How to succeed with succession

By Jonathon Parkinson, UK managing partner at Marktlink

The big players may get the headlines, but family-owned businesses make up a huge slice of the global economy. In the UK, a staggering 86% businesses are family-run, so are 70% to 90% of all firms in the European Union, and 75% of businesses in the United States (source: Global Entrepreneurship Monitor).

With so many private sector companies operating within family structures, emotional ties can get in the way of selling a company and finding the right successor. That’s entirely understandable. But a variety of other factors can undermine effective succession planning, and are less easily excused.

In some cases, the whole issue gets pushed to one side. The daily pressures of managing clients, customers and employees takes priority. The years go by, and the day of reckoning quietly creeps up on owners who don’t ‘have time’ to pick a successor or mentally appoint a replacement without actually consulting the intended individual – resulting in sub-optimal decisions if that person is unable or unwilling to take on the role.

Whatever the reasons, the lack of a thorough succession plan is a problem for a large proportion of family-owned businesses. Shockingly, fewer than one in four private company boards have a formal succession plan in place.

Without adequate preparation, your business may be saddled with a new leader who lacks the knowledge to continue its success. Yet only 54% of companies actively develop CEO successors.

85% of owners also fail to be transparent about the selection process, creating rumour and dissent among employees who feel excluded or disagree with the decision.

If the successor lacks the right qualities or training, the monetary risk of poor succession planning quickly becomes apparent; and urgently correcting a ‘false start’ be extremely costly.

It’s harder to obtain long-term financing if lenders think the company hasn’t laid the foundations for its future success; but a strong succession plan provides assurance that it can meet its commitments despite any leadership changes.

Succession planning can be a complex process. Most business owners need significant legal and financial help to ensure a smooth transition.

From management buyouts , to employee ownership trusts, or selling to a third party, the range and complexity of exit routes can be overwhelming, but an experienced advisor can help you to find a way through, and to make the right decisions for yourself and your business.

The best and easiest way to ensure a successful succession is to start planning as soon as possible. By preparing at least three to five years in advance, you’re demonstrating that the business is ready for a new era of success. And there’s plenty to do: as well as selecting an ‘heir’, you’ll need to gather the correct legal documents, such as a shareholders’ agreement, and ensure that strong internal management and accounts systems are in place.

A sudden leadership vacuum is enough to cause financial damage, especially when there’s no obvious replacement waiting in the wings. When the CEO of Hewlett Packard stepped down in 2010, its shares took an immediate 8.3% plunge.

Even if your business is sold externally, stakeholders need to be kept abreast of developments, as far as confidentiality allows. If your colleagues and employees are kept in the dark about changes that affect them, or denied the chance to apply for senior positions, they can lose motivation and confidence. They may even take their valuable skills, experience, and knowledge elsewhere – severely impeding the company’s success. To ensure continuity, be sure to promote internally where appropriate, and pass responsibility to key people at the right moment.

Succession planning can be a complex process. Most business owners need significant legal and financial help to ensure a smooth transition.

From management buyouts , to employee ownership trusts, or selling to a third party, the range and complexity of exit routes can be overwhelming, but an experienced advisor can help you to find a way through, and to make the right decisions for yourself and your business.

The day of succession is an inevitable part of business ownership, but the damage produced when owners fail to prioritise future plans is an outcome that can be avoided.

Acting on immediate priorities may feel like the most logical way to protect business health, but it’s essential to consider long-term as well as short-term success.

It’s only natural to want to preserve the value and sheer hard work you’ve poured into your business. Ultimately, preparing early and carefully is the best and easiest way to do just that.