For business owners, succession planning is often focused on transition – the next chapter of your life. But there’s another side that’s just as critical: continuity.
No matter how much time and effort you’ve put into building your business and boosting its value, if you don’t invest in a strong leadership team you can trust to keep it running smoothly without you, you risk ending up with something no one wants to buy.
“We all know the stats – 50% of business owners don’t have a succession plan and 70% of transitions fail between generations,” says John Paniccia, Vice-President & Head of Business Advisory and Succession Planning at BMO Private Wealth. “But they don't fail because valuations or tax plans are off. They fail because of the business is over-reliant on the owner and lacks an adequate management team that can run the business in the owner’s absence. That adds risk to the business, therefore depressing values and limiting exit options.”That’s why owners need another type of succession plan, one that focuses on management roles. Without what’s called a management succession plan, the loss of a key executive can cripple a company, affecting revenues, sales, stakeholder relationships, employee engagement and operations. Worse, it can derail your own transition away from the business.
Succession planning deals with two primary components, he says. The Transfer of Ownership or procedural items, such as tax structuring and legal documentation, among others, and the Transition of Management, which helps ensure the business isn’t reliant on one person, the owner, to achieve future revenues. The latter ends up accounting for a vast majority of planning, but’s often initially overlooked.
“Each is an important element of succession planning, but on their own they don’t cover everything that needs to be included in an effective succession plan,” he explains.
The key, he adds, is to build a business that can operate successfully in the owner’s absence. This is true whether preparing for a third-party sale or an intergenerational transfer.
“Look at key roles and the current team, then decide where gaps need to be filled, effectively de-risking the business,” he notes. “This will ensure continuity of the business, the transition of goodwill or stronger valuations, and maintain flexibility in exit options.”
What goes into creating a plan? We explain.
Create job descriptions
The first step to creating a plan is to write out a formal job description for each of the key positions in your company. You first need to have clarity on what skills and abilities are needed for a particular role within the business.
Identify candidates
Look at the people within your business. Identify individuals who have the skills, talent and drive that could allow them to grow into leadership roles above them. Write down what gaps they may have in their knowledge and skillsets today and identify where they need to be before they take on the new role.
Start upskilling future leadership
Create a plan for how you can bridge those gaps in knowledge and skills to help develop the employees you’ve identified. That could involve additional training like sending them to courses to help them learn new skills; on-the-job experience and interactions with key stakeholders to build relationships; or having them shadow an executive to help understand the strategy and economics of the business rather than simple tasks or functions.
Communicate your plan
Outline who might take over and when and what they’ll need to do to hit the ground running. Communicate your plans to your lawyer, accountant, banker and any other advisors who can provide insight and feedback.
Protecting your business
There are several reasons why you need a plan like this, but mainly it protects the company’s operations and the value of the organization. The biggest advantage of having a management succession plan in place is maintaining business continuity. In the sudden loss of a key leader, the business can continue functioning at a high level with people quickly filling the gaps because they are prepared.
A management succession plan also helps with staff retention. Someone simply knowing that they are being groomed for a leadership position will likely incentivize them to stay with the business. As well, knowing that their company has a documented plan for the future will boost workforce morale.
This type of plan also gives suppliers, lenders and customers confidence that you can keep operating and fulfilling commitments no matter what happens to staff. With a plan, a financial institution could potentially provide better lending terms, since they’ll know the business can withstand a key departure. Suppliers might feel better that their terms can continue to be met.
Finally, a strong management succession plan helps immensely with valuation. With a strong succession plan, potential buyers may be willing to pay a premium for a business based on the assurance of seamless business continuity.
Without a plan for management, it’s much harder for you, as an owner, to execute on your succession plans. “Management succession planning is ultimately a process, not an event,” says Paniccia. “It takes time and dedicated attention. Often business owners are the business, and the business would falter in their absence.”
Paniccia adds that he “can’t stress enough” the importance of starting early. “There comes a time when business owners need to work on the business rather than in the business as they prepare for transition,” he notes. “We see successful management transitions taking an average 5 to 7 years to execute in advance of the owner’s eventual departure from the business. Putting a roadmap in place for your leadership team to continue after you’re gone will help make your own transition much easier.”
As busy as you may be in your business, you can’t overlook management succession planning as it leaves the business exposed to unforeseen events. Ultimately, it’s about giving you peace of mind that your company can keep running no matter what happens, which ultimately protects you, the business and your family.
