What every business owner needs to know about succession planning

I recently completed doctoral research on succession planning. Yes, I dedicated seven years of my life to studying the ins and outs of what happens when a business owner decides to pass the torch. 

For me, the question of how to exit is the most important financial decision an owner will make, and I’ve built a business of helping other founders figure it out. 

Thanks to a TV show you may or may not have heard of, succession planning is having a moment. On the one hand, this has made my job easier – everyone is talking about succession – but on the other, I feel I owe something to the countless case studies, researchers and academics that contributed to my research. I owe something to the science of succession planning itself (yes, it’s a science, not an art), because succession planning, when done right, doesn’t have to be a collision of money, power and family dynamics.

My top four takeaways when it comes to succession planning are:

Know thyself… and make getting out of your own way part of the plan

Owners, particularly of the boomer generation, often make succession planning harder than it needs to be. There’s a bunch of reasons, but the one that tends to derail even the best-laid plans is a concept called role identity fusion. So closely tied is our identity to our role as business owners that stepping away creates profound emotional challenges. The business is our baby and we don’t want to let it go. This makes selling it a challenge. Suddenly, no buyer is good enough and faults can be found with every deal.

Which means it’s vital that you…

Have a plan B (that’s not the kids)

A key theme of my research was the changing drivers of exit choice and, specifically, the difference between those choosing a financial harvest strategy where it’s all about the money, versus a legacy stewardship strategy, where keeping it in the family and ensuring the business continues strongly is more important.

I found that given the average wealth of today’s boomers, financial harvest is no longer the imperative it used to be for funding retirement. Many owners are now tending towards legacy exit options, looking to preserve what they’ve built and continue to create wealth for future generations. 

But again, there are challenges, this time external ones. Tougher trading conditions in the form of rising interest rates and wages are making it a difficult time to confidently pass the business on to the kids. Not that it probably matters – research shows that younger generations aren’t particularly interested in taking over the family business anyway.  

This makes it essential to start the process long before you’re ready to exit. In fact, my favourite piece of advice is…

Begin with the end in mind

It comes from The 7 Habits of Highly Effective People by Dr Stephen R. Covey (habit #2). It means making sure every decision you make in business gets you closer to your endgame. The people you employ, the business model you adopt, the financial strategy you map, the way you promote your product, your pricing model, your client service, and your delivery all need to focus on the endgame. If you look at a decision that is taking you further away from that, it is the wrong decision.   

In succession planning specifically, it also means an extended timeline for planning and strategy, having a goal that is five or ten years out, not 90 days. This is because it takes time to build and increase value – or the equity available to you when you’re ready to exit.   

So, what’s an owner to do? The thought of selling is traumatic, the kids aren’t interested, and besides, you don’t have time to sit down and figure it all out – you’re running a business!

Fortunately, the research offered some solutions…

Think outside the box

Employee share schemes (ESS) are increasingly being used by business owners to solve these challenges. ESSs are a legal arrangement set up by businesses to allow their employees to own equity. They are also known as employee share ownership plans, employee equity plans, employee options plans, and phantom share plans. 

The research found that ESSs when established properly, can provide a combination of financial harvest, legacy stewardship, and a gradual exit over time. 

They achieve this by serving as an effective employee buy-out instrument when founders are ready to exit. The exit can happen gradually, with founders extracting cash by selling shares to employees over a period of time, and with the comfort that they are leaving their baby in good hands, with trusted people who they are training to step into their shoes.

You can read more about ESSs, what they are, and whether they could work for your business here.

In summary, my seven years in research found that one of the best ways to navigate succession planning is to think outside the box. And of course, as television has taught us, avoid behaving like the Roy family. 

Dr Craig West is the founder and executive chair of Succession Plus.