What is Business Succession Planning?

Posted on 07 Sep 2023, by admin

What is Business Succession Planning?

Business Succession Planning: A Comprehensive Guide for UK Businesses

Succession planning is crucial for any organisation, whether it’s a small family business or a multinational conglomerate. While many UK business owners focus on short-term goals, it’s important to think about the long-term picture. Planning for succession ensures that businesses remain resilient and can navigate challenges with ease.

This article provides an in-depth look into the intricacies of business succession planning and its importance in the UK business landscape.

What is Business Succession Planning?

Business succession planning is the strategic process of identifying and developing potential leaders within an organisation who can replace current leaders when they retire, resign, or otherwise leave the company. The process helps businesses continue to function smoothly even in times of change and ensures that they are prepared for both predictable and unpredictable future events.

How does Business Succession planning tie into selling your business?

Well in some respects they are one and the same. Planning to sell your business is a form of succession planning, but in this case you are looking outside your current business for the successors and in doing so, hopefully realising the value of the business at the same time.

However in any business sale, a buyer will not want to purchase a business that is expecting the entirety of the future of the business to be figured out by themselves post purchase. They want to know that once the current owners leave there is a plan in place for how the business can continue to operate without them. Yes, the new owner might be key to that plan but they know that there is a strategy in place and the other key secondary management personnel needed are staying in the business to help the transition and ensure it goes smoothly.

What this ultimately means is that planning on selling your business is no magic solution to business succession planning, whilst it is one strategy and solution it still requires either steps to be taken and planning to be done. If these are undertaken then this will allow the full value of the business to be realised on sale buy the owners, but if not then there is a high likelihood that the business will be sold for less than it potentially could be. Here at Dexterity Partners, this is key to what we do in any business sale of any kind.

Our fit to sell and fit for the future analysis we undertake and the start of any process helps to identify these issues and resolve them early on before you’re already halfway down the road of a sale. By addressing things early it allows real actions and solutions to be implemented and helps to ensure you realise the full potential value of the business on any sale and don’t leave value on the table.

How Does Succession Planning Work?

Succession planning generally consists of several key steps:

  • Identification of Key Roles: The first step involves identifying the critical roles in an organisation that would need successors. In a sale this is usually the owners who are selling, who are also some of the key management personnel. But it could also be secondary management or other key business functions.
  • Assessment and Evaluation: The current skills, competencies, and performance of existing employees are evaluated to identify those capable of filling these key roles in the future. This also allows you to understand exactly who does what now, and in a potential sale having this understanding can be very useful for any buyer in helping them understand the business and how it runs. Often this will highlight what the owners actually do day to day, where they are vital to the business and sometimes what they think they are key to in business but actually that function runs smoothly with minimal involvement from them. By understanding all of these aspects you can develop a plan to address them either to ensure the future of the business or in the case of a sale, build a management team that can make that transition smooth and successful.
  • Training and Development: After potential candidates are identified, they often undergo training programmes tailored to prepare them for the future roles they are expected to fill.
  • Implementation: This involves the actual succession, whether planned, such as to prepare for a business sale, or forced due to unforeseen circumstances like resignation or illness. When it comes to a business sale, having a period of the implementation phase underway and successful prior to the deal is a huge green flag for any buyer and will undountab;ly help improve the chances of a successful sale and of a greater value.
  • Review and Adjust: Post-implementation, it’s important to review how the process went and what could be improved for future succession planning exercises.

What are the Benefits of Business Succession Planning?

  • Business Continuity – Succession planning ensures that business activities continue without interruption, preserving stakeholder trust and company reputation. This is the most important aspect when it comes to succession planning for a business sale. The new owners will want to ensure that day 1 post sale things carry on as normal and it is business as usual. They want to know if there is a plan that they can help implement to ensure that after they buy the business and the old owners leave, the business doesn’t fall down without them. If a buyer is not comfortable with this aspect it can be a huge issue as to whether the deal actually completes and goes through, and if it does, these issues often result in less money being paid for the business, either in total or on day 1.
  • Talent Retention – By investing in the development of your employees, you can also improve retention rates. This is particularly important in competitive sectors.
  • Risk Mitigation – By preparing in advance, you mitigate the risks associated with an abrupt leadership change. No one likes change, but sudden change even less. By starting early it gives you time to make the changes slowly, see what works and what doesn’t, adjust the plan as you go and ultimately increase the chances of success. When it comes to selling your business, this often is a abrupt leadership change.

