The Importance of Succession Planning

Succession planning provides you and your business with a strategy to ensure you enjoy optimised financial security when you transfer the ownership of your business. While this might not seem something you plan to do in the near future, it is important to keep in mind that life-changing events can happen in a split second. When you have a succession plan in place, you are prepared for all eventualities  – protecting yourself, your family, and your business partners in the event of a financial crisis.

What is Business Succession Planning?

Business succession planning determines the method by which you transfer your business ownership and/or transition out of your business management role. It also ensures business owners maximise their realisation of capital value as part of the transition – either by financial settlement to your own hands (or to ownership of your preferred investment entity), or by transition to the next generation of your family.

What Are The Benefits Of Being Strategic About Succession Planning? 

Think of succession planning as part of your financial security plan. Good Planning offers many benefits to maximise your financial security including: 

  • Extracting optimal capital value to retire with the funds available to you in the correct entity to support your desired lifestyle
  • Making certain to utilise the many generous small business capital gains tax concessions available should you be in a position of selling a business 
  • Making full use of generous Self Managed Superannuation and zero taxed income streams
  • Provision for your estate for the financing required in the event of your untimely disability or premature death
  • Having an estate plan and Will ensures your estate assets go to your intended beneficiaries
  • Your estate plan may consider the use of Testamentary Trusts for the significant tax and asset protection benefits they offer.

A significant element of business succession planning focuses on the continuity of business aspects including: 

Promote the positioning of capable individuals to takeover

When you plan well, you have a pool of talent ready to assume key roles within the business. As these leadership roles become available, they are immediately filled by skilled and groomed individuals identified as suitable replacements. This provides effective management of your talent and provides a succession plan that helps you meet the long-term goals of the business. You have qualified individuals ready to take on new roles, while you also have time to ensure they are prepared to take over when vacancies come available.

Reduce the risk of losing corporate leaders

When leaders are unclear on what the future might bring, they tend to lack motivation and potentially loyalty. However, when you provide a plan and include them in it, the risk of talent attrition decreases. These future leaders are vital in assisting in your succession planning and take on the roles for which they are uniquely trained and qualified. By involving future leaders in the plan and demonstrating to them where their future is going, they see the benefits of remaining with the company and continue to contribute as top performers. Better still, they may well be the ideal candidates to whom you may sell the business.

Reduce spend on recruitment efforts

When you have a plan to groom existing employees, you minimise the time and effort of recruiting and training new talent. As you help nurture existing talent for senior manager roles, you can train them in a familiar environment where they are comfortable. Motivating those internal candidates as future leaders serves them to commit to your future interests as well.

The succession can begin

When you have a succession plan, your people management team can begin to formalise procedures to enable the succession and a smooth transition of power. They can engage in the process to select middle management to participate in developing the skills to have them ready to take on new roles. In turn, new talent comes up behind them, and overall, the entire workforce becomes motivated knowing there is a demonstrable opportunity for advancement.

This well-developed and clearly understood succession plan sets the wheels in motion to ensure there is a clearly defined path for new leadership, whether it happens as planned, or circumstances change forcing the transition to occur sooner.

Why All Businesses Need Succession Planning

There are several reasons all businesses need succession planning:

  • Without a plan, you increase the risk for business failure and loss of capital value
  • You can maximise your retirement capital and minimise risks associated with loss of management transition or loss of initiative to competitors
  • You can coordinate your business plan with your estate plan, paving the road for family members to take over, and assessing their capability to do so
  • If you become ill or lose competency, you can initiate exit strategies for you and your family
  • You are prepared in the case of death or disability with successors ready to take over
  • You avoid disorganisation and painful disputes when you leave

Generally speaking, succession planning protects the wealth you have built in the family business, for yourself, your family, and your business associates, so you are prepared for all eventualities.

Mediation with Families 

If you decide to go the family succession route, you should seek objective advice from your Chartered Accountant. Even the most loving of families can run into issues without the assistance of a guide and mediator. Your accountant can help you spot issues with family succession you might not see. They ensure family succession is a sound business process that won’t lead to the downfall of your company. 

Mediation can help you answer important questions such as:

  • Does your family dynamic make sense for family succession, such as the age of children, your age, your children’s education, aptitude etc.
  • How much involvement has family had in business decision making so far?
  • How do you reach a consensus on key issues?
  • Have you shared your business goals and vision with potential successors?
  • How well-received will family succession be with partners, customers, suppliers, and creditors?
  • Are there existing managers in the business who are more deserving of key roles than family members? Can they work constructively with family members?
  • Have you taken time to train and groom family members for succession? 
  • Can you objectively say your children possess the required skills, capabilities and motivation to run the business or take on the roles you envisage them playing? 

These are all important questions you need to answer objectively. A mediator and business succession planner can discuss these concerns with you and your children/spouse to ensure it makes sense and that everyone is on board.

Getting It Wrong! 

If you do proceed with succession planning, it is possible to get it wrong. Be certain to avoid these common mistakes:

  • Playing favourites instead of choosing the right person for the job
  • You don’t include objective input when choosing successors
  • You move on with your succession plan without managing disappointment and explaining why individuals might not have been chosen at this time
  • Instead of choosing candidates, you pit people against each other to vie for leadership roles
  • You aren’t open about the succession planning process
  • You proceed without the assistance of your accountant.

All of these mistakes are detrimental to the process as they can lead to ill-will, conflict and the potential loss of top talent. Remaining objective and involving others creates a transparent process that helps encourage support and helps keep people engaged and motivated.

Our accounting practice is very experienced in business succession planning and would be more than happy to have an initial discussion regarding your current or future needs.  Please feel free to give us a call for an initial discussion.

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