Five tips for effective succession planning

Most people want to grow a business and sell it or retire at some point in time (and hopefully take some capital value out in the process). Therefore, succession planning is something that should always be on the agenda. The older you get, the more obvious succession planning becomes. Once you get to 55-60 years old and no longer have the financial responsibilities you used to (e.g. your mortgage is paid off and your kids have grown up), you might start to think about stepping away from the business and spending more time travelling or playing golf.

Personal situations can change very quickly, even for those who aren’t close to retirement age. Let’s say you just inherited £2 million from your parents. Would your priorities and objectives change? For most people the answer is a resounding ‘yes’. Whatever your situation, it’s very important to think about succession planning at the earliest possible stage, and, as we’ll go on to discuss, ensure that you leave your goodwill in the business when you exit. Here are 5 tips for effective succession planning:

1. Understand the rules of exit

The rules of exit should be crystal clear and written down in your shareholder agreement. You should also explain how you value shares. Let’s say you value shares at 50% of what you believe you would get on the open market, that makes it easy for others to come through and borrow money. If it’s very clear that they’re borrowing to buy at a 50% discount, then often the people buying the shares are very happy, as are the people exiting, because this valuation was agreed right at the outset.

2. “Where do you want to be in 10 years’ time?”

This is a question I ask in every strategy meeting, where the two key areas of discussion are business goals and personal goals. It’s essential to ensure that the two are aligned. There have been a number of occasions where I’ve asked someone about their personal goals and they’ve said, “Well actually I’m glad you asked that question Ross because I’d quite like to get out in the next five years”. Beyond any initial shock, it’s a real Eureka moment as the people in the room can start planning for that person’s exit, and have five years to ensure that the transition is as smooth and effective as possible.

3. Know when the exit is going to take place

Having a very clear understanding of when that exit is going to take place is essential – if you know when somebody’s exiting you can of course plan for it. One of our clients in his mid-40s said he wanted to leave the business in 5 years’ time. No one in the meeting was expecting him to say that, but we had plenty of time to ensure that his role was covered and that the money required to buy his shares was available. Effectively facilitating an exit at very short notice can be a real challenge, so it’s always best to give everyone as much notice as possible.

4. Get a mentor that isn’t on your board

I used to see a mentor regularly, and would ask him questions like, “I’m thinking of taking this to my board of 12 directors, but I’m not sure how they’re going to react. How do you think I should play it?” I found that one-to-one mentoring very helpful. I highly recommend having a mentor (and it’s a service that we offer to our clients), but it’s essential to choose someone who can look at your business in a completely objective way. A number of Chief Executives look to their own board for a mentor, yet in most cases other board members find it very difficult to be completely objective, as they’re directly impacted by the decisions made around the table. This issue is often exacerbated when broaching topics like succession planning, where the potential implications are significant – that’s where it really pays to have an external mentor – someone with no personal agenda.

5. Leave goodwill in the business

Be absolutely sure that when you exit, the goodwill is left in the business and doesn’t walk out of the front door with you. For example, if you hold the relationships with 70% of your clients when exiting, that would not be healthy for the business. Additionally, if the business needs to immediately replace you when you exit, this can be highly costly as they’ll have to pay you off and pay an (often high) salary to the person filling your role. This is something that you need to think carefully about as you head towards exit, and is all part of good planning.