Succession planning in business – Frequently Asked Questions

Whatever stage your business is at, it is vital to consider and decide upon a succession plan to work towards. We have worked with owners of businesses in various sectors to offer succession planning advice which helps them refine their plans.

Here, we answer some of the most common questions about succession planning in business. To find out more, learn about the succession planning services we offer to support business owners.

What is succession planning in business?

Succession planning is when a business replaces its current leadership with new, up-and-coming talent. There could be various reasons why the current leadership is departing – often, it is because they are retiring.

Succession planning is more difficult than selling a business – it is more time consuming and costly, so work on succession planning should start a lot earlier than planning to sell a business might begin.

Succession is a long journey because it is all about making sure you have the continuity of your business in place so it continues to run in the same or a similar environment.

Why is succession planning important?

When a business leader leaves, that business is losing the person who has created and maintained its culture. This is why succession planning is important in business – to ensure that their departure doesn’t cause uncertainty and potential disruption to the company.

Change at the top could lead employees to question their own future with the business – they might wonder whether they should move on or stay on under the new leadership.

Uncertainty like this creates a risk that talented people may be more likely to look elsewhere or consider a rival offer, especially if they feel unsure of what’s happening.

Having a defined succession plan in place which is communicated to the team can help to nip uncertainty in the bud and protect the business against losing its talent, which is important to its ongoing success.

Who needs succession planning?

Any business owner who is looking to move on, while also securing the ongoing success of their company, needs a robust succession plan in place.

For a departing business owner, that business will have been their baby for a long time and they will have put their heart and soul, not to mention a lot of their time, into setting it up and running it. So, when they exit, they want to achieve a value for what they’ve built.

One option to achieve this is to sell the company. However, many business owners want to reward the team who have helped them build their company, while ensuring they secure their own wealth.

They may also be keen to secure the culture of the business for the future and to put measures in place to maintain the status quo. All of this is where succession planning comes in.

When should succession planning begin?

Ideally, from the day you start your business, you should be considering your exit from it.

Each succession plan is different – some business owners may have a goal to step back after a certain number of years in charge, or to grow the company to a certain size before taking a back seat.

If it’s a family business, the owner may intend to grow the company until they feel their children are ready to take the reins of it.

Whatever the circumstances, as a business owner, my advice is that you can never start having those thoughts about succession planning early enough.

Why succession planning fails

There are various reasons why succession planning fails. If business owners don’t invest in the talent to take over the business early enough, or incentivise them appropriately, this can mean there’s not the required talent in post for their plan to succeed.

When a business owner makes their exit, the ideal situation is that the process is smooth, with continuity in place, and the team continues to evolve with the right people running it.

Succession planning can also fail for financial reasons – for example, the departing owner may want too much from the business financially and could leave it struggling.

How to do succession planning

The mechanics of how to do succession planning can take various forms, depending on the desired outcome.

If the departing business owner wants to take a cash lump sum and have no further involvement with the company, this could take the form of a management buyout. This means the owner would receive the capital and have no further ties to the business.

Some may want to achieve a financial lump sum while retaining an active interest in the business they built, in which case they could look at a part management buyout – they may wish to sell 50 per cent of the company, for example.

Another option is for them retain all of their shares in the company while their team run it. This means the owner wouldn’t receive a lump sum but would receive an annual dividend. It also means that their financial security is linked to the business and its performance.

Another option is to create an employee ownership trust. This is an increasingly popular option which involves the owner selling their shares to a trust for the benefit of current and future employees. Essentially this means selling to everyone in the organisation.

This is gaining popularity as it provides a way for owners to step away from the business they created while rewarding everyone involved, keeping the company culture in place, and creating a legacy.

Speak to us for succession planning advice

If you have a question about succession planning in business or are looking for professional support and guidance, please get in touch, or find out more about our succession planning services.