The Complete Guide to Succession Planning

By Generational Equity


This guide provides essential insight into how careful planning can safeguard the continuity of your business as it changes hands – and how a well-presented succession plan can help you to achieve the optimal exit.

It’s tough trying to be an expert on a process you’ll most likely only complete once. That’s why the right advice from a trusted source will pay dividends when it comes to getting your succession planning process right first time.

Here, we look at various aspects, techniques and implications involved in business succession planning to help you to enter the process fully-equipped with the kind of information that will save you time and money when exiting your company.

Explore our essential guide to succession planning best practices.

Table of Contents:

What is succession planning?

A solid succession planning definition would be that it’s the set of measures that you put in place ahead of selling your business to ensure the continuity of the company’s success in the future.

After your exit, the success of your business will have to endure without your leadership – otherwise, how can it be expected to command a good price on the M&A market? Buyers won’t spend top-dollar on a business that is overly reliant on your position as CEO. The business needs to have a strategy in place that will maintain its performance after your departure – that’s the purpose of succession planning.

A prospective client visited our offices in Dallas a few years ago and as we discussed the business and its future, he rather sheepishly said,

“You know I used to think that I was key to the business; 20 years ago when I first started it I was. But last year I took my wife on a month-long vacation to Asia and was in areas where phone and internet access was limited. I mean, I went for days without calling the office and when I did, I learned that everything was going fine. It just showed me that I was no longer key to the operation.”

Now, he was lamenting this, sharing that he was no longer the key decision maker on daily issues that had to be handled (and even some of the larger strategic ones). But we were very happy to be able to inform him that he should look at this as a positive, not a personal negative (yes, his ego was impacted), since he had solved one of the major issues that buyers are concerned about – succession planning.

Can’t picture your business getting by without you?

The life-blood of privately held businesses in the middle market is the entrepreneur – the owner-managers. It’s these gifted individuals that have grown their companies, weathered years of recession and uncertainty and come out the other side, not just surviving, but thriving. They have achieved this because they have:

  • 100% commitment to their business
  • Comprehensive knowledge of its operations and market

…but remove that individual, and what happens to the value of that business?

That’s the question many business buyers find themselves asking as they scan the market for opportunities. And it’s the reason why, for business owners considering exit, it’s important to embark on the formidable, disconcerting and ultimately humbling task of planning out how to hand over the knowledge and expertise required to run your company successfully to another party.

The succession planning process is concerned with identifying candidates to replace you at the head of your company, selecting your successor and managing that transition to minimize the impact on your company. But it’s also about securing a greater future for the company and its employees under new leadership with the skills and experience to take the business on to the next level.

Once a business owner puts aside their reluctance to hand over the reins, there is a raft of practical measures they can undertake to kickstart their succession planning process, secure their company’s future and reassure potential buyers.

Why is succession planning important?

We’re talking about what happens after you exit – so why should that bother you as a business seller? In fact, we’ll come to see that succession planning can be of vital importance to optimizing the deal structure you are able to enter into, the legacy you leave behind for family and employees and, crucially, the sum you raise on exit.

It worries us greatly that 58% of small business owners don’t have a company succession plan. But what’s worse is that the reason cited by 42% of these respondents for not addressing succession planning is that they are too busy running their company.

If these businesses can’t cope without their CEO while he or she devotes some time to creating a succession plan, how could that business get by after the CEO leaves the office for the final time? Such a business is surely devaluing itself in the eyes of professional buyers looking for a business that not only has a history of success, but a future too.

What if I don’t think my company needs a succession plan?

You may think this is all very well, but that it doesn’t apply to you. You may feel you have a pretty clear idea of what the future of your company looks like without you. But the future has a knack of presenting us with unexpected outcomes.

Business owners we meet who neglect to make any formal plans for succession tend to be working under the assumption that either one of these situations will come into effect when they exit:

  • Either the next generation will step up to take control of the business
  • Or someone from within the organization will step forward with a buy-out offer

The problem with these assumptions is the relative rarity with which we at Generational Equity have seen them successfully materialize as planned.

