Why leaving succession planning to the last minute doesn’t pay

Tuesday, February 15, 2011 | Posted by: Fiona Cullinan
Categories: Business advice, Thought Leadership | Tags: tax, report, strategy, talent, guide, succession planning, ownership, transfer, White Paper, exit strategy, selling a business, valuation, structure, steps, legacy, goals

Figures show that 27% of UK businesses are expecting a change of ownership in the next 10 years, according to Grant Thornton 2009 International Business Report (IBR). Preparing ahead for such a major change makes financial and business sense. So why don’t companies do it?

Last month Grant Thornton released Succeeding at Succession, a series of white papers to help privately held business owners plan an effective transfer of ownership without suffering adverse financial or tax consequences.

Last week, we posted a step-by-step guide to succession planning. Now we look at why businesses shouldn’t put it off.

Why do businesses delay succession planning?

Despite 25% of companies globally set to change hands in the next 10 years (Source: Grant Thornton 2009 International Business Report), only half of these have a formal succession plan in place. Why?

Business owners cite a number of reasons for failing to develop a succession plan, for example:

• They worry what will happen in their absence, who will be responsible and how the business will fare after their departure.
• They are concerned about meeting the needs of both managers and family members who are not in line for succession.
• They are uncomfortable about discussing personal and financial goals or about disclosing family issues to outsiders.
• They are afraid of compromising their personal relationships or creating irreconcilable rifts.
• The day-to-day realities of running a business can hamper efforts at this type of long-term planning.
• Often, owners are simply hesitant to retire, concerned about their financial prospects or feel that any identified successors are not ready to take control.
• Additionally, many businesses now point to recent economic volatility as a reason to defer succession planning. In a worst case scenario, without a sustainable strategy for the future and a viable business model, planning for succession becomes a moot point.

As a result, many privately held businesses find themselves making succession-related decisions under pressure, rather than planning in advance. This may explain why only 30% of private enterprises survive into the second generation and only 12% survive into the third.

The consequences of deferring
Although many of the reasons above appear valid, failure to act can result in a host of unintended consequences:

• Without taking time to maximise the value of the company or adopt a structure that supports future growth, you may find yourself unable to attract buyers or investors. This may also compromise the company’s ability to continue compensating owners following their exit – putting their financial welfare at risk.

• Without developing an appropriate leadership structure or properly preparing successors, the business may flounder and ultimately fail – compromising investors’ ability to realise a sufficient return on their investment.

• Without gaining buy-in from all the key stakeholders, you risk losing essential staff or alienating family members in a family-owned business.

• And without planning for contingencies and considering all your alternatives, you can face a forced sale, higher tax payments and the potential dissolution of the business you worked so hard to build.

For these reasons and more, succession planning is not a process that can be put off. Although there is no definitive ‘how to’ manual for developing an effective succession plan, by laying the groundwork in advance, you can position the business to capitalise on opportunities as they emerge, regardless of economic conditions.

In our next post, we will be looking at the first steps involved in succession planning. If you have any questions now on succession planning or are considering selling a business, contact our Corporate Finance team for tailored, individual advice.

You might also find these links useful:

* Read more succession planning posts
* Download the white paper series here: Succeeding at Succession
* Stories behind the deal – including a business disposal and an international acquisition