Succession Planning for Business: Why You Need a Financial Consultant

March 19, 2020

Succession Planning For Business

What is a succession plan?

In the context of a business and its continuation, a succession plan is a plan for orderly progression through the retirement or other movement of an existing business operator.

In practice, this might mean moving from a founder to a new management team, such as an internal management team or even grooming family members to take over the organization. Or it might involve bringing in a strategic investor or partner to move the organization forward.

But knowing what succession plans are and understanding the importance of succession planning for business continuity are two very different things. There are four essential considerations for an effective and reliable succession plan.

  • Identify specific needs.
  • Revisit the plan regularly.
  • Plan in a way that mitigates risk.
  • Enlist a financial analyst.

 

A Universal Need for Succession Planning

There is no particular industry where it is more important to have a succession plan in place. It’s for everybody. With that said, the critical aspects of such a plan will vary from business to business.

Creating one may seem a more immediate and urgent need for small and midsize companies. These companies might not seem like they need succession plans, but without a plan in place, their situation is probably the most precarious. If the owner/operator of a 40-employee business were suddenly incapacitated, who would take over?

When an organization gets to a certain size, though, it naturally develops depth of management. With a board of directors and senior management in place, the scope of succession planning starts shifting. It’s no longer just a matter of what will happen should the founder or CEO retire or die. Let’s say the founder of a large company, who owns a controlling interest, unexpectedly passes away. Will his child, who is not actively involved in the company, end up controlling the business because she inherited the controlling stake when the stock went to her through the estate?

More than industry, succession planning best practices evaluate needs and purpose in relation to size and how closely held an organization is. Does it have depth of management and a good team in place? Does that provide a natural ability for the company to have its own built-in succession? Or is there a noticeable break when the people running the company decide to step back? Will it just fall apart?

 

When Is the Time To Develop a Succession Plan?

There are many questions you need to consider when thinking about the creation of a succession plan.

When should you develop a succession plan? Once an organization creates a succession plan, can it follow the same plan for all successive transitions? Do you need to redevelop it every time your company goes through a leadership transition? Do you need to reevaluate it even more frequently than that?

Effective succession plans are detailed, flexible and situationally specific: to the organization’s current state, to the individuals transitioning out and to the individuals transitioning in. Best practice is to always have a succession plan in place. As soon as a new leader or leadership team takes control of an organization, they should make plans for how that control can transition to the next team, whenever that may be. If you wait, you risk any number of scenarios that could potentially wipe out your new leadership structure.

To answer the question of frequency, you need to look at your succession plan regularly — especially in a dynamic organization. When you deal with growth, mergers, acquisitions and divestitures, a static plan might fall short. If you don’t look at your plan for a number of years before you need to use it, your organization may have 10 different things going on that weren’t anticipated when the plan was put in place.

You really have to look at it as part of your overall annual strategic planning initiative.

 

Pitfalls of Poor Succession Planning

Without a solid succession plan in place, you risk the loss of leadership and even the destruction of value.

Without well-developed succession plans, companies (and small ones in particular) can potentially go out of business. If you fail to move your company from one generation of leadership to the next, or even if you try to and the next leader isn’t equipped to run it well, that’s a significant risk.

But if you choose well and bring in the right strategic partner, they can bring capital, talent or other resources to help move the organization to the next level.

Sometimes a succession plan involves the leader or management team moving into a strategic role, providing guidance and oversight to the incoming team. If executed well, it makes for a strong, smooth transition — particularly if the new leader is just joining the organization or is an internal promotion who knows the industry but doesn’t have the experience of running an organization. It gives time for a person or team to grow into the new role while maintaining industry contacts and transferring institutional knowledge.

But even the best laid plans don’t always work out.

A leader may express a desire to step back but maintain an advisory role during a specified transition period, and the plan looks rock-solid — on paper. But what happens if that person can’t take his or her hands off the reins? He may think he’s working strategically, but in reality he’s undermining the new leader’s decisions, creating strain and uncertainty.

You’re dealing with people. It’s hard to do that well, and if you don’t — despite your best intentions and efforts — there can be significant repercussions.

An effective way to mitigate the risks inherent in this situation is to ensure that those involved have a vested interest in the transition’s outcome. Whether it’s the outgoing leadership or the new team, it’s critical to make sure everyone involved is fully invested in the situation, regardless of the money changing hands. If you expect a leader to stick around and provide assistance during a transition period, you want to carefully vet their work ethic after they receive a big payday from the sale. By aligning everyone’s interests, you guarantee partnership and set up the organization for the smoothest transition possible.

 

Get Planning Help From a Financial Analyst

Accountants are really good at telling you where you are today and where you’ve been. But a skilled financial analyst or financial consultant will help you take your current financial state, overlay what your business activities on top of that and project, into an uncertain future, what your organization could look like going forward.

And that’s a dynamic exercise, because you’re extending a plan into the future, into a realm of uncertainty. As you react to events, you may need to deviate from your plan and then continue to baseline where you are, resetting the plan as you move forward.

And that should always dovetail in with any succession plan or strategic planning process. You should never run your organization against a static plan that was developed when the business structure and situation were totally different.

Some financial analysts might be good at evaluating and structuring mergers. If you’re doing those kinds of activities — mergers or divestitures — then a financial consultant who’s skilled at that would be instrumental. Others operate in really volatile commodity markets and possess expertise in evaluating a business plan through an environment requiring a healthy dose of risk management control. Depending on your business structure, you may even need multiple analysts.

If your organization’s succession plan is stale (or nonexistent), call Percipio Partners and let us help you project your organization into an uncertain future. We have experience guiding small, midsize and large businesses through leadership transitions. Our financial consultants are ready to help ensure your future is even stronger than your present.

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