succession planning for small- to medium-sized businesses

Succession Planning for Small- to Medium-Sized

Businesses How to create a back-up for your business

By James Price, BBM, FAIM

2 jpabusiness.com.au +61 2 6360 0360

Table of Contents

Introduction ........................................................................................................... 3 What is succession planning? ......................................................................................................................... 3 Succession – it’s not a disease for older people ...................................................................................... 4 How to measure the success of your business back-‐up ....................................................................... 4 Who makes up your ‘people resource’? ...................................................................................................... 5

1. The three elements of your people resource: You .......................................................................... 6 Is succession planning relevant for me? .................................................................................................... 6 What if I choose not to create a business back-‐up? .............................................................................. 7 Help! I need back-‐up .......................................................................................................................................... 8 What level of business back-‐up for me? ..................................................................................................... 8

2. The three elements of your people resource: Your team ......................................................... 10 How to achieve best practice in people back-‐up ................................................................................ 10 How to create a Professional Development Plan for your team .................................................. 11 How to talk to your team about professional development .......................................................... 12 4 Top Tips for building a reliable and dependable team ................................................................ 14

3. The three elements of your people resource: Key external influencers ............................ 15 4 Top Tips for ensuring a successful outsourcing relationship .................................................... 16 External influencers the way of the future ............................................................................................ 17

Disclaimer: The information contained in this eBook is general in nature

and should not be taken as personal, professional advice.

jpabusiness.com.au +61 2 6360 0360 3

Introduction By James Price, BBM, FAIM

What is succession planning? There is a lot said about succession planning for large and small businesses alike. However, for many business owners, it remains a somewhat nebulous concept that often challenges the basic tenet of business ownership i.e. business control and destiny!

In my view, put simply, succession planning is really about creating a dependable and reliable business back-up.

Succession planning relates to the people in your business, but to emphasise what succession is all about, let’s use a systems analogy:

Imagine your business installs a series of large servers to run its operating system. It also has a web interface for its customers to log orders and interact with the business.

You and your supplier for these IT and business systems would normally sign a service level agreement providing some standards regarding how those servers and systems are maintained and some agreement on service levels to deal with outages or downtime.


That’s a systems example of how you protect against the risk of failure or removal of the functional system that is assisting your business to operate.

You have a back-up – a dependable and reliable business back-up.

Business succession is about the people in your business in the same context.

It’s about creating a back-up system relating to your people resource to protect your business against the removal of key individuals that impact and operate the business, including yourself.

Succession – it’s not a disease for older people Succession starts the minute you start up a business, whether you buy it or start it from scratch.

If you’re thinking about succession it’s critical to put yourself in the shoes of a potential purchaser at any time during your business’s life, even if you’re not thinking about selling, and ask:

• If someone paid me to hand this business over to them, what would it be like for them?

• How easy would it be to take over this business and run it? • Are the recipes and ingredients clear and available, or are they a

secret?

How to measure the success of your business back-up Surplus sustainable cash earnings is a measure of the robustness of a business’s succession plans.

In our eBook on How to Assess Business Value, we introduced the analogy of the diesel engine. Sustainable cash earnings is the extent to which the diesel engine keeps running and is not dependent on one individual or group of individuals to make it generate what it generates.


If a purchaser were to consider a business highly dependent on you, then their interest in the business, offer price and conditions, will be based on the time and risk involved in rebuilding your business so it’s no longer dependent on you.

Business value, whether you’re marketing it for sale or building the inherent value of the business for future generations or just to extract value along the way, is inextricably linked to how you manage the issue of what I call business back-up, or succession.

Who makes up your ‘people resource’? If succession planning is about creating a business back-up relating to your people resource, then who and what comprises your people resource:

• You – the business owner • Your team – the key individuals that manage and operate your

business • Key external influencers – people who interact with your business

and can have a significant impact on your ability to achieve your aims and objectives; people you rely on to deliver a component of the product or service that you offer the market; or people who support or advise you on financial, legal, statutory and systems matters (e.g. key suppliers and key partners in your distribution network, your financier, etc.)

A business’s people resource is what I like to call the immediate business family:

• The people who have the most impact on your success; • The people you know and trust to assist you grow, manage and

change your business; • The people with an intimate and engaging knowledge and involvement

in your entire business, or in a specific part or component due to their expertise;

• The people you depend and rely on – if one of these people became ill or (suddenly) left the business for another reason, it would be like you losing a finger or toe or, worse, losing an arm or a leg!


1. The three elements of your people resource: You

There are three elements of business back-up, or succession, that you need to consider.

The first is you, the business owner, and your ambitions and motivations in running and owning the business you control.

Is succession planning relevant for me?

When you think about business back-up and succession as it relates to yourself, you first need to ask: is it relevant for me?

There are some businesses that are reliant on the owner almost exclusively and the owner decides that’s how they want it.

