession means that the current owner is exiting, this can create an unsettled environment for employees and stakeholders and the successor must be equipped to manage this change.

Financial Resources

If the successor buys the business from the current owner, he or she must have access to funding for the purchase. Furthermore, they need a good understanding of the roles and responsibilities of a shareholder or business owner.

Commitment and Vision

The successor must have a genuine interest and passion for the business, they should be committed to the business’s success and willing to invest the necessary time and effort.

Compatibility with the Company Culture

A good fit is essential to ensure the successor can continue from where the current owner left off. If the successor does not align with the company’s culture and values, it is difficult to maintain the business’s identity and employee morale.

The Importance of Planning Ahead

No business owner wants to plan for something to go wrong or consider what would happen to their business if they are no longer there. This can be an emotional issue, especially if the business owner has spent years building up their business with many sacrifices made along the way. However, a clearly communicated succession plan can ensure peace of mind for the business owner, knowing that their business will continue successfully into the future, and their legacy is protected.

This article was submitted by Kate Combrinck, Managing Director at Growbridge Advisory. Find her in our SME Advice directory.

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