The fact is, most offspring and key employees lack the financial capacity to deliver the maximum value for your business.

Whether or not your anointed successor has the skill and desire to secure your company’s future is a whole separate issue we discuss later in our “Family Business Succession Planning” section, but they’re certainly unlikely to represent the best buyer for your business in terms of optimizing its value.

No one wants to see the transfer of their business to an heir or a trusted colleague fall through, but it’s important for any business owner planning for the future to have a backstop plan in place.

Effects of succession planning on deal value

Effective succession planning can demonstrate to buyers that a business has long-term viability. Doesn’t that sound like a good aim for any business owner?

Business buyers, especially those from the Private Equity sector, are a cautious breed and any reassurances that a company’s future is secure will help boost its value in their eyes. Conversely, if there is little to reassure the buyer that the company’s success won’t just depart along with its incumbent CEO – then that is going to ring alarm bells. Buyers will turn away from such a prospect and the value of that business will be lower than that of a similar company that has taken documented measures to secure its future.

The issue you need to realize as a business owner is that by neglecting to implement a succession plan strategy you could be leaving thousands and thousands of dollars in unrealized value on the table. To protect that value, all you need to do is hire, train, and mentor a solid person to replace you. When you consider the impact on your financial legacy, it makes sense to go through a succession plan replacement program.

The importance of a succession plan that finds your replacement

One of the most important tactics that a business owner can pursue is in the interests of developing a succession plan is the idea of grooming and developing an eventual replacement. Unfortunately, far too many don’t address this issue in a timely manner and are left forced to do so when one of the Big Ds hit –

  • Death
  • Divorce
  • Disability
  • Distress (personal or business)
  • Disaster
  • Disagreement

In his insightful article, Kenneth Greenberg of Auctus Search Partners, LLC describes the importance of planning for succession:

According to a recent study by the Center for the Middle Market, 45% of middle market businesses face challenges lining up successors for critical roles in the business…

Middle market businesses are frequently overly dependent upon owners and a few key executives for core competencies and the company’s strategic vision.

Having a formal and documented succession plan in place will demonstrate to buyers your commitment to the continuity of your company’s performance beyond exit and will bolster its value as a result.

Timing – don’t leave it late when creating a succession plan!

For a number of reasons, succession planning can get pushed to the back burner. Maybe you are so busy with urgent tasks that achieve results in the short-term that long-term planning is ignored. Maybe the idea of relinquishing control is one you are not quite ready to face yet, let alone ideas such as retirement or even death. Our advice, however, is not to leave it too late. In fact, the earlier the better for the value of your business.

This situation is further compounded by this reality:

“60 percent of the 15 million privately held businesses in the U.S. are owned by business owners born before 1964,” says Christopher Nicholas, Shields & Co., at ACG Boston’s DealSource Select.

This means that about nine million businesses will face some sort of decision about the succession of their company over the next 15 years or so.

For the 44% of the owners surveyed who felt that succession is too far in the future, it really is not! The future will be here faster than you can imagine.

Even if you are not planning to exit for several years, succession planning can benefit the entire organization because what got you here won’t get you there. A new generation with a new set of skills may well be what your business needs to drive its progress into a secure and profitable future.

How to do succession planning

Now you have an appreciation of what a succession plan is and why it plays such a crucial role in your future, you’re probably wondering how to approach this process successfully.

The purpose of succession planning is to hand over control of your business in a way that not only ensures its continued commercial success, but provides assurances over the continuity of your business to potential buyers, helping your company command a higher price at exit.

But how do you approach succession planning to realize this purpose? Above all else, you should aim to satisfy the following areas:

  1. Defining the role – what are the responsibilities of your current role, and what qualities will a person need to be able to take on the role?
  2. Gauging interest – is there a genuine appetite among your middle management team to take a step up?
  3. Assessing talent and identifying potential – if there is interest, do the candidates at your disposal have the skills, experience and drive to take on your business? Or will you have to look beyond the walls of your company?
  4. Alternative successors – even if you have suitable candidates within your family or your middle management team, are there other viable fits outside of your business?
  5. Developing your business through your succession plan – once you have a vision for your succession in mind, is your business model tailored to make the transition as smooth as possible?