What Are Some of the Common Mistakes Companies Make During Succession Planning?

Lack of Early Planning

One of the biggest mistakes is not starting the process early enough. Succession planning is often viewed as a ‘future problem,’ which leads to rushed decisions when the time comes. At Dexterity Partners, this is key to what we do in any business sale of any kind. Our fit to sell and fit for the future analysis we undertake and the start of any process. This helps to identify issues and resolve them early on. By addressing things early it allows real actions and solutions to be implemented and helps to ensure you realise the full potential value of the business on any sale. Early planning is at the core of what we do as we believe it is vital to success.

Inadequate Training

Simply identifying a successor or what the succession plan is, is not enough; they must be adequately trained to take on their future role and the plan must be properly carried out and committed to, to ensure it succeeds.

Failure to Consider Company Culture

Ignoring the importance of company culture can lead to the selection of leaders/successors/buyers who may not be the right fit.

How Long Should a Succession Plan Be?

There is no one-size-fits-all answer, this can vary depending on several factors like the size of the organisation, complexity of roles, what the issues you are trying to address are, how large they have become. The simple fact is in most cases the earlier you start the better.

When is it Best to Start Business Succession Planning?

The ideal time to start is now. Regardless of the size or stage of your business, having a plan in place will offer you peace of mind and stability. Additionally, the sooner you start means the longer the plan will have been in place and thus more time to show that it has been a success, as well as time to resolve any issues that pop up in the early stages.

How to Choose Your Business Successor

Whether an internal successor, such as in a management buyout or an external one in a more general business sale, your successor should ideally have a blend of skills, both hard and soft, that align with the organisation’s needs.

Additional considerations could be loyalty to the company, understanding of its culture, and the ability to drive strategic vision. In any business sale whilst these factors need to be considered, there is an element of weighing them up against the fact different parties will offer you different deals for the business and ultimately value it differently. So whilst you may want to choose the perfect fit, there isn’t always that luxury of the perfect fit being the one that also makes the perfect offer to buy your business. You may have to make trade offs as to which is more important to you and where the exact differences and issues lie.

Family Business Succession Planning

Family businesses offer unique challenges, including balancing family and business needs. It’s important to have open and transparent conversations with family members involved in the business to plan effectively. To be honest, family succession can often be the easiest but also the hardest. There are always unique dynamics at play and each one is very unique.

Who is Responsible for Succession Planning?

The responsibility ultimately lies with the business’s top management, usually this is also the owners of the business. This applies in a general succession planning scenario as well as one which is focused on a business sale. The key difference is that when selling, the plan on how the key owner/managers are replaced is vital and cannot be a half baked solution or a half implemented one, as once the business is sold, they will leave and so there will be no more time to just “sort out the last few details”.

The plan when a sale is the route being explored must be well thought out and executed to completion as much as possible. Doing this will give huge confidence to any potential buyer as to the ability for the business to function and thrive once the old owners leave and at the end of the day, this is something that can help increase the value of the business to a buyer.

By dedicating resources and time to effective succession planning, UK businesses can ensure long-term success and sustainability. While the process can be complex, the benefits far outweigh the drawbacks. With the right strategy, any business can effectively secure its future. When it comes to planning for the sale of your business, this is an equally key process to undertake.

You are essentially planning for the future owner of the business, and whilst this may seem odd – isn’t that their problem to solve? It actually can be a huge advantage when selling, it makes the business much more attractive to any potential buyer, shows its potential and dispels those concerns about what happens when the existing owners sell and then leave. All of this means you will get a greater value for the business when it is sold and even if you end up not selling – the business will end up in a stronger position as a result anyway.

For further information and impartial advice, feel free to contact our founders at Dexterity Partners.