Succession planning: definition

Succession planning is the process by which control over and responsibility for a company is passed on from one generation to the next. This complex undertaking can be fraught with challenges ranging from clearly defining the handover process to finding suitable successors and establishing the best time to proceed.
 

Challenges of succession planning for SMEs

In contrast to large corporations, succession planning in small and medium-sized enterprises (SMEs) comes with a range of special challenges. This is because their specific circumstances, such as limited resources and the fact that they are often family-owned, require a different approach. Overcoming these challenges is key for a successful generational handover.
 

Succession planning options

There are various options for planning successions in a business. They include:

• Handing over the company to other family members
• Selling the company to employees, i.e. management buy-outs
• Selling the company to other companies
• Integrating an external management team, i.e. management buy-ins
• Selling to investors or going public
   

Internal and external succession planning: a comparison

What are the advantages and disadvantages of internal and external SME succession planning? 

Internal succession planning 

Advantages:

• Succession planning involving other family members or existing employees ensures that there is continuity and protects a company's values
• Preserves the company's culture and values
• New generation of leaders will know the company inside out
• More likely to ensure a very smooth transition thanks to familiarity with the company

Disadvantages:

• Choice of qualified people limited to family or employees
• Risk of tension or conflict within the family or employees
• Limited access to new approaches and innovation

External succession planning 

Advantages:

• Introduces external expertise and new approaches
• Potential of interest from investors or other companies, which could increase the company's value

Disadvantages:

• Changes to the company’s culture and direction due to external influences
• Risk of conflict between existing and new management
• Potential of changes being met with unease and resistance by the workforce
   

Company valuation and taxation

Having a realistic idea of a company's value is key to succession planning. Hence, it is crucial to draw on the expertise of a business consultant in order to ensure that you’ll get an accurate valuation. At the same time, it will also be important to systematically plan your taxes to minimise potential charges and make use of savings potential.
 

Potential tax savings

Tax planning is a key component of succession planning and requires some careful thought. This is because getting it right could save you a lot of money. Doing so involves the use of strategies such as using tax allowances, taking into account tax write-offs and minimising inheritance and gift taxes.

Tips for successful succession planning

1. Start planning your succession as early as possible to make sure you’re well prepared. Starting to plan ten years before the handover is considered perfect timing.
2. Start by creating a detailed schedule to get a clear overview of everything that will need to get done. When doing so, it is best to view the handover as a gradual process to make it as easy as possible in terms of letting go on an emotional level.
3. Make sure to get expert advice as early as possible, including from lawyers, accountants and business consultants, to make sure you will be able to make informed choices.
4. Perform a detailed business valuation to make sure you have realistic price expectations. When doing so, do not just take into account financial figures, but also strategic factors and market potentials.
5. Start working with a tax consultant as early as possible to identify and minimise potential tax burdens.
6. Further, start identifying potential successors as early as possible and invest in their professional training and development.
7. If you have a perfect buyer, try to be as flexible as possible in terms of the sale's financing and perhaps consider granting a loan.
8. Identify the best timing for announcing your succession plans to prevent disclosing them too early or late.
9. Weigh up alternative succession solutions for the event your original plan does not work out.
10. Make sure to provide clear communication channels for employee, customer and supplier questions and concerns.
11. Put things into place to enable the successor to take over responsibility gradually to ensure that the transition is as smooth as possible. When doing so, create clear structures and processes to make it easier for the successor to integrate.