Guide

How to develop a succession plan for your business

Putting a robust plan in place

Age is very much a number in today’s society, and, for many people, reaching your 60s no longer means stopping work to enjoy a quiet retirement. But for some business owners, nearing this milestone does bring into focus the need to consider a succession plan, so they can start to take a step back.

If we look at the make-up of companies across East Anglia, the average age of directors across more than 200,000 businesses is 50. Although not all business leaders will plan to retire at this age, many will be starting to think about the future. And the prospect of taking a step back could mean an unsettled transitionary period not only for the business, but also its employees, suppliers and customers.

As a result, stepping down from a leadership role is one that needs to be approached with careful planning and consideration. This will also help to minimise any disruption to the day-to-day running of the business.

For some firms the structure of the business will mean a natural succession plan is already in place. Many family-run businesses will see ownership transfer to a family member or another director or manager, for example. But in the event that this structure doesn’t exist, there are other routes business owners can take. This could be selling their business to a competitor, merging with another firm or securing the support of an external investment partner to facilitate a management buyout with existing team members.

While a succession plan may sound like common sense, recent research has shown that less than 25 per cent of all private companies have one in place and as a result are not prepared for the end of the current CEO’s reign. This is something that businesses need to address.

It may not always be easy to decide on the best type of succession plan, but it is absolutely vital to ensure the future success of any firm and working with a trusted business adviser can help reduce the inevitable period of ambiguity.

Preparing for a management buyout

People buy people and it is important to invest in your workforce. Not only will this help to attract and retain talent, it could also help you to attract the attention of future investment partners.

Business leaders work very closely with management teams and will be able to spot those who show strong strategic, teamwork and leadership skills. In doing so this could help to uncover the future leaders of the business. Take the time to develop your team – it’s important to remember that having a management team on board that you genuinely trust is the first step in preparing your company for a successful management buyout.

Whether a chief executive is retiring or simply wanting a change in direction, selling a business to existing managers can be an effective way of mitigating disruptive change and maintaining continuity for employees and customers. The years of investing in employee development will pave the way for a smooth transition, as well as having the assurance that they already know the business inside out.

For the more senior members of a team, having shares and being on the board of the business is most likely the next natural step in their career. It can be an incredibly rewarding process for those who have put a lot of time and effort into a company to sit in the most senior position, while knowing that they understand the intricacies and mechanics of the business from top to bottom.

Management buyouts are often also supported with external investment from a private equity house and this is a common route to exit for many business owners. A new wave of investment can breathe new life back into a business. It can give existing management teams a new lease of life, both motivationally and financially, to take the business forward and kick start the next phase of its growth strategy.

Mergers and acquisitions (M&A)

For those looking to take a step back, another option is to sell the company to a competitor or a trade buyer. An M&A deal can help the business’ legacy to live on and allows companies to collaborate and share expertise, which can ultimately build a stronger business in the long-term. It is also a useful way of achieving scale, meaning the business can benefit from becoming part of a larger organisation.

If this is the chosen route, it is important for business owners to know the market value of their business – this will help to ensure they do not undersell. Working with a trusted business adviser can help ensure that a company finds a buyer that is the right fit for them, while designing a deal that will return maximum value. It can often be easy for management teams to be wooed by potential investors, but it is important to play the long-game and shop around for the right buyer. This will benefit the business financially.

An M&A deal can also bring access to extra resource and a wider network, both of which can help to breathe new life into a business and generate growth opportunities moving forward.

While valuations and growth opportunities are important, any business owner will also want to know their employees, customers and the company’s reputation will be safeguarded. So, it’s also vital to find a strong cultural fit between the seller and the acquirer.

Calling time on the business

While many business owners will look to secure a future for their business, there will be occasions where a decision is made to shut up shop and voluntary liquidation is the chosen route forward. If this is the case, there are steps to be taken to ensure a smooth transition.

Winding down steadily, rather than abruptly, can help to salvage a business’ finances and reputation. It’s therefore important to understand the market the business is operating in and if there is still a demand for your product or service. This can give business owners the chance to wind down in compliance with legal requirements and allow time to clear any outstanding debts.

Communication will also be key and business owners should ensure that all parties are aware of the plans. This includes notifying customers in advance to reduce the volumes of orders, to telling landlords and utility providers that the business intends to close.

If this is the case, seeking support is not only recommended but essential and a specialist business adviser can help to guide you through the process.

First published in the Essex Chronicle in October 2019.

Related team

Glyn Mummery

Glyn Mummery

  • Partner
  • Restructuring Advisory
  • Brentwood