In this section, we will tackle each of these areas individually and how they help you to develop a succession plan with greater assurance.

Developing your succession plan

1. Defining the role

First and foremost, it is crucial to define your role. How can you pick the best person to succeed your business if you don’t have a clear idea of your job description?

Of course, no one will have a better grasp of the responsibilities, skills and mindset required to run your company than you, the owner. But, if you don’t sit down and ask yourself what these are and how they’ve evolved over time, then when you come to determine a successor, you could overlook certain vital skills that a candidate would need to run the business effectively.

So, take some time to consider the following as the first step of your succession planning:

  • What are your day-to-day responsibilities?
  • What is your motivation for running the company? (and has this changed over time?)
  • Which of your characteristics do you believe are key to running your business?
  • What skills/qualifications are necessary to perform your role effectively?
  • What culture have you instituted in your business?
  • What key decisions have you made to support your company’s growth?
  • Where do you see your business going in the future?

Frank, honest answers to these questions will give you a clearer sense of your role and how you’ve been running your company. This is essential when determining a successor, whether that proves to be a family member, key employee or external buyer – you need to know the type of person required to continue the development of your business.

To clarify, this does not mean identifying someone who is exactly like you. While you have guided the company to where it is today, your successor might have fresh ideas about developing your business for the future. So, you are not looking for a ‘new you’ to take over, but someone capable of taking on the responsibilities and challenges you face day-to-day as well as guiding the business into the future.

Finally, and we can’t emphasize this enough, write this information down. Having a succession plan set on paper means you and other key individuals have the parameters for your ideal successor to hand at all times, and they can be easily updated and amended over time without any detail being unwillingly forgotten.

2. Gauging interest

When gauging interest among your family or middle management team over the prospects of taking over the reins one day, you should let them answer openly and honestly.

One of the biggest challenges to succession planning is letting go of any assumptions you have about the future and keeping an open mind. All too often, business owners neglect to be thorough with their plan as they convince themselves one of their children or a key employee will take their place eventually, while not vocalizing this or asking the person directly.

This approach could lead you to pick a successor that is ill-fitted for the role based on the criteria you established earlier. Or they could feel coerced into saying yes, even if deep down they have no desire to be the next owner. So, it’s key to keep your options open about who will want to succeed you at the helm of your business.

Because wanting the role is the key ingredient in succession planning. Even if a person fits the mold for running your business, if they aren’t interested in the role, it is a recipe for disaster. Your passion for your company is likely a key driver of where it is today – if your successor does not share this passion, it could halt progress down the road.

3. Assessing talent and identifying potential

Once you’ve determined which parties might be interested, it is now time to assess their potential. As mentioned above, a key element of succession planning is approaching candidates objectively and dispassionately, whether they’re family, team members or external applicants.

An effective technique for formalizing the thoughts and feelings you have about candidates is the “9 Box Succession Planning Model”. Recruiters, M&A advisors and other professionals often refer to this as a powerful aid to business succession planning.

The model grades candidates based on their current performance and their future potential to objectively determine if they have the qualities to be an effective business leader. As you’ll see in the images below, you’re ideally looking for individuals that score highly on both edges of the graph.

9 Box Succession Planning Model

9 Box Succession Planning Model

The important thing to remember when using this graph to identify internal or family candidates for your successor is that you are recruiting them for the job they will have, not the job they already have. This means there must be enough ‘headroom’ in terms of their potential to be able to step up.

Identifying those with potential allows your business to devote its attention to those individuals in terms of training and development, but it’s important that the identification process looks beyond how candidates execute their current roles. True potential is the projected ability to perform in roles that exceed their current responsibilities, and that’s the golden quality you’re looking for.

4. Alternative successors

If you’ve followed a thorough succession planning policy up to this point, and discover that you have not been able to identify an appropriate candidate among your family or current staff, or you simply wish to cast your net wider to find the ideal fit, you will want to consider external recruitment strategies that explore the pool of talent in the recruitment market at large.

