"Every business owner will eventually leave their business. The question is whether the business will be ready when that happens."
A business succession plan sets out what you want to happen to your business when you are no longer running it. That could be through retirement, selling the business, passing it to family, transferring ownership to a business partner or employee, or an unexpected event that prevents you from continuing.
For New Zealand business owners, succession planning is not simply about retirement. It is about protecting the business, its people, customers and value by planning what happens next.
A good business succession plan should answer five basic questions:
- Who could take over the business?
- How and when would ownership transfer?
- What needs to happen before the transition?
- How will the business continue operating without the current owner?
- What happens if the owner has to leave unexpectedly?
What Is a Business Succession Plan?
A business succession plan is a written plan for transferring the ownership, leadership or control of a business when the current owner steps away.
It sits alongside your normal business plan. Your business plan focuses on where the business is going; a succession plan considers what happens when you are no longer the person leading it.
Succession does not necessarily mean selling to an outside buyer. Depending on the business and the owner's circumstances, ownership might be transferred to a family member, business partner, employee or third-party buyer.
Why Is Succession Planning Important?
Without a plan, important decisions may be left until the owner needs to leave. That can create uncertainty for employees, customers, suppliers, family members and potential successors.
Planning ahead gives you more options and more time to prepare the business for a change in ownership.
A succession plan can help you:
- Identify potential successors
- Reduce the business's dependence on you
- Retain important employees and knowledge
- Document important business systems and relationships
- Protect customer and supplier relationships
- Plan how ownership could be transferred
- Consider valuation and funding requirements
- Prepare for retirement or a future sale
- Reduce disruption if circumstances change unexpectedly
Perhaps most importantly, succession planning gives you time. Time to develop people, strengthen systems, improve the business and make decisions before they become urgent.
When Should You Start Succession Planning?
Earlier than you probably think.
You do not need to be approaching retirement to benefit from a succession plan. A business owner in their 40s or 50s may have decades before they expect to leave, but beginning early allows plenty of time to develop management capability and reduce reliance on the owner.
A succession plan can also become extremely important if circumstances change unexpectedly.
Ask yourself:
If I could no longer work in this business from tomorrow, who would run it?
If there is no clear answer, that is a good reason to start planning.
The Main Options for Business Succession
There is no single succession route that suits every New Zealand business. Four common options are:
1. Family succession
The business may be transferred to a son, daughter or other family member. This can provide continuity, but it is important to establish who will lead the business, how ownership will be divided and how other family members will be treated.2. Business partner buyout
A business partner may purchase the departing owner's interest. Partnership or shareholder agreements should clearly establish how ownership is valued and transferred if an owner leaves.3. Employee or management buyout
A senior employee or management team may have the knowledge and relationships required to take over the business. This can provide continuity, although funding and an agreed purchase mechanism need to be considered.4. Sale to an outside buyer
If there is no obvious internal successor, selling the business to an external buyer may be the best option. This could be another business owner, an investor, a competitor or an entrepreneur looking for an established business.The important point is to consider the options early rather than assuming that a particular route will always be available.
What Should a Business Succession Plan Include?
There is no universal template, but a useful succession plan should address the following:
| Area | What to consider |
|---|---|
| Exit objectives | Why you want to leave and what you want to achieve. |
| Potential successor | Who could take over and whether they are willing and capable. |
| Leadership | Who will make decisions and manage the business after the transition? |
| People | Key employees, responsibilities, skills and knowledge that need to be retained. |
| Business systems | Processes and knowledge that currently depend on the owner. |
| Customers and suppliers | Important relationships, contracts and arrangements that need to continue. |
| Assets and ownership | Business assets, intellectual property, shares and other ownership interests. |
| Value and funding | How the business might be valued and how a transfer or purchase could be funded. |
| Timing | Target dates, transition periods and responsibilities during the handover. |
| Unexpected events | What happens if the owner dies, becomes seriously ill or cannot continue working? |
Reduce the Business's Dependence on You
One of the most important parts of succession planning is making sure the business can operate without its current owner.
If every important customer relationship, decision, supplier contact or operational process depends on you, transferring the business can be difficult.
Start documenting the knowledge that currently sits in your head and gradually give other people responsibility.
Good business processes, trained staff and clear responsibilities can make the eventual transition much easier.
Learn why good business processes matter when selling a business.
Succession Planning Is Not the Same as Selling
It is important to distinguish succession planning from preparing a business for sale.
Succession planning considers who will take over and how the business will continue.
Preparing a business for sale is more specifically about making the business attractive, understandable and ready for potential buyers.
The two can overlap, particularly if your eventual succession plan is to sell the business to a third party.
Learn more about preparing your business for sale.
Review Your Succession Plan Regularly
A succession plan should not be written once and forgotten.
People change, businesses change and your own plans may change. A potential successor may leave, family circumstances may alter, the business may grow or you may decide that selling rather than passing on the business is the better option.
Review the plan periodically and update it when circumstances change.
Start Planning Before You Need To
The biggest benefit of succession planning is having choices.
You may eventually sell your business, transfer it to a family member, arrange a management buyout or simply step back while someone else takes over the day-to-day running.
You don't need to decide today exactly how your exit will happen.
But you should have a plan for what happens when you are no longer the person running the business.
Starting early gives you time to build a business that can operate independently, develop potential successors and protect the value you have spent years creating.
If you are considering selling your business, succession planning can also form an important part of becoming business sale ready.
Selling a Business – When, How and to Whom
Be Business Sale Ready
Planning is critical to making sure you are always business sale ready. As part of your business plan, ensure you are continually preparing your business for the day you sell or transfer the ownership.Have a succession plan in place well before it’s needed. Make sure it details when you intend to list your business for sale, retire, or transfer the ownership of the business. And if something untoward happens, then it’s all in place ready to go for a smooth transition.
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By NZBizBuySell
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