They are taking the risk, so they prefer to drive, manage and control the business themselves.

There is nothing wrong with that; business succession is not something that needs to be forced on everyone.

However, as the owner, you must accept that by making that decision you are potentially limiting the value of the business, because it is highly dependent on you as an individual, today and in the future. But, of course, these are the trade-offs a business owner has to consider and deal with regularly.


What if I choose not to create a business back-up? Choosing to drive, manage and control your business yourself is a very valid strategy, but there are consequences you need to think about in that situation:

1) Need to extract value now – You need to ensure the business generates significant value day to day, year to year, because it is highly dependent on you and therefore is not necessarily a business that can be easily transferred to another party. As a result of its dependence on you, it probably won’t have large sustainable earnings and therefore will be seen as having limited value by potential purchasers, as you will have all the knowledge and relationships relating to customers, suppliers, processes and systems.

2) High return on investment required – If you’re not getting your value along the way in terms of return on investment over and above reasonable market wages for your involvement in the role, then the business is not generating what it should. If you are taking most, if not all, the risk, then you need to think of what reward for risk the business is generating.

3) Accept the personal stresses – If you choose not to have a back-up system for your business it can create certain personal stresses and strains if you become ill or need to leave the business for a certain time. The workload may also impact your health, as all the pressure is on your shoulders.

4) Increased perceived risk – People around you, such as financiers and customers, will rate the business differently if it’s solely dependent on you because they know that one person can only have influence on so many things.

5) Staff may lack motivation – The people working for you will need to be somewhat subservient or have more moderate motivation to grow their individual skills and capabilities in your business.

6) Poor staff retention – You may find retention of staff is difficult as they can become frustrated by a lack of opportunities for individual growth. You’ll then have to spend time going to the market to supplement your team, and your business will be impacted by having to train new staff on your systems and processes.


Help! I need back-up So, you’ve decided you want to share the load, but you’re still not entirely comfortable with the concept.

You’re thinking: “I’m taking the risk, I like things done a certain way and I know better than anyone else how that needs to be done – and I have the results to prove it!”

Don’t worry, we often deal with people in that situation, and the key issue is to work on building a team around you that addresses your weaknesses.

You can still have ultimate control, but a good team will cover your gaps.

Start by having a conversation with yourself – or go out and get some advice – and analyse your strengths and weaknesses as a business owner.

You need to admit to the things you’re really good at, but be equally clear on your gaps and weaknesses.

What level of business back-up for me? There are different levels of succession, or business back-up, that you might like to build as a business owner, depending on the extent to which you want to release control for the ultimate accountabilities and decisions of running and managing your business.

It’s a continuum from simply filling a gap, but filling it with a reliable, dependable resource, through to partnering with an employee with expertise that you haven’t got.

Where you end up on the continuum will, to a degree, depend on your comfort with sharing your influence and passion for the business:

• You can fill positions but still make all the decisions; • You can delegate some of the decisions to some of the positions; or, • You can delegate all the day-to-day decisions and instead just make

the strategic decisions and provide the guidelines and framework for your team.


Should you head down this path, then your attitude and approach to managing situations where your people make mistakes or do things differently to you, may need to change.

You might find yourself becoming more of an adviser, wise owl and mentor to key members of your team, in assisting them to tackle their personal challenges as they impact the business.

We’re all individuals with egos and the need to be satisfied in our working life.

Some are satisfied by doing, driving, deciding.

Others are satisfied by guiding, nurturing, reflecting.

There’s no right or wrong way to go, but there are consequences for your business.


2. The three elements of your people resource: Your team This section deals with the key people in your business who either:

• have the capacity to make business-shaping decisions, from both a strategic and day-to-day operational perspective, or

• are critical links in the operations of the business.

These key people drive the outcomes in the business and are accountable for those outcomes. And just like your IT system back-up, this ‘people resource’ needs to be reliable and dependable.

How to achieve best practice in people back-up Absolutely core to good succession planning and building a good team around you is that each team member knows:

• what’s expected of me; • where we’re headed, and • what success looks like when we get there.

If your goal is to be a business owner working on the business, rather than in the business, and to have a team of people working in concert for you, then one way to approach this goal is to consider the analogy of an orchestra conductor.

Before a good orchestra conductor even lifts his baton, he first shares the piece of music that is to be played.

After the piece of music is passed out, the conductor will talk to the various sections about his expectations of them.

After these individual discussions all the musicians will come together as a group to discuss the piece of music and the coming performance.

As the orchestra plays, the conductor will have the piece of music in front of him and will check the flow and the nuances.


Most importantly, he will look ahead, assessing the risks and ensuring he brings in the relevant sections at the right time. He’ll also pay attention to how the audience is receiving the performance.