The earlier work you’ve done in defining your role should benefit this process of recruitment, as you’ll be aware of the characteristics, training and skills necessary for your position. This should help you create specific job descriptions and develop a role that will support their training and development towards the end goal.

As mentioned above, avoid gut-level assessments – the more you review and inspect the performance of the candidates at hand, the better your process will be.

5. Developing your business through your succession plan

The final stop in how to do succession planning relates to how you adapt your business for a future that is ‘under new management’. Even if you’ve found a candidate that meets all the criteria and has excellent potential, work still needs to be done to prepare them for the role. So, your succession plan should include a plan of action for how you’ll train and nurture your candidate and build your business.

Here are some top-line points to growing your business with succession at the core:

  • Allocate time and resources for training your chosen candidate, familiarizing them with your role and responsibilities, as well as identify materials to help bolster their skills and unlock their potential
  • Maintain up-to-date job descriptions and company policies
  • Institute an annual calendar of your role’s and the company’s most important activities and events
  • Conduct evaluations of your candidate on a consistent basis (at least once a year) to ensure they are on track to succeed in the role
  • Focus on creating a positive atmosphere and culture in your company to encourage your successor to stay motivated and invested in your future
  • Compile a comprehensive list of your company’s details, including your financials, clients, suppliers, collaborators and staff information
  • Outline your fiscal policies and procedures to ensure strong oversight of company finances

Research has shown that better results are achieved when high caliber candidates are recognized early on, and developed for a longer period, giving them a greater opportunity, not only to learn, but to become accustomed to the expectations placed upon them.

Operationally, you’ll also need to become more comfortable with sharing your day-to-day actions with the chosen candidate. This level of transparency might be tricky at first, particularly for those with a more guarded management style, but being clear with successors shows your commitment to allowing them to take responsibility when the day comes.

7 challenges of succession planning

Realizing the need to create a succession plan is the first hurdle in securing the future of your business. But this isn’t the only challenge you’ll contend with during the process of developing it.

If you are one of the many business owners who does not have a succession plan in place, the challenges you need to face can appear overwhelming at first glance. But, they will impede you from creating the most secure strategy for your company’s future, hurting its potential and your legacy in the long-term.

Knowing is half the battle, so it is important to understand the potential hurdles you’ll need to take on before starting your strategy. The standout challenges to those developing their succession plan are as follows:

  1. Lack of time
  2. Procrastination
  3. Psychological barriers
  4. Delegating responsibility
  5. Remaining objective
  6. Maintaining company morale
  7. Retaining top candidates

Below, you will learn more about each of these seven obstacles in detail and advice on how to beat them.

1. Lack of Time

Many business owners without a documented succession plan will point to a lack of time to put this in place. Managing a company is a drain on this precious commodity, which can cause you to lose track of vital responsibilities, like preparing your company for life without you.

It’s important to remember that the future is coming, and it won’t wait for you or anybody else. So, you should set aside a portion of time each day to making your initial exit strategy, which will keep it manageable and allow you to devote most of your day to the demands of running the business.

There’s no hard and fast solution unfortunately – you need to dedicate the time to get results in the future. But this will reap rewards down the road, and once you have a succession plan setup, it will likely just need tweaking every now and again, so you can then be more fully focused on managing your business.

2. Procrastination

You may think your succession is an event so far in the future that there’s no need to establish a plan now. Or the thought of confronting the day that you depart might be too difficult to confront, so you place your succession plan on the backburner.

It’s never too early to start your succession plan – in fact the earlier you start, the more prepared and comfortable you can feel when that moment arrives. Take the mindset of what could happen to your company if you or another key employee departs without a plan in place. It would almost certainly suffer, and it might not be able to recover quickly enough.

Succession planning supports your business and makes it stronger for the long-term, so don’t wait too long to approach this.

3. Psychological Barriers

We have seen that a key element to getting started is overcoming certain psychological barriers at the outset that are preventing the succession process from getting out of the blocks. This may sound wishy-washy to some, but we have witnessed first-hand the emotional factors that affect exit deals from getting off the ground.

