Planning for succession?

Here’s what you need to know

Organising the future of a business through succession planning can be daunting, but it’s a critical component of moving forward in a direction that satisfies all parties involved.

It doesn’t need to be a stressful undertaking, as long as business owners take the appropriate steps to ensure a fair and equitable outcome.

Proagtive Succession Planner, Tim Lane, said although there’s often negative connotations surrounding the process, it’s just a normal part of effective business planning.

“If you’ve got a good business and want this to continue to operate within the family control framework, you need to go through a process of recognising how that’s going to happen,” Tim said.

Here, Tim talks about common roadblocks to succession planning he’s seen from more 10 years with Proagtive, and provides his tips to avoid these when the time comes to think about the future.

The roadblocks to successful succession planning

It’s important for producers to understand some of the common pitfalls during succession planning so they can avoid these when the time comes to work through it themselves.

“The most common roadblocks we see in the process come from disagreement or uncertainty around management, leadership and ownership, which are all critical aspects to get right in good succession planning,” Tim said.

“Management creates the most conflict and challenges, as it means deciding who’s going to be doing what in the business when the time comes for the older generation to step aside.

“To successfully navigate this, there needs to be a reasonable framework put in place around who’s going to make what decisions, which comes down to determining who has the right skills in different areas to help the business succeed.”

After management, Tim said leadership is the second aspect to be accounted for to achieve a satisfactory outcome.

Leadership concerns who makes the higher-level strategic decisions of a business, like its future direction, whether more land is needed and if there will be an enterprise change.

“Leadership is tricky, because we often find with the older generation, if someone isn’t in the driver’s seat in the business, they may lose a sense of place and purpose, so they’re reluctant to let go of the wheel.

“That’s why it’s crucial to get clear on who’s in charge of business decisions currently, and who’s going to be in charge of these when the time comes to step away, so everyone has clarity.”

For ownership, Tim said this is about asking the tricky questions such as what happens if someone passes and what this means for the business.

“The issue with ownership is that if you start with it, rather than looking at management and leadership, then you might end up with a scenario where the next generation can’t actually run the business effectively anyway, so it’s all been a waste of time.”

Personal challenges

Tim said if these three aspects could be sorted out, there are other roadblocks which could arise at a personal level, such as a sense of entitlement from the next generation, and a lack of financial planning for the older generation.

“Everyone’s going to have ideas in their mind about what they should be getting, but ultimately you need to reach a decision everyone can agree on. If people have pre-determined positions and an unwillingness to engage in discussions, it puts the other parties in a very awkward position,” Tim said.

“An effective plan also includes an effective retirement strategy for the older party so they have the financial security and flexibility, and the independence to effectively transition away from the business.

“If they haven’t sorted financials prior to this, it could leave the business in a position where it needs to fund them on an ongoing basis, and if you lose those labour units but can’t release that financial pressure, there are going to be problems.”

Avoiding roadblocks

Tim said although roadblocks were common in succession planning, many of them could be avoided if the parties took the necessary steps and were genuine on wanting to achieve a fair outcome.

The first step to a smooth process is to start as early as possible. This could be as basic as having casual conversations with family members in their teenage years to determine their intentions and develop a level of communication.

“Having those early conversations makes it clear to everyone what the long term looks like, and will mean when it comes time to make the big decisions around management, leadership and ownership, everyone’s on the same page,” he said.

Another important aspect to avoiding roadblocks is to have open and effective communication, or to seek out training for this if it isn’t present.

“Poor communication can mean an inability or unwillingness to participate in discussions, which will be detrimental to working out what’s going to happen to a business,” he said.

“If you find this to be the case, sort it out as soon as possible, because it’s likely that communication will only deteriorate further and create conflict if you don’t.”

Another way to avoid roadblocks is to develop a clear strategy and document every agreement from the outset.

Tim said documentation doesn’t mean the parties are untrusting of one another. Rather, it gives people clarity and comfort that they can carry on and get a plan in place if the worst happens.

“Word of mouth doesn’t cut it with succession planning, because everyone’s going to have ideas about what they should be getting, so documenting everything each step of the way will really help,” Tim said.

LESSONS LEARNT

• Start the succession planning process as early as possible.
• Maintain good communication with all parties, or seek training if parties aren’t communicating.
• Document all discussions from the beginning.