Succession planning – what to do when the transition doesn’t go to plan

Everyone has a plan until they get punched in the mouth” – Mike Tyson

This famous remark is a reminder that despite our best-laid plans, unforeseen challenges can quickly disrupt even the most carefully crafted strategies. Yet, this reality doesn’t negate the importance of planning; rather, it underscores its necessity.

Professional boxers meticulously plan each move, fully aware that things can go awry in the ring. They prepare not only for success but also for the inevitable setbacks. The same principle applies to business planning, particularly when it comes to succession.

Just as in boxing, where resilience and adaptability are paramount, a robust succession plan ensures continuity and resilience in the face of unexpected circumstances.

In this article I explore some of the setbacks you may experience and how you might prepare for them.

  1. Financial decline

Financial decline can occur for many reasons, some of which are outside of your control, like a global financial crisis, but often, it is due to the day-to-day decisions within the business.

A recent example of financial decline is Starleaton. A multi-generational family business that has only recently come out of voluntary administration. The creditors report, created by Cathro & Partners, provides some insights into some of the reasons that a decline can occur.

“We consider the reasons for failure are: Inadequate cash flow and working capital; Trading losses depleting equity; Poor strategic management of the business including investing in new divisions requiring substantial working capital at a time when there were inadequate funds; Poor financial control including lack of accurate reliable financial information and records.”

This underscores the critical importance of crafting a comprehensive plan aimed at safeguarding against decline, encompassing elements such as robust strategic management, adequate cash flow, stringent financial controls, and access to quality information. By identifying and addressing potential areas of vulnerability in your succession plan, particularly those pertaining to strategic management and financial stability, you fortify the foundation of your business against potential threats.

  • No desire

Many founders devote their entire lives to constructing their businesses, only to confront the disheartening realisation that their children have no interest in assuming control or responsibility for the business.

For some this is a welcome relief as it means they don’t have to concern themselves with the complexities of planning for such a transition. However, for others this can lead to disappointment and the dilemma of what to do with the business.

When this scenario arises, there are few courses of action you could pursue, including:

  • Sell the business to existing owners or to an external buyer
  • Undertake a management buyout whereby you sell a controlling stake or the entire business to one or more of your current employees
  • Bring in management personnel to run the business while you maintain ownership of the business.

There is no ‘right’ course of action in this scenario. In fact, you should consider all of these as part of your planning process so you can increase the chances of making the best decision for yourself and your family. Have you mapped out all of these possibilities as part of your succession planning process?

  • Lack of experience or education

It’s important your successors are prepared to handle the responsibility that comes with taking over the family business. They may have the desire to take over the business, but they also need to be prepared for the challenges that come with owning and running a business.

To assess if they are ready, you should first conduct an inventory of your successors preparedness to handle the transition. Consider how money and responsibility may affect them and their lives.

As part of this process, it may be beneficial for your successors to undergo additional training, study, and possibly work in another business to address knowledge gaps. Given the complexities of business ownership and management, there may be aspects beyond your expertise, underscoring the value of providing the next generation access to a business advisor or coach to navigate challenges effectively not only now but into the future.

  • Conflict

Whether it be a disagreement over business strategy, conflict over entitlements, a personality clash, or simply a difference of opinion. All family businesses will encounter some degree of conflict over their life.

These conflicts can make or break your business and your family. So, it’s important to be ready to mitigate its impacts and create positive outcomes. Some steps that you can take now which may assist mitigate and deal with conflict include.

  • Establish clear roles, responsibilities and have a formal governance structure to ensure accountability and open communication
  • Reduce the amount of non-active family members in the decision making of the business
  • Seek assistance from advisors, coaches, and mentors
  • Communicate and document everything.

In summary, much like a skilled boxer who anticipates and prepares for setbacks, successful business owners recognise the value of continuous planning. By proactively addressing potential challenges and charting a course for continuity, businesses can navigate transitions with confidence and resilience. In an ever-changing landscape where uncertainty is inevitable, a well-crafted succession planning process serves as a beacon of stability, guiding businesses through turbulent times and ensuring a legacy of success for generations to come.

This first appeared in the May issue of Australian Printer magazine. Read the original article here.

Andrew Ash is Director – Accounting and Tax at HLB Mann Judd

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