The biggest challenge here is confronting your own mortality, or envisaging a time where you won’t be able to take the reins of your business anymore. That is certainly difficult to face, and it is understandable that it might take a while to fully digest.

Something that can help here is thinking of your company as an extension of your legacy. So, by preparing a succession plan that will support its development beyond your leadership, a piece of you will always have played a role in every step it takes going forward.

4. Delegating Responsibility

One common trait most entrepreneurs share is absolute confidence in themselves. By their very nature, this is vital to have. However, the downside is often a challenge in learning how to delegate. If you believe that you are the only mastermind in your business, delegation will be a challenge.

Moving from the founder to leader requires the abilities to surround yourself with talented people and mentor them so that they can develop into your mid- and upper-level management team. Dedicate time to give your successor an unimpeded insight into your role and responsibilities, and educate yourself on becoming the mentor they need for this transition.

5. Remaining Objective

As a business owner, you will know what it takes to run your company based on your own experience. But, this could cloud your mind to other approaches that could help your company reach another level that a successor might one day introduce. Plus, this experience might have instilled assumptions over who your replacement will be.

People find comfort in familiarity, so the immediate temptation will be to choose someone similar to you, or fits the mold you’ve developed over time. Instead, you should plan ahead to identify the characteristics, skills and responsibilities your successor will need. This will help you stay logical and overcome biases, ensuring the best candidate takes on the role.

6. Maintaining Company Morale

Discussion about succession can lead to a negative impact on company morale. This is especially true when it relates to ownership of the business – it can lead to fear over the future of the company without your management, or jealousy and competitiveness among key employees over who succeeds you as owner.

Succession planning should be as straightforward and open a process as possible. Open discussions about who will take the reins next allow all sides to collaborate over the next steps for the business, air any concerns, and get on board with the plan without any contention or secrecy.

7. Retaining Top Candidates

If you’ve identified standout candidates to take over ownership of your business one day, it is likely that other companies will see the same potential in these individuals. Retaining top performers is a challenge for all organizations in this environment, but when it directly relates to the future for your business, it is important to retain those who you intend to lead its development one day.

To fend off the competition and motivate your future leaders to stay with your project, offer development opportunities, training incentives and mentoring to keep them fulfilled in their ambitions. Also, once you’ve determined their role upon your departure, be clear with them about this and why you’ve selected them especially for this position.

Preparing and managing these challenges will greatly benefit your succession planning, helping ensure it stays on track and isn’t left incomplete when the time comes to depart your business.

Family business succession planning

The longevity of most family-owned and operated businesses hinges on one key component: having a plan in place that clearly outlines who will take the leadership role and when the succession will take place.

Far too many business owners assume one of two scenarios will one day occur:

  1. One of their kids will take over the business, or
  2. A key employee will buy him/her out

Both of these scenarios have serious issues attached to them.

First, have you even chatted with your kids about succession? Too often business owners who attend our exit planning conferences only do so AFTER being told by their offspring that they have no desire to take over the reins.

This leads into another issue: Are you sure your child has the aptitude and/or ability to be a CEO? It is one thing to work in the mailroom, quite another to make the leap to CEO.

Not to mention the insult that could be felt by key employees who have been with you for decades if you hand the company over to your child as your succession plan.

Finally, both of these scenarios carry a huge financial burden to the departing owner. Most offspring and key employees lack the financial capacity to deliver the maximum value for your business.

The third party buyer option is by far more financially lucrative (in most cases) and removes the burden of hoping that offspring or key employees even want to replace you or doubts over whether they’re capable of replacing you.

And the odds are short of family-owned firms surviving past the original entrepreneur. According to The Economist magazine:

“Even strong and successful firms can implode soon after a generational succession, which is why so many countries have some variation of the saying, “from shirtsleeves to shirtsleeves in three generations” (clogs to clogs, kimono to kimono). Alarmingly, a study of 2,400 family firms in 40 countries published last month by PwC, a consulting firm, found that only 16% of them had a “discussed and documented” succession plan in place.

