finding the right successor
Putting a succession plan in place helps ensure the future stability of your business when you want to step aside so the business is well run in your absence. Or if you want to sell, a plan leads to a smooth transfer of ownership and leadership plus job security for your staff.
Finding your successor
You may have already decided who will succeed you. A family member, a key employee or another shareholder are common examples of ideal successors as they understand the business and are familiar with the business, customers, and suppliers.
If you don’t have anyone lined up, start by drawing up a list of all the possible candidates whether they’re likely to take over or not. Then, look at each person on the list and consider to what extent he or she has shown:
- Strong relationships with customers, suppliers, or other employees
- A passion for business
- Business common sense
- Business management skills, including financial and human resources management
- Leadership skills
If one or more people are internal candidates, give them a particular task that involves skills such as introducing a new product line or marketing to a new customer segment. After evaluating each person’s qualities, you’ll have a clearer idea of who your preferred successor could be, or a shortlist of two or three people.
Using external sources
If you’re struggling to find a person inside your business to take over leadership, then consider an outside sale. Look at your external network, this can include your accountant, wealth advisor, industry contacts, other small business owners, business broker, chamber of commerce etc. Cast your net as wide as you can.
Train your successor
Once you’ve identified your successor and they’ve agreed to take over the leadership of the business at some stage, it’s important to train them thoroughly to gain the necessary skills, expertise, and experience.
If your successor is coming from an internal source, start by asking your successor to work in each area of your business for a certain period, so they know exactly what’s involved with the following areas:
- Financial management
- Sales and marketing
- Customer services and other operations
Have the potential successor shadow you for a time, matching your tasks and time each day. Much of your expertise will be learned from experience and may not be written down. Now is the time to document all your activities to be able to leave a ‘manual’ of your leadership style and decisions.
If your successor is coming from an external sale, follow these steps:
- Keep good records. Income and expense trends including any ‘one-time’ expenditures and owner discretionary items, revenue trends by customer and/or product, and inventory aging reports are all useful to potential buyers and may not only reduce time delays but could aid in commanding a higher multiple.
- Know your culture. Numbers aside, this is the single-most disruptive factor for an outside sale. Understanding your company’s culture, what drives your employees and what the priorities are so you know who may or may not be a good fit as a buyer.
- Make your company rapidly transferrable. The less transition time required for a potential buyer, the better. Document your systems, your process, your key relationships both inside and outside the company and delegate your involvement to a capable management team. Ask yourself “Could I take six months off with little to no change in my company’s operation and performance?” If the answer is no, you have some work to do.
Think about your role in the business, if any, to provide on-going support for your successor such as:
- The time you can commit each week
- If it’s an advisory role only or part-time working
- The period of time you’ll be available
- The effect your presence is likely to have on your successor and staff
- Decide when you'll step aside. Set a target date and gradually transition out of day-to-day management over time
It’s important to address these points in advance and include them in your succession plan.
Plan an exit strategy
It’s important to plan your exit strategy from the business considering all the tax, investment, and legal implications of transferring ownership. For example, the transfer of ownership may be subject to tax if your successor buys the business for less than its ‘fair market value.’
Seek the advice of your accountant, attorney, and other advisers, such as business valuation experts and investment professionals for any tax or legal implications. Decide how you’ll transfer ownership of your business:
- If you are a sole proprietor, it should be relatively easy to transfer the business to another person (in effect selling the assets and possibly charging an amount for goodwill)
- If you’re in a partnership then it’s more difficult, as you are in effect terminating the existing partnership and expecting the buyer of your portion of the partnership to continue
- A corporation should also be easier by selling your shares in the company to the new owner
- Determine what your life looks like after exiting. What are your goals? Are you retiring or are you starting a new business? These are important considerations and will determine your post-exit satisfaction to a great extent. Like planning for your transition, this requires advanced planning to ensure a smooth transition.
Effective succession planning gives you the reassurance that your business will be in good hands after you’ve retired. However, it’s rarely an easy task. Begin your succession plans as early as possible and seek as much advice as you need to make the transition as smooth as possible.
Planning your succession? Our business team can help. Reach out to us today and we can guide you through every step of the way.