While art imitating life doesn’t usually translate into the world of business, the latest TV season of Succession, about the scripted maneuverings and vicious shrapnel of Logan, Kendall, Roman, Shiv and the rest of the fictitious Waystar Royco family, may trigger more mundane but important interest about the critical issue of real business succession.
In many ways, and for various contemporary business reasons, succession planning experts are sounding an alarm about avoiding the disaster of procrastination or not succession planning at all. They candidly but bluntly urge Edmonton business owners and executives into action, warning that, in some situations, failing to plan translates into planning to fail.
Reality warns that making no plan is also a decision. A risky and poor decision. Some recent Canadian business trends and figures make the decision even more critical.
- Some 76 per cent of Canada’s business owners plan to exit their business within the next decade, with a potential of over $2 trillion worth of business assets that could change hands.
- Only 1 in 10 business owners (9 per cent) have a formal business succession plan in place to ensure a smooth transition.
Trends and specific case stories echo the cause and effect that, without succession planning, a successful business is courting disaster. There is an urgent checklist of risks and consequences:
- Owners failing to realize the full value of their business.
- Alienating potential successors (senior management, family or outsiders).
- Inability to achieve the mission and realize the vision, putting the business at risk.
- Increased difficulty in obtaining long-term financing if lenders perceive inadequate business planning.
- Loss of expertise and knowledge about the business.
- Leadership gaps and loss of continuity and naming an unprepared or unqualified successor who lacks personal drive, commitment, skills, training and education.
- The owner taking a significant tax hit.
- Damaged client and partnership relationships.
- Uncertainty for staff and potential of low morale.
Some succession planning experts go as far as to warn that not having a plan is dangerous, risky and irresponsible. They point out that succession planning IS risk management in its most urgent and important form.
Of course, the most basic and obvious risk is that the business goes downhill, really fast. In many specific situations, the business has grown partly due to a leader’s experience, drive and ability. Without proper succession planning and strategy, the future success of the business deteriorates when the leader’s experience, drive and ability are gone.
When the experienced leader goes, the business suffers and triggers lower productivity, lost work, a slump in business and low morale, which causes lower quality of work. In many ways, succession planning is a matter of avoiding risks.
Experts suggest that a business’ financial risk increase exponentially without the buffer of a succession plan. The impact of a sudden departure or crisis for a key leadership role or mission-critical position is significant and could cause disruption to the business and financial damage. It is a notorious fact of business life that investors scare easily and often react to a change at the top by assuming the worst.
Some impact of business disruption includes issues such as suspended initiatives, disrupted third-party/partner relationships, poor financial performance, loss of revenue or shares and more. There is a lot of uncertainty and turbulence posed by a sudden vacancy/departure of a key position within the organisation.
While business growth, revenues and cash flow are key factors, stats show that most owners rely on the sale of the business as a source of retirement income. Not having a plan can reduce their chances of selling at the price they want. That means lower retirement funds.
Obstacles encountered by the owner looking to sell the business may not only be problematic to the business itself, but the well-being of the owner and their family. Failing to plan also puts the employees’ livelihoods in jeopardy, on top of all the other risks.
Deferring or putting succession planning on the back burner is much too common and an easy to do, with the most familiar excuse that “we’re all way too busy, and there are other pressing priorities.”
The Canadian Federation of Independent Business (CFIB), Canada’s champion of small and medium businesses (SMBs), is a dynamic advocate of succession planning. Regardless, its recent Business Succession Planning Survey acknowledged that some small business owners do procrastinate.
“Succession planning is a complicated process and, for one in four owners, it’s hard to know where to start,” explains Laure-Anna Bomal, CFIB’s research analyst. “Also, when planning does start, there are other obstacles.”
- 75 per cent of SMB owners will leave their business for retirement, while 22 per cent will leave because of stress; 21 per cent just to step back from their responsibilities as owners.
- 54 per cent say finding a suitable buyer is the most common obstacle to succession planning, followed closely by business valuation and reliance on the owner for day-to-day operations.
“Given the magnitude and complexity of the process, business owners may also be too busy running their business, do not have the time needed and may avoid or postpone any plans,” Bomal says.
Despite the cliché that “it’s business, not personal,” many succession planners warn that the personal, family aspects can be sensitive speedbumps.
“Handing over a family business to the next generation, especially the first succession, is make or break time for most family-run businesses,” cautions Deborah A. MacPherson, partner, KPMG, Tax Business Unit Leader, Regions West. “It doesn’t matter how successful a family business is in one generation if it isn’t able to effectively transfer that momentum to the next generation. Without a good succession plan in place, each time the business passes into the hands of the next generation, it could face failure, no matter how well it was doing previously.”
Regardless of size and the nature of the business, MacPherson cites the Canadian business stats that underscore cold, hard and indisputable family business risks and trends.
- Fewer than 30 per cent of family businesses survive into the second generation.
- 12 per cent are still viable into the third generation.
- Maybe 3 per cent of family businesses are still in business by the fourth generation or beyond.
Research and volumes of specific, individual family business details show that many family business failures are invariably traceable to one underlying and common factor: a lack of calm and carefully thought out family business succession planning.
While most consultants and analysts stress the importance and urgency of succession planning, they are reluctant to put all the blame on the leader. Recent stats and surveys illustrate the failure or lack of succession planning as often due to boards and stakeholders allowing it to fall off their priority or agenda.
There are also other challenges, such as the lack of a structured process, ambiguity of accountability for succession planning, decision-making based on gut-feel over objective data, and other factors. According to the CFIB survey, and unlike the fictionalized scandals and in-fighting of TV’s Succession family, real families are not such significant speedbumps in real success planning.
