This article from Succession Plus Founder, Craig West, highlights a key element in the business succession planning process which can often be overlooked.
While the focus for many business sellers is on ownership succession, Craig reminds business owners of the other key element in the process – management succession…
There are two types of business succession.
Ownership Succession (which a lot of the material focuses on) refers to the selling down of equity or ownership within the business either internally to family members or employees or externally through a trade sale or private equity for example.
Management Succession refers to handing over control or management of the business both at a day-to-day operational level and in terms of senior executive management board directorships etc.
What is Management Succession?
Management succession is often ignored…
Management succession is often ignored – it is seen to be easy, simple and often just relies on promoting people within the business to more senior roles.
Management succession should actually be a process taken over an extended period of time that involves several key stages:
- Designing a time frame and project plan
- At what point do you wish to relinquish control?
- At what point do you wish to hand over board control?
- At what point will those within the business be ready to manage it day-to-day?
- What preparation needs to be done to ensure your successes are ready, trained, experienced and qualified to undertake the role?
- How would you manage the internal and external communication about who is taking over which roles and why?
- Identifying internal and external skills required (gap analysis)
- Training, skills, experience and qualifications program for successors
- Communication – internal and external (using a succession org chart – now, 1 yr, 2 yrs and 5 yrs to map and communicate changes)
- Project timeline – with key milestones and time targets, including critical success criteria
- A succession agreement
Why is Management Succession always left until too late?
In most cases management succession is underestimated. Most business owners believe that management succession can be completed relatively quickly and fairly simply – and neither is correct.
…management succession …is a process for somewhere between two and four years
In the best examples of management succession done well, this is a process for somewhere between two and four years. In an ideal world, we need to start way before the owners intend to exit or hand over control.
Many business owners are concerned about confidentiality and don’t want their staff to think they are leaving – the reality is staff already know you are leaving – they just don’t know when or how or what their role will look like going forward. Providing clarity and a certain pathway to management succession will ease a lot of stress.
Many business owners are “control freaks” and do not believe that staff are capable of running the business without them. This is only true if they are not prepared, trained and qualified over an extended period of time leading up to the handover.
What should be included in a Management Succession Plan?
Firstly, a skills assessment matrix to determine any gaps, training needs and experiences which need to be factored into the plan to better prepare staff for future roles.
In addition, an organisation chart should be drawn up mapping the current position, and the position in 12 months, 24 months and five years. This will allow identification of gaps where we may need to recruit externally to fill positions or focus on upskilling existing employees.
The plan should also include a strategy including key milestones and timelines for the founders/owners to step back from various roles within the business gradually. Finally, any management succession plan should include success criteria and “deal-breaker” criteria such as: ‘When do we realise it is not going to work?’ and ‘What is our plan B?’
What’s the process of creating a Management Succession Plan?
The starting point for creating a management succession plan should always be communication with your management team and wider employee base.
Management Succession often comes with a lot of fear and stress – much of it misplaced due to lack of communication which means employees make up the story from a place of uncertainty. Much of this can be reduced through clear communication.
An education program like ownership mindset to explain how the management functions within the business work and what the key roles need to be is one important aspect as well as an honest conversation about the owners’ intentions, timelines, and expectations.
Key deliverables should then be a skills matrix, identifying any gaps, a training and development plan, a project timeline and an agreement document (not necessarily legally binding) that is shared amongst all involved outlining the intentions and timing.
Why is a Management Succession Plan important?
In a lot of recent studies around employee retention and engagement, the issue of management succession (i.e. an employee understanding their career pathway, development and opportunity) is a very important aspect of attracting and retaining key employees. At the same time if management succession within the business is not handled well, not only could we lose employees we are likely to see the value of the business decrease.
One of the substantial issues and risks for SMEs is owner dependency…
One of the substantial issues and risks for SMEs is owner dependency – reliance of the owner/s for management, sales, decision making and responsibility within the business. A management succession plan should identify and mitigate this risk by reducing reliance on key people (including founders)
How does a Management Succession Plan fit into an overall Succession Plan?
A succession plan needs to cover both management and ownership succession.
If we only address ownership succession issues, then the business will struggle to operate and continue without the owner. This also makes it very unattractive to an external buyer. Ideally, both plans should be implemented and communicated to ensure the smoothest possible transition of ownership and handover of control and management.
Both plans should be coordinated in terms of timing and overall exit strategy to ensure the best possible outcomes for all stakeholders.
What are some good examples of Management Succession?
There are several high profile cases on family business succession – some done very well (Pratt) – some not so great (Rinehart).
We have several clients who have managed this well – both family businesses handing over to the next generation (or in one case skipping a generation and handing over to grandchildren) and also privately owned professional services firms who have used employee ownership to manage both ownership and management succession at the same time.
In all cases, three things stand out:
Time – good strategy takes time
Communication – early, open and honest and ongoing
Gradual – handover of roles, responsibilities over an extended period produces better outcomes
Craig West is Managing Director | Succession Plus
Craig West is a strategic accountant who has over 20 years’ experience advising business owners. His background as a CPA in public practice, provided invaluable experience in the key issues of concern to business owners. Following 6 years of study to gain two masters degrees, Craig focused on Capital Gains Tax (CGT) for business sales advising on strategic management of tax issues. This experience formed a very strong view that business owners (and often their advisers) were unprepared and unaware of the steps required to prepare a business for exit.
Craig now acts as a strategic mentor for mid-market business owners and has written four critically acclaimed books on employee incentives, succession planning, asset protection and exit strategies. Craig has conducted numerous seminars and keynote presentations throughout Australia & internationally, including adviser education programs for the Institute of Chartered Accountants and CPA Australia.
Riskinfo thanks Craig and Succession Plus for the opportunity to release this article, which appears on the Succession Plus website.