Business succession planning is often an overlooked aspect of leadership for many business owners, most of whom tend to consider it only when retirement is imminent and the need to hand over the reins becomes apparent.
“Regrettably, even when the need to identify a successor becomes clear, many business owners treat their succession planning as little more than a checkbox exercise, rather than an integral part of the business’s growth and risk management strategies that it should be,” says Michelle Geraghty, Business Development Head at FNB Business Advisory.
“Instead, a successful succession plan requires a comprehensive and holistic approach and should be constantly reviewed to adapt to changing circumstances and the evolving operating environment.”
She adds that in their work with thousands of South African businesses of all shapes and sizes, we at FNB have identified five key components that any effective and successful succession plan needs to have:
1. Executability: To ensure a seamless transition, a succession plan requires the collaboration of three key role player groups, namely: the business owner and other leaders; the business’s financial institution; and relevant advisors such as legal and accounting professionals. Each stakeholder group has a critical role to play.
The business owner and leaders must actively engage in the planning process, sharing their insights and intentions. Financial institutions need to provide support, including financial analysis, funding options, and guidance on regulatory compliance.
And advisors should offer their expertise to ensure all legal, tax, and accounting aspects are properly addressed. Neglecting any of these stakeholders can undermine the success of the plan and lead to potential disruptions.
2. Risk Management Integration: The Covid-19 pandemic served as a stark reminder of the importance of incorporating succession planning into a company’s risk management strategy. An effective plan goes beyond identifying a successor; it encompasses a comprehensive transfer of knowledge and skills, establishing a robust support structure, and adapting to changing compliance requirements.
The plan must address the transfer of specialised expertise, ensuring the successor is equipped to handle evolving risks and challenges. Furthermore, in countries like South Africa, where Broad-Based Black Economic Empowerment (BEE) regulations apply, the succession plan should be aligned with current and future BEE requirements.
It is also essential to consider the expectations and aspirations of the proposed successor, particularly in family-owned businesses, where incorrect assumptions about family members’ readiness or desire to take over can lead to frustration and potentially massive complications.
3. Financial preparedness: A successful succession plan must factor in financial obligations associated with the business. This includes evaluating contingent liabilities, sureties, loans, and other financial commitments that will be inherited by the successor.
It is crucial to establish workable plans to ensure the successor can meet these obligations without compromising the business’s financial stability. Additionally, an effective succession plan requires a realistic assessment of the business’s value and the compensation the departing owner can expect to receive.
Transparency and open communication are key to avoiding misunderstandings and ensuring a smooth financial transition.
4. Governance and compliance: An ideal succession plan should account for good governance principles and compliance requirements. This involves evaluating the appropriateness of the board’s structure to facilitate a seamless transition, including assessing whether the board composition has the necessary diversity and skills to support the new leader effectively.
Moreover, the plan should consider investor readiness, ensuring the business is prepared to secure funding if needed during the transition. If the successor is based overseas, careful attention must be given to the governance structures to ensure their effectiveness and compliance with local regulations.
By proactively addressing governance and compliance, businesses can maintain stability, instil confidence, and inspire trust in stakeholders throughout the succession process.
5. Readiness for the new leader: A successful succession plan is one that not only prepares the successor, but also ensures the business and its key stakeholders are ready for the change in leadership.
The board and executive leadership must be fully aligned with the succession plan, providing unwavering support and guidance to the new leader as he or she navigates the new role.
Additionally, clients and other stakeholders should be informed and engaged, facilitating a smooth transition of relationships and responsibilities. Without the backing of all stakeholders, there is a real risk of losing business value and potentially even facing closure.
By fostering a supportive environment and ensuring a seamless leadership transition, businesses can maintain momentum and set the stage for continued growth and success.
While these are the five key components of any successful succession plan, arguably the most important consideration is that business succession planning cannot be an afterthought. It needs to be a critical component of a long-term business strategy, ensuring a seamless transition of power and safeguarding the legacy that has been built.
By embracing a holistic approach that addresses executability, risk management integration, financial preparedness, governance and compliance, and readiness for the new leader, businesses can navigate the complexities of succession with confidence.
Such proactive engagement in succession planning not only protects the business’s continuity, but also lays the foundation for sustained growth and resilience in a rapidly changing business landscape.
The bottom line is that, irrespective of where you are in your business leadership journey, now is the time to start planning for the future, and shaping a legacy that will endure for generations to come.