10 Reasons Why Succession Planning is Essential

“What happens next?” Often the most difficult question to answer for a business owner. Energy and resources are often focused on the immediate needs of the business, with little time devoted to strategically planning for a handover of the business. Effective succession planning requires careful planning, honest conversations with all stakeholders (including business partners and family), and a willingness to take action well in advance of any succession event occurring.

Serial entrepreneurs may have exit goals but no real strategy for achieving them.

For other business owners stepping out of the business may seem a distant inevitability but the reality of age, illness or a change in circumstance can catapult them into a sudden search for options.

It’s hard to talk about exits, particularly in a business where the owner’s identity is interwoven with that of the firm. How do you start a conversation about a topic no one wants to consider? But it’s a topic that needs to be addressed to ensure a smooth transfer of wealth and operations.

Succession planning is not just about a sale. Businesses experiencing high growth need to invest in their internal leadership capabilities to maximise opportunities and de-risk the business. Owners need to carefully consider their future options to ensure the best outcome for themselves and for the business.

What we know from our research is that effective succession conversations are not being had early enough or often enough in the business sector.

Louise Broekman, Advisory Board Centre Founder & CEO

The Value of Independent Advice

The Advisory Board Centre has conducted research that reveals succession planning is an issue. The good news is that firms are seeking assistance to formulate their exit plans.

In fact, 17% of businesses using an advisory board are doing so specifically to handle the thorny question of succession. That’s according to the Advisory Board Centre’s State of the Market Report 2021.

A business owner may dream about the day they hand over the keys and happily deposit a big cheque, but the reality of achieving this is often much more difficult than they anticipate according to Advisory Board Centre Founder and CEO, Louise Broekman.

Broekman said, “Succession planning is not just about a sale. Businesses experiencing high growth need to invest in their internal leadership capabilities to maximise opportunities and de-risk the business. And owners need to carefully consider their future options to ensure the best outcome for themselves and for the business. What we know from our research is that effective succession conversations are not being had early enough or often enough in the business sector.”

A recent survey of advisory professionals found that 75% were concerned that businesses were unprepared to execute a succession event in their business. The general consensus was that owners should have a minimum 2-year horizon when considering an exit.

The Advisory Board Centre researched 500 organisations and uncovered a list of 10 major factors that trigger a significant strategic decision for succession. Both push and pull factors can be a trigger for succession planning. Push factors are a personal or operational need to change the structure of how the business operates and pull factors are a desire to want to change the business structure to aspire for something specific.

75% of external advisors are concerned that businesses are unprepared for succession. It’s time to close the knowledge gap.

(Market Rate Analysis Survey, 2021)

Succession Planning Triggers

Push Factors

1. An Ageing Population

The lack of conversation about exiting a business is particularly pertinent given the ageing Australian population. Many small business owners have looked at their firms as retirement funds, investing profits back into their business with the hopes of a successful sale. With an appropriate succession plan in place, an owner can ensure the business is well set up for the sale.

2. The Next Generation

The traditional option of handing over the business to family members is becoming less likely. Next generations are increasingly reluctant to take on business ownership, particularly in third-generation family firms. Access to education and technology is shaping their future, opening opportunities that are greater draw-cards than the family business.

3. Fatigue and Conflict

Running a business is tough. Years of putting sweat, tears and equity into a business can take their toll on owners. Management teams and business owners may find themselves in continual conflict over strategy or implementation which can be detrimental to the health of the business. A restructure to release owners from the business could be an option along with other potential strategies allowing maximum value without jeopardising the business.

4. Business Competition

A more aggressive marketplace is increasing competition and demanding disruptive approaches to trade. In this landscape safeguarding a client base and gaining a competitive advantage by locking out competitors is important to generating a healthy and robust business. Owners may look for a high investment exit strategy to build the business value for future acquisition.

5. Sunset Industries

Technology has transformed the way we do business at every level and the impact can be felt in individual firms, industries and regions. The fall-out can be severe, and business owners need to address this by identifying future survival risks and implementing a risk management strategy. This may include a planned and timely exit from their business.

 Pull Factors

6. Minimising Risk

Business owners know more than anyone the impact external influences can have on a business. Whether there is a new regulation, damaged brand reputation, illness in the family or a cashflow crisis, things that impact a business can be beyond the owner’s control.

The need to exit a business suddenly puts the owner in a vulnerable position at a time when they are least prepared to handle it. A succession plan can help fortify the business to ensure a smooth and safe exit.

7. Entrepreneurship

Business owners with an entrepreneurial spirit often look to take their skills to a new project. How they transfer business ownership can be crucial to ensuring their legacy is retained in a successful business and allows them the financial capabilities to tackle the next big milestone.

8. Return on Investment

Owners who have built up their business as a financial asset will want to extract maximum value from the organisation to gain a strong return on their investment. A succession plan is a useful tool that positions the business in the market to attract the right buyer.

9. Business Growth

The skills required to build a business may not be the capabilities needed to extend that same business into maturity and sustainable growth. The question of how to continue leadership and management can be a difficult one for business owners, particularly founders.

As an organisation takes its place in the market, the business owner may not want to move on. A succession plan can create a pathway to improving sustainable business performance.

10. Maximising an Opportunity

A pioneering spirit is required in building a business. This is particularly evident when an emerging market or technological advance provides the forum for a business to seize or maximise the market opportunity.

To undertake this high-risk activity demands innovative thinking and preparedness to shift business focus. It’s crucial to have strategies to protect the core business and manage cash flow and balance out the risk of advances.

Mapping an appropriate path to succession is important. Having the right advisors and advisory board can help ensure the process is done smoothly.

“Through the complimentary Advisor Concierge service, the Advisory Board Centre supports businesses to access independent advisors that can support a business in objectively considering their options for succession planning. This is especially important in situations where there are multiple stakeholders- such as partnerships or family businesses. Independent advice and a facilitated discussion mean all options can be considered and effective plans can be made to support the owner(s) and the business,” said Broekman.

Still have questions?  Ask the Advisor Concierge.

The Advisory Board Centre is an independent industry group that provides membership, certification and best practice training for board chairs and advisors. When you are engaging strategic advisors in your business – look for our logo.