Monday, 1 October 2007

Succession Planning for Smaller Businesses

Any business owner, especially those in a family business, will tell you how hard it was to establish their businesses, then build it and make it successful, let alone having to worry about how they might ever leave them!

But those who are trapped in their business know is not a happy place to be. Unfortunately too many owner-managers find themselves completely shackled to their businesses because they didn’t plan ahead. Once a business is up-and-running successfully, there should be no more important an issue to address than Succession Planning, with as long a time-scale for its execution as you can possibly manage.

Clarification - Exit Strategies versus Succession Planning

Those owners who have had to raise funds to buy or develop their business may have been asked by their accountants, ‘what about your exit strategy’? If they have ever approached business angels or venture capitalists, they most certainly will have!

But, ‘exit strategies’ are not the same as ‘succession plans’. Exit strategies tend to focus specifically on how the owners may optimise the capital value of the investment in their business through an eventual sale. Of course you may not want to sell your business when the time comes to move on from your executive duties. Or you may have family members or loyal colleagues already identified to whom you want to pass the business on to. Whatever the choice, you will still need to plan for your succession.

An exit strategy without a succession plan is rather like a car with no engine: worth no more than scrap value. Neither will take you very far…

Why plan for your succession?

Here are three stories that will make you shiver – feel relaxed. Names have been changed to protect identities, but these are real people in real situations!

Alan set up a perfect business 20 years ago. Time came for Alan to move on, but he had made just one big mistake. No bank was willing to support an outside buyer because none believed his company was independent of him. Alan had no succession plan.

Alan’s business had been established for some years. Alan had found a highly profitable niche market that served a captive, long-term, customer base. His business model was sound. His company’s products carried no ‘big ticket’ purchase prices and therefore did not require main Board approvals. Even better, his products were only bought by large, financially secure customers whose main concern was faultless delivery.

Alan’s company had some great long-term contracts (which external funders will always look for), with many more prospective clients to develop (and funders love that too!), the business had a solid reputation which would support further growth - with proven potential for any new owner. Any investors would now be really excited!

Alan had a new wife and wanted to sell and go round the world with his new wife. He had three senior managers, all excellent at their jobs, but they were on ‘second careers’, working part-time for the fun of it. Not one of his senior managers was committed to staying with the business should he sell it.

Some ten years later, Alan has still not managed to find a buyer for his company. He is running a very profitable business, with part-time senior managers and still with no succession plan in place.

Alan’s his wife isn’t happy with him spending so much time on his business but he can’t find anyone who might run his business better than him.

And maybe he never will!

Liz was very different from Alan.

She established a business more than 15 years ago at the age of 50, within five years she realised she recognised that she needed a much larger infrastructure around to take the business to the next level and beyond, preferably with people young enough to take over from her in due course. So she set out to do just that.

First Liz first expanded the team recruiting younger people, which included her two oldest children as recently-qualified professionals.
However as the team developed, Liz found they didn’t always appreciate the difference between being an ‘expert’ in their professions and the vastly different management challenges of running a demanding business. Several said privately that what Liz did in actually running the business, was ‘self-evident’ and ‘trivial’ - compared to their own tactical but highly specialist contributions.
To make things worse (as many of my clients report in these situations!), Liz felt increasingly under-valued as the business founder. But, she persevered with her longer-term plans.

She then recruited some outside help for her business in the shape of a Non-Executive Director, and they drew up a strategic plan and devised long-term management development and mentoring for her next generation of managers. This was a challenging time for them all. But Liz’s visionary succession plans paid off in spades.

Seven years later, Liz began to sell her shares in the business to her management team in small parcels as they developed. She then passed on the post of MD to her eldest son and became Non-Executive Chairman.In the last three years, her business now has a hugely capable executive board comprising her two children and three other professionals, the business has grown more than threefold - and profits have quintupled. All her team have become very wealthy through her enlightened generosity. Alan would be deeply jealous!

Sometimes though, succession planning has nothing to do with your existing Team, or your own family.

Neil established a company based on his own academic research, and quickly gathered 4 more researchers like him to invest in his business idea. Of course building their business took a while because, unlike Alan and Liz, none was sure if there was a market for their ideas.

Happily, Neil and his colleagues did find a market. He also found that most of his founding investors didn’t want the tedium of business management, but they very much enjoyed contributing technically.

Neil’s had planned ahead of course – and considered not just how to commercialise the opportunities they had found, but how to develop them as a ‘real business’.

After recruiting brining in a consultant to guide him and to offer broader business mentoring, the first thing Neil did was to create a detailed succession planning strategy, to find some carefully-selected senior managers to fill the management gaps that were identified and start to devolve responsibilities in a smooth and planned way.

Less than eight years on, Neil sold his business and is a multi-millionaire. He has also made his original shareholders and senior managers millionaires.

The Moral

The lesson to be learned here is that every business and especially family businesses need to plan for succession or you will find the future that you had in mind doesn’t turn out as expected.

Contact us today on 07917 446068 or e-mail for a free business diagnostic and plan for the brighter, richer future that you want and deserve.

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