Succession planning: There is no template

Whether we like it or not, things end. 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 with BDO Wealth

Advisers.

It's important to remember that with owner-managed businesses, the lines between ownership and management are often blurred, which complicates succession planning. 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 doesn’t succession 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. But 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. When it comes to ownership, this problem is more straightforward, 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.

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. 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.

When it comes to consulting a family, a good course of action can be to draft something like 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.

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 fiveto-seven-year window period is advisable.

In cases where a succession plan is involuntary, things are 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. ■