We have highlighted the last sentence in the paragraph above to stress a key point: A very small minority of family businesses have a documented succession plan. This is a shocking statistic. Most families that have their own businesses usually have nearly their entire net worth tied up in the company. If the family has not created a plan that outlines how and when the founder will step down and who will take his/her role, then financial disaster could be on the horizon.

Remember that there are six Ds that can detrimentally impact the succession of your business:

  • Death
  • Divorce
  • Disability
  • Distress (personal or business)
  • Disaster
  • Disagreement

If any of these (or several) hit your company BEFORE you have a succession plan in place, the impact on the family’s financial legacy could be disastrous.

All too often we encounter entrepreneurs who assume that their business will eventually pass on to their children but they don’t do anything to make that a reality. Again, according to The Economist:

“However, sometimes children do not want to join the family business, or turn out not to have inherited the entrepreneurial genes of the founder. It may then be in the best interests of the firm for a professional to run it, rather than a reluctant or incompetent scion, even if the family retains some control. Letting professionals take over can make a lot of sense. Talented managers are more likely to join a firm where there is a chance of getting to the very top, or at least where they do not have to work under a useless heir. Some 40% of the family firms interviewed by PwC said that professionalising their business was among the main challenges they face in the next five years.

This paragraph points out what many business owners are often far too reluctant to believe: That Junior simply is not talented, trained, and/or lacks the leadership skills needed to run the family company. We strongly encourage every family-owned business that has children that will be taking over the reins to begin training the offspring in all facets of the business early on. The reality is that unless the kids understand each department and how each interacts with other departments, they won’t have a feel for the entire company.

In addition, they need to begin developing the trust of their co-workers that they will be leading one day. Without this trust, no matter who you pick, your successor will have a hard time leading if the employees believe that the only reason your offspring has taken over was simply having lucky genes.

Another great point is that eventually most family businesses will typically need to “professionalize” operations either by hiring talent and/or bringing in outside investors who offer capital, connections, and talent. Quite a few family-run businesses that we work with have reached the peak of how large the company can grow without an infusion of capital. The family and its management, in many cases, have great ideas for growing the company, but they are simply lacking in resources, both financial and otherwise, which is stifling their expansion plans.

If you find yourself and your business at a crossroads with ample opportunity to grow but lacking the means to do so, or if you have realized that your children will not be interested in replacing you, then you need to attend a Generational Equity exit planning workshop. These meetings are educational in nature and are designed to take owners who are in the 84% of the business population that have no exit plans in place and give them tools to at least get the process started.

We fully understand that your family’s financial legacy is closely intertwined with the business you are running. We also respect the fact that if your offspring are not interested in the company, then you need to act soon before one of the six Ds listed above come across your path.

What documentation is required for the succession planning process?

A 2018 MassMutual study revealed that only about 50% of business owners have any kind of written succession plan in place. Realistically, if you don’t have a succession plan documented in writing, then you don’t have one at all.

There are many elements that need to be included in a comprehensive succession plan, which is why it is crucial that these are compiled in the documentation. Without this, regardless of the internal planning and preparation you’ve conducted for the future of your company, you won’t have the structure in place to complete the most successful transition possible.

Here, we will outline the most important succession planning documentation you will require: a Succession Policy and an Emergency Succession Plan. This will cover what is included in these and why they are valuable pieces of writing.

Succession Planning Policy

Your succession planning policy will be a useful guide during your preparations. It will outline the people involved in the process, the procedures in place for succession and a timeline for how this would take place.

At the start of this document will be a policy statement, which outlines the terms of the succession policy, why this succession plan is in place and the key individuals that will be involved in the course of introducing your successor.

