Business Succession – The Importance of Forward Planning

In our business world, ‘succession’ doesn’t have quite the same drama or entertainment value as you’ll find on TV, however it is an integral part of your business plan.  A thorough succession plan will provide a framework for the smooth transition of your business into its next phase, while optimising its financial value for you, at the time you plan, or need, to exit.

What is Business Succession?

Business succession refers to the strategic process of smoothly transitioning a company’s operations, ownership, and leadership from one generation or set of owners to another, while ensuring the continuity and growth of the business. It involves careful planning, communication, and execution to ensure a seamless transfer of responsibilities, assets, and decision-making authority, typically with a primary view to maintaining the company’s legacy, optimise its value, and ensure its sustained success under new leadership.

What Constitutes Effective Succession Planning?

In the context of passing on a family-owned business to the next generation, several critical facets come into play:

  1. Business Succession: Transitioning the business itself.
  2. Ownership Succession: Passing the proverbial ownership baton.
  3. Succession Planning/Pathway: Charting the course for succession.
  4. Evolution from Business Family to Investment Family: Transforming from an operational to an investment-oriented family entity.

The achievement of generational succession hinges on effective communication. Often, the stumbling block arises from a lack of formalised succession plans until a catalytic event or retirement precipitates the need. According to the PWC Family Business Survey, one in three Australian family businesses anticipate that the next generation will assume majority ownership within five years. However, only one in four of these businesses have a robust, documented, and communicated succession plan in place. This indicates that while there is often a desire to pass on a business to the next generation, there is insufficient documentation and planning in place to give that transition the best chance of success.

Merely relying on the idea of a “legacy” isn’t enough – effective succession comes from a place where core tenets of governance, family protocols, alignment of values, conflict resolution, succession, and estate planning are all firmly established well in advance. Generational succession typically involves transferring business interests to a younger generation within the family. It’s not solely about having a family business, but rather a business family.

Key Succession Challenges

Implementing succession planning strategies in your business demands addressing its specific challenges:

  1. The Next Generation’s Capability and Willingness: Assessing whether the younger generation is ready and equipped to sustain the business successfully post-transition. Sometimes, older generations seek generational succession to uphold the family legacy or secure a stable business future. However, these intentions only bear fruit when met with aptitude and eagerness, necessitating transparent communication of expectations.
  2. Capital Transfer: Evaluating the financial needs of the exiting generation. How much capital must be extracted from the business during the transition? The greater the capital requirement, the more stress on the business and its equity stakeholders.
  3. Managing Compensation: Shifting from informal owner remuneration to structured compensation matching roles, possibly incorporating performance incentives.
  4. Operational Management and Control: Managing the sensitive handover of control. Establishing and agreeing in advance how operational and management control will transition, preventing confusion or a power vacuum, which can be detrimental to both the business and its generational stakeholders.
  5. Transition Timeframes and Expectations: Acknowledging that generational succession is a process, not a singular event. Active management is essential to align mutual expectations and stave off frustration-induced derailment.
  6. Formalising Management Structure: The boundaries between the roles of the Board, shareholders, and management can blur, particularly with generational succession. Establishing formal structures with clear role definitions is pivotal.

Many savvy business owners engage an external adviser to help with the planning an implementation of succession, and tackling the above challenges. This includes the relevant tax structures to facilitate an effective transition, and a robust plan for the next generation’s compliance requirements.

Implementing a Succession Plan in Your Business

Navigating generational change is a complex journey, and we’re here to assist you in providing a pathway for the next generation to successfully take over your business when the time is right. To see what we can do for your business, call us today on +61 2 9093 1311, or get in touch with us via our website.

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