How to Succeed with a Succession Plan for an Owner-Managed Business

Whether we like it or not, things come to an end. This reality, which applies to life as it does business, was brought into stark relief by Covid. As grim as the picture appears, it’s also an opportunity to confront this harsh truth head on. This is not only sage advice for someone concerned about the well-being of their family, but just as essential when it comes to succession planning for an owner-managed business, writes Ricardo Teixeira, CFP®, Chief Operating Officer BDO Wealth Advisers.

It's important to remember that with owner-managed businesses, the lines between ownership and management are often blurred, which brings in nuances that complicate succession planning. And so, with succession planning, as the owner it’s really about planning for two things: how you transfer ownership as well as management when you’re no longer running the business. This process also needs to take into consideration whether your exit is either done voluntarily (you choose when to handover) or involuntarily (a life event makes the decision for you).

Why succession doesn’t get addressed?

One of the main difficulties in succession planning is the vulnerability required to have the conversation. It requires recognising that you're not going to be around in the long run – a bitter pill to swallow. But the irony is that by not confronting the issue and creating a plan, business owners put themselves in an even more vulnerable position.

Ignorance is another common factor. In some cases, this is simple procrastination, thinking it’s OK to put succession off until it’s really urgent. Concomitant to that is not knowing how to start such a process, which is often a problem of self-diagnosis i.e. I don’t know, what I don’t know and therefore how to solve it. When it comes to ownership, this problem is more straight-forward, often involving a simple shares transfer. However, from a management perspective, the question of hiring a successor can pose difficulties.

Family-owned businesses can also introduce a challenge in terms of relationship dynamics. Not every family member will be an owner and or manager of a business, but there will always be certain emotional connections that come with the matter of legacy and how a family is treated throughout the process. This often leads to an expectation gap regarding the question of a successor, with a family having a different opinion to the Board of Directors.

Overall, the challenge most businesses face when trying to develop a succession plan is clarity of thought. Distilling what is important to you and what’s best for the long-term success of the business. For that reason, there is no template, meaning it’s not a problem that can be easily outsourced. It's about having an authentic dialogue and developing a personalised solution that speaks to each family, owner and the executive management team to the business.

Who puts together a succession plan?

The starting point of any successful succession plan begins with the stakeholders. This includes the owners of a business, the shareholders, as well as the executive management, and the family, if it’s a family-owned or branded business.

External advisors can be brought in for conversations related to the structure of ownership and management. This expertise can prove helpful when it comes to governance discussions, specifically an owner’s position in relation to management, as well the transfer of wealth between generations.

When it comes to consulting a family, a good course of action can be to draft something along the lines of a family charter. While it’s not a legal document of any sorts, a charter is a way for a family to establish a set of principles related to how a family business is managed, how the family relates to the business, how decisions are made in relation to the business, and how the family engages with the Board of Directors. In essence, a family charter is a way to establish certain values and help a family articulate a sense of purpose in relation to the business.

How much time should you give yourself to plan?

There is no specific length of time a succession plan takes to form. If it’s put together to address a voluntarily exit, it’s easier to plan in advance. If an owner is clear on when they are going to leave a business, or step aside from ownership or management, then a five-to-seven-year window period is advisable. This allows enough time to groom a successor, or identify what sort of person is needed to fill the role. This period also adequately allows an owner to prepare the various stakeholders of a business if they are looking to sell or merge.

In cases where a succession plan is involuntary, things are naturally a bit more difficult. At any stage something can happen to an owner, making them unable to continue operating the business. In such a case, if a succession plan has not been developed, it’s advisable that a business hold key man insurance, or an equivalent policy. This will provide a safety net so that there’s capital should a business need to employ a new CEO at short notice.

The key is regular review

The hardest part of building a succession plan is starting one. Once that’s underway, the key to making it work is constant review to ensure it stays relevant. As a business grows and changes, so too should the succession plan and over time, once the ball is rolling, it can help to bring in outside guidance to help review the plan.

This is where an independent advisory service such as BDO can come in useful. We’re able to bring a framework of thinking and objectivity that can help to identify any gaps in a plan.

How does your plan account for wealth transfer? What does it mean for the owner’s estate planning? Have you considered the tax implications and what it would mean for the business’ cash flow?

These are the sorts of risks and consequences we’re able to identify and manage, bringing oversight through a broad service perspective, that includes accounting, corporate finance, wealth management, legal counsel, cyber security and an internal audit.

Every business is unique which is why having a succession plan is so important. By not putting together a plan, a business owner ultimately leaves it up to someone else to make the difficult decisions, leaving everyone attached to the business to deal with the consequences that come with that.