Following this will be the procedures involved. This will differ from company to company, but it will commonly include the following:

  • A timeline for the departure of the current owner
  • The stakeholders involved in facilitating the transition, and when they should be contacted
  • A list of those offering consulting assistance if required, such as transition management or executive search consultants
  • Reviewing the company’s business plan
  • Conducting an assessment of the company’s strengths, weaknesses, opportunities and threats (SWOTs) to identify top priorities for the successor
  • A time frame for the recruitment/selection of a candidate
  • A list of other documents needed to support a transition, such as hiring policies and human resources

Emergency Succession Plan

An emergency succession plan relates to situations where an owner or other key staff suddenly depart or are unable to perform their duties. These unexpected changes are challenging at any time, but the measures in this plan should help to minimize any damage caused.

Here are elements that may be included in a sample emergency succession plan:

  1. Rationale – the reasoning why this plan is in place and in what scenarios it should be implemented
  2. Plan implementation – the individuals and procedures involved in facilitating the transition
  3. Staff role – a breakdown of the roles and responsibilities the candidate will need to take on in this position
  4. Succession plans – outlining the different actions to be taken if this is to be a temporary, long-term or permanent succession, including the people, procedures and assistance involved
  5. Approvals – the different channels this succession plan must go through to be implemented

Succession Plan Checklist

These two documents are pivotal components of your overall succession planning checklist, which will also feature vital information relating to your role and your business. Again, this will vary from business to business, but here are some common elements that might relate to your company:

  • Succession Policy
  • Emergency Succession Plan
  • Calendar of key dates/deadlines
  • Job descriptions of various staff roles
  • Directions to all key organizational documents
  • Directions to all financial documentation and banking information
  • Copy of the most recent Annual Report
  • Location of current contracts and service agreements
  • Location of letters patent
  • Location of company policy and procedures manual
  • Location of any proposals
  • Location of maintenance plans
  • A list of key partnerships and referral contacts

Succession planning and selling your business

Sometimes the ideal successor for your business isn’t found internally, but is a buyer with shared experience of running a company like yours. Here, we outline the role of a succession plan in the process of selling a business.

The choice of a successor for your business shouldn’t be limited to a family member or an employee. As mentioned above, these individuals may lack the desire, skills or experience to build on the work you’ve done for the company.

Consider the development of your succession plan as a financial investment in your company’s future, because frankly, this is exactly what it is. You cannot allow emotion to cloud the selection of your successor, even if it initially feels cruel or unjust that one of your key employees or family members won’t take the reins going forward. Sentimentality won’t compensate for them not being fit for the role.

The option of choosing an external buyer or investor as your successor is often far more financially lucrative and removes the burden of hoping your offspring or employees want to replace you, or the doubts that they will be able to step up to the plate. Plus, if they have experience with another company, they might be more likely to have the skills to take your business to another level.

Succession planning and building a buyer ready business

Succession planning is all about creating a sustainable future for your business, which is what buyers will be looking for. Remember, when a buyer acquires a company, they are not buying its past or present – they are focused on the future. Anything that appears to risk the future of your company will be a big red flag for prospective buyers, reducing its value in their eyes.

This is where succession planning can play a key role in building a “buyer ready” business. Buyers are looking for illustrations that the business owner has made (or is in the process of making) the challenging transition from one owner to another as straightforward as possible. A detailed succession plan is a clear illustration of this.

As your succession plan will outline the features you consider crucial to effectively run the business beyond your ownership, fitting buyers will see their own qualities in this, and feel reassured that, with their skillset, they can have success with your company.

Even if your succession plan has outlined a family member or key employee as your successor and you decide at a later date to sell, it will identify to the buyers the key staff and people they will want to prioritize to support the transition and keep the company’s development on course.

If you haven’t found or groomed a replacement, buyers will view that as a risk, and any perceived risk will impact your ultimate valuation. Consider the financial consequences as you weigh the cost of creating a succession plan.

How deal structure affects succession planning strategies

When you come to sell your business, you may find that there are a few different deal structures open to you. Depending on your aims and those of your most likely buyers, you should consider tailoring your succession planning strategy to cater for the deal structure you envisage taking.

There’s often an assumption among private sellers that the deal they do on exit will be a 100% cash out deal that takes them from owner and CEO to detached, disinterested party with the scrawl of a signature.

But let’s have a look at 4 of the most common alternatives to this traditional deal structure, and their influence on how you should conduct your succession planning.

