Business planning

Small business guide to succession planning

One day, you might decide to sell your business, retire, or try something else. A succession plan will ensure a smooth exit or transition.

Succession planning is often thought of as something that only large businesses need to do. The truth is that it’s even more critical for small business owners to have a plan, as death or disability in a small or family-run business could spell the end for the company.

PwC’s Africa’s Family Business Survey 2021 noted that 76% of African family businesses don’t have succession plans in place. Succession planning can be emotional, which is why many small business owners put it off. Only 41% of these business owners have a last will/testament in place, which means that, when they die, there is no fixed plan to ensure that the business is formally passed down to the next generation.

COVID-19 highlighted the need for a succession plan, as many business owners passed away quickly, leaving no time to plan or find a suitable replacement. However, one positive to come from the pandemic is an increase (62%) in communication between family members regarding their business.

What is a succession plan?

A succession plan is a strategy to safeguard the future of a business by replacing key employees should death, disaster, or any other exit require it.

During the process, employees are groomed to fill the shoes of the current heads of the business. Corporate skills and knowledge are imparted to the potential replacement, providing them with the experience they require for future opportunities.

Why should small businesses have a succession plan?

Good succession planning acts as a business’s insurance policy for sustainability. Top roles are often difficult to fill – especially at short notice – and small businesses need to be prepared to react to departures, whether they are planned or not. Finding someone who knows the business inside-out from the get-go is impossible, and the only way to navigate an immediate replacement of a crucial role is to groom someone to take over.

Succession planning benefits you, your staff, customers, the business itself, and all relevant stakeholders. It means that the company will suffer minimal disruption in providing the goods and services that your clients rely on.

Succession plans, like business plans, must be reviewed regularly to ensure that they are up to date and serve the business as they should.

What happens to a business without a succession plan?

Without a clear succession plan in place, the business is at risk of being ‘in limbo’ while the search for a replacement is on. This could result in significant losses to the company and an unmotivated and fear-driven workforce. Current employees could compete for the vacancy, and there could even be animosity towards a new hire if they weren’t part of the original workforce.

Worst case scenario is that the business could fail without its leader or a suitable replacement at the helm.

What to include in a succession plan?

A succession plan should include:

A list of short- and long-term goals for you and your business

A list of possible successors, including their strengths and weaknesses

Timelines for the succession events

Exit options and the pros and cons of each

A copy of Standard Operating Procedures

A professional business valuation

Key employees, plus their roles and duties

Financing options for the transfer of the business

Tax consequences for each transfer option

Good succession plans also include contingency plans should the preferred plan become untenable.

How to identify employees for succession planning

How do you fairly rate an employee’s potential for growth or identify characteristics that will make them suitable for succession roles?

Tools like the 9-box grid can help. It is a talent management tool that divides employees into nine groups according to their performance and potential. It’s simple, effective, and works well for succession plans due to the projective nature of the box.

When leadership performance and potential are plotted on the graph, those in the top right corner – Box 1 – are considered good candidates, while those in the bottom left – Box 9 – do not fit the bill.

The boxes on the grid identify potential future leaders. Those in Box 1 can be groomed for succession within a year. Those in Boxes 2, 3 and 6 will take longer to reach that potential.

What are succession plan options for small businesses?

When drawing up a succession plan, it’s essential to review all the options to make the best choice for you, your business, and your family.

These are the most common succession plan options for small business owners:

1. Transfer to a family member(s)

Many small business owners build their businesses for years, intending to pass it on to the next generation. The trouble is, sometimes family members don’t want to – or aren’t able to – run the business.

Or, there might be multiple family members who want to take the reins. How will ownership and profit share be structured in that case? These are all issues to consider when transferring your business to family members.

2. Selling to a key employee or business partner

You may consider selling your business to a key employee. If you do, you can finance the sale over several years and upskill the employee as required. There are many ways to finance the purchase.

If you sell to your business partner, you could have limited choice on how to transfer your interest in the business as the partnership agreement typically dictates this.

3. Selling to an outside party

Selling your business to an outside party could be the best way to get the most value for your business, but it’s not always easy to find an interested party who ticks all the boxes. What’s more, you need to take numerous steps – like getting a business valuation – to sell it. It is advisable to get a business attorney to help you with this task.

4. Close and liquidate the business

You’ll need to jump through similar hoops to liquidate your company, but this is another way to maximise your value.

Who can help small businesses with succession planning?

When developing your succession plan, chat to those in business with you and your friends and family who could be affected by the decision.

Spend some time identifying your personal and financial short- and long-term goals, as these can help you determine a path for your business when you are no longer in charge.

You should also meet with a business lawyer, a financial advisor, and CPA (certified public accountant). You will need the legal and financial professionals to guide you to avoid any pitfalls and get the most out of the sale, transfer, or dissolution of your business.

What to avoid when succession planning

An informal strategy: Succession planning must be a formally agreed strategy to provide a ready-made talent pool for your future vacancies.

Assumptions about your talent: Understanding the qualifications and potential of your employees is essential to drawing up an effective succession plan.

Only focusing on C-Suite: Succession planning is multi-level and should include all your employees.

Overlooking continuous performance management: Continuous performance management is vital when doing succession plans.

Not having supporting technology: HR employee management software can support your succession planning strategy. It provides insights into the competencies of your workforce and allows HR to assess, monitor, engage, and grow your existing talent. It also helps you to accelerate the development of skilled employees.

One day, you might decide to leave your business, whether you sell it, retire, or pursue something else. Whatever the reason, having a succession plan will ensure a smooth exit or transition. Once you’ve prepared a succession plan, make sure to revisit it frequently, especially if things change.

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