It is a sobering statistic that 70% of family businesses do not survive into the second generation – a significant loss considering the time, effort and investment required to start, manage, and grow a business in South Africa.
Ensuring your business can survive beyond the loss of an owner, a partner or another key individual requires a well-structured succession plan that unlocks business value not only in the long term but also in the immediate future.
“A leader’s lasting value is measured by succession.” (John C. Maxwell)
Succession planning is preparing for the future of your business, ensuring the people and resources are available for its ongoing success beyond the lifetime of the current key players. It is especially critical in small businesses where the loss of a key person can bring the business to a sudden halt.
A formal succession plan details exactly what happens if the owner or a partner or another key individual in the business is no longer there, for both expected and unexpected reasons. These reasons range from the sudden or unexpected death or disablement to a planned and expected exit, for example, due to retirement.
Some of the options for succession include grooming the owners’ children and heirs to take over the reins; training loyal employees to take over key roles; bringing in high level expertise from outside the company; or selling the stake in the business to family, to the other partners, to a loyal employee or a group of employees, or to an outside buyer.
Why is succession planning so important?
Succession planning is crucial to ensure the viability of the company over the long term, and to unlock many benefits in the short term.
A good succession plan can secure a business owner’s legacy, and their retirement or their family’s well-being, instead of the business simply becoming one of the estimated 70% of inherited businesses that don’t survive.
It also ensures that what happens after the loss of a key person is planned and structured, rather than forced on the business by circumstance or by the courts.
A clear and fair succession plan can also:
- Prevent confusion and uncertainty after a sudden and unexpected loss,
- Avoid family disharmony and conflict between heirs and employees,
- Allow for continuity and a smoother transition, reducing the impact on the business and its stakeholders
- Ensure that successors, whether a promoted employee, a newly appointed manager, or a son or daughter or another family member, or a buyer, are qualified, skilled, and groomed to take over
- Provide opportunities for employee career growth internally
- Ensure you can get fair value if selling the business or a stake in it
- Prevent the forced sale of assets to settle the estate.
How to plan
Succession planning involves a combination of financial planning, estate planning and wealth planning and therefore requires the expertise of qualified advisors including your accountant.
The details of a succession plan depend on a range of issues, such as the ownership structure of the business, whether succession involves handing over to the next generation or an employee or an outside buyer, and the unique financial and legal aspects of the business.
As just one example, many businesses are sold to family or staff who may not have cash up front, and this requires special planning, for example, staggered payments over time and a slower transition.
However, here are a few common characteristics of a successful succession plan:
- All stakeholders are included in the planning and decision-making process
- Suitable, practical and gives the best outcome from a family and business perspective
- Documents and puts in place formal mechanisms and clear procedures for governance, conflict, and dispute resolution
- Contains a short-term emergency plan for each key position
- Details a full long-term succession plan for each key position
- Considers the financial, estate duty and tax implications of the decisions
- Takes into account legal compliance and commercial and practical considerations
- Ensures continuity by providing essential liquidity through, for example, key man insurance, life insurance for the partners and contingency policies
- Creates a viable and sustainable business operation now and for the future through modernised business systems, clearly documented and automated processes, fully trained people, and accurate up-to-date financial data – all of which will add immense value to the business now and in future.
If you consider for a moment what your death or retirement could do to the business’ success and to your family’s livelihood, you will realise how important it is to put in place a well-structured succession plan.
It will ensure that your time, effort and investment to grow a business in South Africa is not lost in a statistic, but rather that your legacy lives on, surviving beyond the current key players into the next generation.