This analogy of business owner as conductor is based on:

• having a written plan of your strategic and business objectives;

• sharing that plan in both the development and finalisation stages;

• getting rid of any ambiguity about direction and focus, roles and responsibilities;

• ensuring everyone knows what the expected outcome is, i.e. what success looks like, and

• executing the plan with monitoring, review and forward-looking perception of the potential risks and opportunities.

How to create a Professional Development Plan for your team As well as a Business Plan, business owners should have a Professional Development Plan as part of their Succession Planning strategy.

This plan only needs to be three or four pages in total, but it must focus on the key management and leadership positions within a business.

It needs to:

• look at each of the roles in the business; • detail what’s required of each of those roles, and • examine the level of proficiency of each of the incumbents.


The plan must then speak to two things:

1) What are the gaps in each person’s proficiency that we need to cover and address? How can we develop that person’s proficiency?

2) Where do I see these key people migrating within the business or otherwise? Will they be in the same role for 3, 5, 10 or 20 years? Are they happy with that? Do they want to get other experience in a different functional area of the business? Are they an understudy to me?

These are questions a business owner needs to ask of themselves and their business advisor but, more importantly, they need to specifically ask the individual team members.

How to talk to your team about professional development Sometimes business owners feel that professional development and succession planning is almost a taboo topic, because discussing it will create expectations among staff: “I’m going to go up in the world; I’ll need more salary!”

The truth is far from it.

Personal, professional development discussions are about a team member’s strengths, weaknesses and capability, how they’re fulfilling their current role versus what opportunities might lie ahead for them in the future.

These are not performance discussions – we’ll deal with performance management in a separate eBook.


Here’s an example of a personal, professional discussion:

So Mr Operations Manager, you’ve been with us five years, you’ve got a family now, you’re hitting your targets in the business, you’ve got 40 people under you – where do you see yourself going forward?

What do you see as your weaknesses in your current role?

If your GM wasn’t in place, how hard would it be for you to step up into that role? What would keep you awake at night in that move?

Is that where you want to go, or do you want to get experience in another area?

Those are the sort of questions that need to be asked and, ideally, a business owner should ask them directly.

If you don’t feel confident asking the questions yourself, then do it in conjunction with an advisor or someone in the business who has the capability.

These discussions are important for directing and developing your team, both as experts in their own particular area and also as your engine room for driving sustainable earnings.


4 Top Tips for building a reliable and dependable team

1) Shared vision – Your key team members need to have and to feel a shared vision for where your business is headed.

2) Clarity – Each team member needs to be absolutely clear on their roles, responsibilities and accountabilities.

3) Written plans – Your Business Plan needs to be clear and shared. You also need a Professional Development Plan for your key team members, and a Succession Plan.

4) Talk to your team about their Professional Development goals and succession – I recommend having these discussions at least once a year. They should be scheduled properly, with some preparation, and they must be kept separate from performance reviews.


3. The three elements of your people resource: Key external influencers

Succession planning is also relevant to the key external people who impact your business.

This area is a little more nebulous and will depend on the maturity, stage, point in the cycle, size and shape of your business.

Examples of businesses with such external influencers include:

• A business that is not large enough to require its own in-house, experienced accounting skills in the finance and administration department;

• A business that doesn’t have its own Chief Financial Officer (CFO) or General Manager (GM);

• A business with a number of staff, but not enough to require a dedicated Human Resources manager;

• A business which outsources payroll and other key roles and people services;

• A business which uses contractors for business systems and IT services and management.


Where this is the case it’s very important that the services provided by outside people are provided in partnership.

The goal is that if one of those outsourcing companies or businesses changed hands, had a business failure, or lost a key staff member, your business would be protected from adverse impact.

This is another form of business back-up, or business succession. It’s making sure you are protected against risks and failures of your external business partners.

4 Top Tips for ensuring a successful outsourcing relationship

1) You can’t protect against everything, but in making the decision to outsource services you need to have a formal agreement with each of those outsourcing parties that addresses potential risks and issues around:

• downtime • business failure • security and confidentiality of information

2) Be open and communicate regularly with those parties on your

expectations around service delivery and transfer of knowledge.

3) Make sure there are documented procedures relating to the interaction with an outsource party so that in the event of staff changes in either organisation – your business or the outsourcer – the linkages for service delivery aren’t broken.

4) Make sure you have a buddy system within your business, which involves appointing one of your internal staff to be the buddy for each of those external service providers. Ensure your staff member communicates with their ‘buddy’ regularly, and make sure they have a relationship with more than one person in the external party, so your business is not solely reliant on a single individual.


External influencers the way of the future A lot of people wouldn’t include ‘Key External Influencers’ in a discussion on business succession, but often businesses today are reliant on a wide range of people who aren’t necessarily directly employed in the business – this goes for businesses large and small.

With the growth of web-oriented services, in particular, outsourcing partnerships are often a critical part of your business.

Be prepared – protect your business – have a back-up – because building business value matters!