As retirement approaches, business owners often face the critical question of what steps to take in order to create a seamless succession plan. Whether you are looking to sell your business or simply ensure its continued success without your direct involvement, having a clear and well-thought-out succession plan is crucial.
In this article, we'll delve into the importance of succession plans, what they entail, and how to navigate the transfer of management and ownership, all with the ultimate goal of helping retiring business owners make informed decisions about their next steps.
Why is Succession Planning Important?
Succession plans are more than just a safeguard; they are a strategic necessity. They ensure the continuity of operations and leadership within a company, preventing disruptions and preserving institutional knowledge. This stability benefits not only the business but also the broader economy. Effective succession planning strengthens a company's resilience and adaptability, allowing it to navigate changes in the market and economic challenges effectively.
The absence of a succession plan can lead to chaos in the event of a business owner's departure, causing instability, leadership vacuums, and operational disruptions.
A well-thought-out succession plan, on the other hand, enables a smooth transfer of management and ownership, paving the way for a sustainable future.
What is a Succession Plan?
A succession plan has two key facets: the transfer of management and the transfer of ownership.
Transfer of Management:
The transfer of management involves stepping back from the day-to-day operations of the business while ensuring its continued success. It is imperative to have capable individuals or teams managing the operations.
Transfer of Ownership:
The transfer of ownership is about realizing the wealth from years of hard work. This facet of succession planning involves deciding to whom you will sell the shares and how to transition out of the role.
Transfer of Management: Operations and Leadership
At Firebird Capital, we see two elements to the transfer of management: operations and leadership.
Operations
If your business is lacking a dedicated individual or team to oversee the day-to-day operations of your business, it is unlikely to sustain itself when you step back. Not only will it struggle to remain viable independently, but it's also less likely to attract potential buyers.
However, in the case of most Small and Medium-sized Enterprises (SMEs), there is typically some form of a management team in place to handle various daily operational aspects. As the business owner, you may still retain responsibility for a limited set of core functions, with Sales and Finance being the most common examples.
If you plan to exit the business, prospective buyers will quickly notice operational gaps. This can result in them proposing a reduced valuation to compensate for the costs of filling these gaps or insisting on an extended handover period.
To maximize your business's valuation and broaden the pool of interested buyers, it's advisable to initiate planning well in advance. When considering the operational aspects of your role, explore options such as outsourcing or delegation. If these alternatives aren't feasible, contemplate recruiting someone to take on these responsibilities. In any case, be sure to provide adequate time for any new recruits to demonstrate their competence.
Leadership
While many SMEs have strategies in place for transitioning operational responsibilities, as discussed earlier, a considerably lower number of business owners have identified a suitable natural successor. We delve into the concept of natural successors more comprehensively here, but to summarize, a natural successor is an individual capable of assuming a leadership role within your business.
In cases where your SME boasts a competent management team for operations but lacks a natural successor, it may restrict the pool of potential buyers. While trade buyers, as described below, may maintain their interest, external investors could become less enthusiastic.
Once again, proactive planning can prove invaluable in such scenarios. Evaluate whether any members of your existing management team exhibit the potential to step into leadership roles. If no internal candidates are suitable, hiring a Managing Director may emerge as the most prudent course of action. Regardless of your choice, allocate ample time for these individuals to demonstrate their capabilities effectively.
Transfer of Ownership - Different Succession Options
There are many options here, each with its own advantages and disadvantages.
Family Succession
Advantages:
Preserves your legacy
Disadvantages:
Difficult to choose the a family member if there is more than one;
Challenging to receive payment for shares
Management Buyout or Employee Ownership Trust
Advantages:
Selling to the team that helped build the business, allowing them the potential for future wealth generation
Disadvantages:
Likely require external finance
Trade Buyer
Advantages:
Greater value due to industry understanding and potential economies of scale
Disadvantages:
Job security concerns for the current team
External Investor
Advantages:
Wide pool of potential buyers
Vested interest in business growth and legacy preservation
Disadvantages:
Requires a clear plan for management and leadership transition
Choose the option that aligns best with your goals and circumstances, as it will guide your succession planning activities.
Why Firebird Capital Might Be Suitable
Firebird Capital offers a unique perspective on business succession. As experienced entrepreneurs who have grown, run, and sold businesses themselves, our team understands the intricacies of business operations and can support both operational and leadership transitions. This sets us apart from most buyers. We can acquire businesses even without a clearly defined succession plan, and, unlike typical trade buyers, we prioritize the well-being of your team and the legacy you've built. Learn ore about us here.
Conclusion
Creating a succession plan is a critical step for retiring business owners. It ensures the continuity of your business, preserves your legacy, and contributes to the overall stability of the economy. By considering the transfer of management and ownership, and exploring various succession options, you can make informed decisions to secure the future of your business and your own wealth.
Remember that planning well in advance and seeking expert guidance, can make the process smoother and more successful.
If you think Firebird Capital can help you by helping with succession and buying your business, get in touch with us here.