What is succession planning?
Succession – Opportunity and Risk
Succession is a sleeping giant that is about to awake and which many business owners do not even recognise will impact them directly.
Succession planning applies the day you think about commencing a business and continues throughout its life. The year 2020 is a critical tipping point for succession and may well see many owners realise or lose the wealth they have sought to build over their lifetime.
In 2020, the baby boomers generation (those born between 1946 and 1964) will be aged between 56 and 74 years of age with the weighting heavily towards the older end of the scale. The outcome will most likely be that by 2020 a significant number of baby boomers will have or will be in the process of transferring ownership of their business. In Australia, the estimated value of these businesses is around $3.5 trillion.
The next 7-10 years represents a period of opportunity and risk. Opportunity will lie in:
- moving ahead of the bottleneck that may arise if many businesses try to exit at the same time;
- planning and acting in your succession now, and
- looking for opportunities to acquire, merge or form alliances with other businesses with a strategy of either growing to exit or growing to stay and improve competitiveness.
Risk lies in complacency and inaction, resulting in either missing opportunities or simply being left behind.
What Is Succession All About?
When you mention the word ‘succession’ the common reaction is to think of ‘retirement’. Whether it is the CEO of a public company or in the private company arena, the connection is immediate and usually without exception.
For private companies, succession connects with the founder and/or owner retiring and selling out to a third party or passing over control to a family member. Whilst these commonly held views of succession might not be incorrect, they do not accurately reflect what should be the real focus of succession planning for private companies.
The eventual retirement of a founder and/or owner may well be an outcome of a succession process but it is certainly not its purpose. Succession is the process of ensuring the continuity of a business beyond its current management. This is achieved through identifying and understanding the capital value drivers of the business, the elements that allow it to compete effectively in its markets, and growing and investing in those drivers.
A focus on capital value drivers allows not only for effective succession, but also supports and allows a compounding of the business’ capital value over its life.
We think of succession planning as a process of evolution – Business Evolution. Enabling the compounding of wealth from generation to generation while ensuring family unity, individual growth and a sense of contribution, this is the essence of succession planning, this is Business Evolution.
Does Succession Apply To You?
Succession planning is a key concern for anyone who has founded, owns or has an equity interest in businesses trading under a private company structure or public company where they continue to hold a significant controlling interest.
Your wealth is materially impacted by your ability to realise and /or transfer that interest to a third party or family members. If you own a minor shareholding in a publicly listed company realising or transferring its value is relatively easy, however with privately owned businesses or a significant controlling interest in listed companies, realising and transferring value is a very different process.
Succession planning starts the day you commence your business and continues until the business no longer exists or you release your interest.
Succession planning is important for family businesses, small businesses, medium and large businesses, closely held businesses, privately owned businesses and a significant controlling interest in publicly listed businesses. However you describe your business, succession is fundamental in determining the ‘capital value, worth, market price’ of your business, and therefore your and your family’s wealth.
In any economy, these ‘privately owned’ business interests collectively represent ‘big business’ and therefore succession planning is a process that should be taken seriously.
If you want to find out more about the succession journey, you can watch Dr. Richard Shrapnel as he explains it.