1. Asset Acquisition

This is where the buyer purchases a business’s assets without necessarily purchasing the business itself. The extent of the purchase will generally be determined by the appetite of the buyer. The seller may welcome the convenience of a cash sale under these circumstances, but may leave an awful lot of cash on the table if they inadvertently disregard and fail to monetize aspects of their business such as brand equity, existing custom, goodwill etc.

In an asset acquisition deal that effectively dissolves the existing business, succession planning becomes an irrelevance and will have no bearing on the value of the deal. However, this kind of deal would represent a pretty sorry worst-case scenario for most proud and successful business owners. For sellers wishing to divest their business as a going concern, effective succession planning goes a long way to securing the future of their company, bolstering its market value and avoiding a sale that only realizes the value of its tangible assets.

2. Stock Purchase

Here, a majority share in the business including the seller’s assets and liabilities is purchased by the buyer. This kind of deal is tax-efficient, achieves the seller’s aims of divestment while allowing for the continuation of the business and can potentially be completed quite quickly.

Under these circumstances, the continued success of the business is very much in the buyer’s interest and the brighter that future, the more valuable the business. In this case, strong evidence of effective succession planning, including assurances that an existing management team will remain in place, will be very attractive to buyers, especially those from the Private Equity sector. Generational Equity has seen evidence that private equity firms are beginning to insist that there is continuity of proven management teams post-sale.

One lower middle-market equity firm we came across, has this stipulation for prospective acquisitions:

“We will invest only when proven management teams with demonstrated records of success are part of the opportunity.”

Notice that this statement is plural. They look for management teams. If you aren’t developing and grooming a cadre of managers to eventually replace you, you better start soon.

Also, as part of many deal structures we are currently seeing in the market, sellers are having to carry paper financing the deal – that is to say, the seller remains a stakeholder in the business for typically 5 to 10 years following the initial transaction. In this situation, if the business falters under new leadership, the seller’s pay-out can be dramatically affected for the worse.

These deals shift the emphasis of responsibility for the business’s continued success toward the seller – all the more reason for thorough and effective succession planning.

3. Merger

Clearly, we are talking about two companies coming together to form a single business entity. It’s difficult to discuss any implications for succession planning that this type of deal may have because no two mergers are alike. The deal may feature any number of clauses governing any restructuring that would result from the amalgamation of the companies involved, such as the new leadership structure and how duplication of roles and resources is addressed.

Sufficed to say, as CEO you work hard, and that hard work will still need to be done post-deal, whether you are involved or not. Considerations such as the consolidation of top roles will be high on the agenda of any merger deal, and if it’s your aim to remove yourself from the business as part of the process, measures will need to be put in place to ensure a smooth and successful transition. Preparations may be delicate and complex, and are likely to involve leaders from both merging businesses.

4. Minority Investment.

This increasingly popular deal structure is where you divest a minority stake in your business to an investor or investors but retain the majority holding and control of the business. On the face of it, of course, this process might seem to do away with the necessity of succession planning. You’re still in charge, right?

However, this solution only puts off the inevitable, because you’ll want to retire one day. Plus, you now have significant investors with a stake in the continued success of your business. They will be even more incentivized than you are to have a succession plan in place for when you go for good.

And that’s no bad thing. Between your minority investment deal and your eventual retirement, you’ll have assistance and motivation in implementing an effective succession plan.

So planning what kind of deal structure you are aiming for goes hand in hand with succession planning.

These examples cover in broad terms some of the headline categories that exit deals can fall into. But the sheer diversity of deal types out there is all the more reason to consult an experienced M&A advisory firm during your exit planning journey. Thanks to the dozens and dozens of ways we have structured deals, our deal teams have the experience to create a package that works best for your ambitions, whether it be a full 100% exit or if you retain a majority and bring in a deep-pocketed partner.

We know that what works best for you might not make sense for another business owner. Our deal teams take the time to get to know each client and develop a deal structure that works for that company’s particular situation. Only then can you be fully aware of the requirements that your succession planning must fulfil.