Securing Success with a Succession Plan
Posted on 11. Apr, 2011 by editor in Business Advice, Business News
Paul Franks, Partner at Gresham Private Equity, discusses the vital issue of succession planning
For owner-managers, wanting to realise value from their businesses, the hiatus in the M&A market has resulted in their plans being put on ice.
With access to capital restricted and the economic environment uncertain, long-term planning and exit strategy has taken a back seat with day-to-day survival the priority for the vast majority of business owners.
But, with a faint glimmer of light at the end of the recessionary tunnel, many owner-managers are now starting to look to the future.
For business owners that hope to realise cash from their business in the next five to ten years, succession planning should be at the top of their ‘to do’ list. Those who ignore this issue could be compromising the valuation of their business and putting its future success in jeopardy.
Preparing the leaders of the future
Complex changes to the fundamental running and overall management of a business cannot, and should not, be implemented overnight. As much time as possible should be taken to develop a well thought out succession plan to ensure that even the most fundamental changes occur without disruption.
In my experience, many business owners believe they have a management succession plan in place but in reality they do not.
The presence of a second tier of management who are good sales people and can “keep things ticking over” while owners are away is not a credible succession plan.
Instead, a more accurate measure of a succession plan is whether the nominated successors have the ability to lead the business and its people independently through its next phase of growth.
In family businesses, a lack of suitable candidates for the top jobs and waning enthusiasm through the generations is a common problem. According to the BDO Guide to Family Business, less than a quarter of UK family businesses survive through to the second generation and only 14% make it to the third or beyond.
For private equity investors, backing the existing management who have had managerial experience and know the business inside out is a far more appealing prospect than having to solve a succession issue by bringing in an external candidate, which can have a destabilising effect.
But, it’s not always the case that there is a person already in the organisation with the right skills to be a credible successor, in which case the next generation of leaders need to be recruited externally and given time to demonstrate their abilities many months ahead of a proposed transaction.
The right chemistry and real empathy for culture of the business are critical factors in the success of any management additions and add considerable incremental value.
If the time has come to exit your business and you are looking to release capital, a private equity partner can work alongside management to maximise your business’s value once you’re gone. However, if hasty succession planning leaves your business with weak management, investment in your business will be hard to come by.
So, if you’ve weathered the recession, don’t let a lack of forward thinking jeopardise your company’s future prospects.
