The key to managing succession

Change happens fast. Yet many privately owned, entrepreneurial and family businesses have no succession plan in place. James Rosthorn, Investment Manager at Maven, discusses why managing succession is important and the steps business owners should take to successfully achieve this corporate objective.

Succession planning is the process of identifying and developing new leaders that can take over the business when the current leaders step down. Having a structured and planned process in place for this significant event has many advantages, such as enabling a business to create a long-term competitive advantage, maximising value on an eventual exit, safeguarding family legacy, or ensuring that the business is left in safe hands for years to come. However, business leaders can often be too focused on the day-to-day management and operational demands of the organisation and fail to put in place the appropriate steps to manage this inflection point effectively. This can be especially challenging when an unforeseen circumstance, such as a senior team member suddenly leaving the business, comes to the fore. The impact of such an event has the potential to create irreparable damage.

When many leaders start to consider an exit or are approaching retirement, it can often be the case that their net worth is tied up in the business, and can only be released through a liquidity event, typically through the introduction of an outside investor. Succession planning, particularly in family and owner managed businesses, can be facilitated through private equity investment as individual shareholdings can be bought out to enable retirement or a buy-out of the business.

Succession planning must be one of the key areas within a company’s business plan and should be as important as its growth strategy. A robust succession plan can reduce organisational risk, and business owners should consider the following key steps:

Objectives
As with any aspect of running a business, before executing a plan it is imperative that both personal and business objectives have been identified. This will enable owners to measure success, ensure leadership buy-in and revisit these objectives if things are not going to plan.

Once identified, an assessment is required to understand what needs to be done to bridge the gap between the current status and the objectives of the succession plan.

Timeframe
Owners need to consider what is an appropriate timeframe for meeting those objectives, whilst not losing focus on the day-to-day management of the business.

From the point of view of an external investor, there should be a clear target date by which the future leaders have been given sufficient time to take the reins of the business and acquire the necessary skill set to take it forward.

Required skill-set
It is critical that the current leaders have started to pass on their roles and responsibilities to other individuals well before the identified timeframe. It is therefore vital to identify the full operational and strategic responsibilities of the current leaders and understand what skill sets are already within the business.

When there is a skills gap, the choice is to either invest resources in developing internal individuals or consider looking externally to bring the skills in-house which may alter the initial timeframe.

A private equity investor could help in this scenario, bringing several benefits besides just the availability of new funding. Where an investor knows a sector well, they will be able to introduce individuals with strong operational or non-executive skills and experience, supporting both the day-to-day running of the business and its wider strategic planning.

Communicating with the business
It is important to effectively communicate this plan, and its requirements, to the chosen successors. This should ensure buy-in and significantly increase the probability of achieving its objectives, whilst minimising the risk of impacting the efficient running of the business.

It may also be worth considering how these individuals are incentivised within the medium term. This could be done by allowing them to own a proportion of the business prior to executing the full succession plan. One of many possible routes could include setting up an Enterprise Management Incentive (EMI) scheme.

Smooth transition
As mentioned above, an effective succession plan will ensure that the current leaders are able to gradually transition their roles and responsibilities to the future leaders, in a way that involves minimal disruption to business as usual. However, things will not always go to the original plan, so it is important to continually review and revise the overall strategy and timeframe.

Outgoing leaders should plan and prepare themselves for the time when they finally hand-over. There must be no regrets. History is littered with examples of Chief Executives struggling to let go. Whilst incoming leaders will still require support as they navigate their new role and implement the new strategic objectives for the organisation.

Outside help
Once considerable steps have been made to implement a company’s succession plan, it may now be time to look to a private equity investor to realise all or part of your value, allowing the business to enter the next stage in its journey.

For business owners that do not have a formal succession plan in place and / or would prefer the incumbent management team to take over the running of the business as opposed to selling to a trade acquirer, an MBO may be an option that business owners should consider.

If you are considering an MBO, why not read about the key points to consider. 

Maven provides much more than just finance. We work in partnership with management teams to help shape strategy and deliver on their business objectives, maximising value for all stakeholders. If you would like to find out more about how we could help deliver a solution for any succession issues, contact us at funding@mavencp.com