Australia

One of the more challenging issues a business must contend with is managing the succession to the next generation.

Although this should be a time to celebrate the business’s success and longevity, disputes often overshadow it. These disruptions can seriously harm a business’s development and productivity.

Unfortunately, succession planning is often low on the priority list. Most acknowledge it is important but not urgent, and so it often isn’t addressed until some major life event, which is too late.

Advantages of early succession planning

The succession planning process should begin well in advance to ensure a smooth leadership transition. This prevents owners from making hasty short-term decisions that lead to larger problems for the business in the future.

Establishing a clear plan as early as possible assists in long-term business decision-making and lessens the risk of disputes or disappointment.

Key components of a succession plan

For a business, it is critical that the succession plan considers timing and expectations around when and how you plan to retire. It should deal with issues such as who is most suited to running the business and what that means for other family members or business partners.

When succession planning for a business, it is important to include everyone in the planning process. Allocating time for succession planning sessions fosters an environment of inclusion, responsibility, and ownership, but it can require outside assistance to ensure objectivity and control emotion.

Careful consideration is required to ensure the fair and equitable allocation of assets. If the business operation is going to be shared, it’s vital that families establish a decision-making hierarchy where each business partner’s roles and responsibilities are clearly communicated. This will address any differences in age, experience, and mindset.

Another important consideration for succession planning in business is that the handover makes financial sense for those exiting the business and those continuing.

Others may include whether you can afford to hand over the business or whether the operation can support more than one family. If not, ensuring fairness for multiple siblings can be a key point of contention that requires resolution.

Likewise, the structure of the business and its financial implications —such as who owns assets and the impact of capital gains tax or transfer costs — also need close attention.

While it sounds as easy as stepping out of the business and having another family member or business partner take over, an effective business succession plan requires careful attention and organisation.

FAQs

What are some of the common mistakes companies make during succession planning?

Issues can arise when succession plans are neglected or not carefully organised. Here are some mistakes that business owners can make and strategies to prevent them.

  • Failing to remain objective when choosing future leaders: In a family business, bias and emotions can creep into decision-making. Having external assistance can help combat any inequality in succession planning.
  • Excluding family members or business partners from decision-making: This can cause fractured relationships and familial disputes. If people are unaware of the upcoming expectations and responsibilities, this can create talent gaps after retirement.
  • Not preparing the potential successors in advance: If you want to maintain business performance, it is important to allow enough time to organise the necessary training and skills for future leaders.

How often should succession plans be reviewed?

An owner should regularly review the succession plan at least every financial year or if there have been any significant changes in finances or employees. To maintain objectivity, it is recommended that the successor and a business advisor help prepare and review the succession plan documentation.

What are the risks of neglecting succession planning?

Neglecting to organise a business succession plan carries numerous risks, many of which can have a financial and emotional impact. Some include:

  • Key details can be missed: Rushing through a succession plan can cause important, smaller-scale details to be disregarded. New leaders and employees can be bombarded with issues that quickly arise after the final handover.
  • Forward-thinking can be stunted: If an emergency succession occurs, the business will only focus on short-term goals. Preparing earlier can give future leaders time to consider future business strategies and long-term goals, encouraging business longevity and success.
  • The business can suffer financially: If the tax implications of succession aren’t considered, it could set the business up for failure in the future. Additionally, careless planning can create long term structural issues or short term talent gaps and, therefore a decrease in performance which harms finances.

Down to Business

Planning for Succession Success, Part 1

Planning for Succession Success, Part 2

Business Advisory Specialists

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