Five tips for effective succession planning

May 27 2020

Most people want to grow a business and sell it or retire at some point in time as well as take some capital value out in the process. Succession planning is therefore something that should always be on the agenda. Indeed, the older you get, proper succession planning becomes more and more necessary.

Once you get to the point you no longer have the financial responsibilities you used to (e.g. your mortgage is paid off and your kids have grown up), you may start wanting to think about stepping away from the business and spending more time enjoying the fruits of your labours.

Personal situations can change very quickly, even for those who aren’t close to retirement age. For example, if you suddenly inherited €2 million, would your priorities and objectives change? For most people, the answer is a resounding ‘yes’.

Whatever your situation, it’s very important to think about succession planning at the earliest possible stage, and, as covered in this article, ensure that you leave your goodwill in the business when you exit.

Here are 5 tips for effective succession planning:

Understand the rules of exit

The rules of exit should be crystal clear and, where applicable, set out in your shareholder's agreement. You should also explain how you intend to value your shares. Striking the right price is a key element of any business transaction so it is important to ensure not only are you satisfied with the valuation of your shareholding, but the new shareholders are too and they can, where necessary, obtain finance to do so.

“Where do you want to be in 10 years?”

This is a question we ask in every strategy meeting and the two key areas of discussion are inevitably business and personal goals. These two must become aligned and deliverable. By defining where you want to be in the future, it then enables meaningful plans and defined outcomes to be put in place – in short, a route map of what should happen for you over an agreed period.

Know when the exit is going to take place

Having a very clear understanding of when that exit is going to take place is essential. This also gives all the key people involved time to ensure that the transition is as smooth and effective as possible. Effectively managing an exit at very short notice can be a real challenge, so it is always best to give everyone as much notice as possible.

Get a mentor that isn’t on your board

It’s essential to select a mentor who can look at your business in a completely independent & objective way. Some Chief Executives look to their board for a mentor, yet in most cases, other Directors find it very difficult to be completely objective because they’re directly impacted by the decisions made around the table.

This issue is often exacerbated when broaching topics like succession planning, where the potential implications are significant – that’s where it pays to have an external mentor – someone with no personal agenda or ties to the business.

Leave goodwill in the business

Be sure that when you exit, goodwill is left in the business and doesn’t walk out of the front door with you. For example, if you hold direct relationships with 70% of your clients when exiting, that can present challenges for the ongoing business, which will require careful transition planning.

Additionally, if the business needs to replace you when you exit, this can be a highly costly exercise as they’ll not only have to buy you out, but also recruit a senior replacement to fill your role. This is something that you need to think carefully about as you head towards the exit and plan forward.

The survival of your business impacts too many people for you to want to leave it vulnerable to your sudden departure. You may feel invincible, but the sad fact of the matter is that life happens, and businesses will lose their founders unexpectedly. Protect your legacy and prepare your succession plan today!

If you’re interested in finding out more around how EFM Growth can help guide you through the challenges of succession planning, speak to our team of experienced Growth Partners. Get in touch today through email or call 01442 8176.

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