A guide to creating your initial Succession Plan

Succession Planning allows you to transition your business to new ownership in a managed and systematic way; reducing stress while achieving a greater outcome.

It’s crucial to consider Succession Planning as an important aspect of your overall business strategy that requires regular reflection and ongoing development.

Succession Planning is a complex process that requires a lot of considerations along with legal documentation. Generally, the longer you have to execute your plan, the bigger the opportunity you have to maximise the value of your business and therefore capital you extract on exiting.

To help set you off on the right foot, we have outlined the first few steps you need to prepare your initial Succession Plan below:

1.   Your business and personal goals

The Succession Plan is all about extracting what you desire from your business. You must start by considering your personal goals and establishing the expectations you have from the business in order to deliver on these; matching your business goals to your personal goals.

This will help you to plan for how you can extract the value that you require to enjoy the lifestyle you wish to lead after you exit the business.

2.   Your Vision

Succession Planning forces you to clarify and discuss the vision for the business, which will play a huge part when transferring to new ownership.

Vision ultimately enables a more effective working culture, helping to align and prepare your team for succession. When your team understand the vision and how their key responsibilities and tasks contribute to the realisation of this, they become more engaged. This will help develop a more stable environment that is receptive to adopting new leadership and ownership.

Sharing the vision with your potential successors will enable them to visualise where their future business is going, growing an emotional connection thats likely to build their perception of its value.

3.   Establishing your business support network

It’s important to take time out from running your business to work on developing it. Seeking advice from our KMT accountant or business adviser will help you remain accountable for this leadership role, which will ultimately have the greatest influence on your succession strategy and outcome.

Speaking with a KMT accountant will be particularly helpful at the due diligence, valuation, and grooming stages. Our broad business knowledge and expert tax advice can help you significantly increase the value of your business.

Your solicitor may also be involved in the planning phase and will definitely be involved in drafting and signing the sale and purchase agreement, as well as when dealing with any post-settlement matters.

Engaging KMT business advisers will provide fresh and impartial perspectives at this potentially emotional time. Decision-making requires a level head and independent advice to ensure you achieve your desired results.

4.    Identifying factors that may influence your plan

The world is evolving at an unprecedented pace. A changing landscape in your industry, global trends and other environmental factors may influence the timing or strategic decision-making behind your succession.

For example, if you have commercial premises the property market could have a considerable bearing on when you decide to exit or sell business assets. Or, you may choose to leave the commercial premises out of the sale so that you are able to maintain a passive income stream post succession.

Establishing and planning for these factors now will help you to manage a variety of potential opportunities and vulnerabilities to achieve the best price for your business. As they say, timing is everything.

5.   Researching and deciding on the most appropriate succession option

You essentially have six options to consider:

  1. Generational / family succession.
  2. Market, sell and exit with a transitional period.
  3. Market, sell, and remain as a consultant.
  4. Transition to an existing team member.
  5. Transition to new recruit.
  6. A structured liquidation of business assets.

If you would like to receive a full PDF Guide to Succession Planning including the detailed information and instructions on those six succession options, submit your enquiry here.

6.   Identifying Potential Successors

There are potential buyers everywhere. Identifying and considering the most suitable successors in the beginning will influence your plan. Successors you might consider:

  1. Family successors.
  2. Employee buyout.
  3. Suppliers or competitors.
  4. Businesses in a similar market that are looking to acquire a new division.
  5. People looking to buy into an established business.

Other considerations in choosing a successor:

  • While succession is a lot about you, you must also consider the business as a whole:
  • Will the successor continue to support your team in the way that you have? How can you minimise the risk to them throughout the process?
  • Are all employee benefits documented in employment agreements?

Now is the time to put processes in place to protect your employees. After all, they are an important part of the business and will help to ensure a smooth transition.

Also consider your customers and how their needs must be managed throughout the transition as this can have a major impact on the price you achieve.

Regardless of who lines up to buy your business, you must follow due process to minimise risk and ensure all parties consult independent advisors.

7.  Creating a succession timeline (in order to work backwards).

This is probably the biggest influencer of your Succession Plan. How much time you have to groom your business (and successor) for sale will ultimately dictate how much additional value you can extract.

A general rule of thumb suggests that you allow:

  • 2 years for a well-prepared business owner with a strategic plan and a business in good shape
  • 3 – 4 years for a family business owner looking to pass on to professional management
  • 3 – 5 years for a knowledge-based business owner allowing for knowledge transfer to manager/successor
  • 5+ years for a family business owner looking to pass on to the next generation

To achieve sustainable increased value, you need at least 2-3 years. You need time to ensure the transfer of knowledge to the new owner. You must also consider how much money you need to sustain your current lifestyle upon exit – this may dictate your exit date.

If under one year, the process will be much more intensive and focus on housekeeping matters and quick wins– basically youll have less opportunity to extract maximum value:

  • Your focus will be more on getting your ducks in a row, rather than grooming the business for additional value.
  • This process may involve untangling personal assets from the business.
  • Depending on the state of the market you may struggle to achieve your desired price.
  • It may take time to attract the right successor.

Basically, the more time you have for planning and implementation the better. Taking time to capitalise on the opportunities in your business will pay offit’s about packaging your business as neatly as possible.

8.   Developing and documenting your Succession Plan.

It is extremely important to involve an impartial third party to facilitate this process for you. Succession planning can be an emotional time; involving an experienced advisor helps keep the process on track. Don’t involve a potential successor at first, theres a lot to be discussed prior to including them in the planning process.

The Succession Plan should recap the decisions youve made thus far in the process:

  • Your business and lifestyle goals (purpose of the plan)
  • Your vision for the business
  • What you will effectively be selling (business assets)
  • Your anticipated timeframe (and matters that may affect this)
  • Key milestones in your process
  • Your potential succession scenarios, and preferred option/successor
  • The business’s approximate value at present (and target value upon exit)
  • The business’s key stakeholders (who could impact/be impacted by the outcome of the plan)
  • Opportunities and vulnerabilities (risks) that should be managed throughout the process
  • How you intend to achieve your desired objectives (key projects/tasks/actions required)

You must reflect on this regularly to keep it up to date and alive in your business.

Learn more about the Benefits of KMT Succession Planning service.

Contact us today to get started on Succession Planning so that you can extract the maximum value from your business with minimal stress.

This is general advice only and does not take into account your financial circumstances, needs and objectives. The article should not be relied upon as specific information or advice without obtaining appropriate professional advice after a detailed examination of your particular situation from a qualified KMT adviser.