Succession planning is a crucial aspect of ensuring the long-term sustainability and smooth transition of a business. It involves identifying and preparing suitable successors for key roles within the company. Without a stable succession plan in the pipeline, should the worst were to happen, it could mean your business’ future is up in the air and complicated.
A staggering only 35% of businesses have a formalised succession plan in place for critical roles. Spoiler Alert: you don’t want to end up like Waystar Royco, where many figures are battling for control after the sudden death of its owner. This can naturally lead to instability, confusion, and market value decreasing.
We examine why succession planning is so crucial for the long-term health of a business, and how to do it successfully…
Why Is Succession Planning So Important?
Succession planning involves identifying critical roles and individuals within the organisation and ensuring there are suitable successors ready to assume these positions when the need arises. It also ensures that the running of the business remains intact should the owner or sole director die. By proactively preparing for succession, businesses can minimise disruption, maintain continuity, and safeguard their long-term viability.
In the circumstance of a business having multiple shareholders, cross option agreements is also a possibility prior to death. These agreements provide surviving shareholders an option to purchase the deceased’s shares at a defined value, while also giving the deceased’s personal representatives the option to sell if they want to.
There are many things you can do to make sure that the succession of the business maintains normality. Here are some steps you can take:
Identifying Key Positions & Key Personnel
The first step in succession planning is identifying key positions and personnel within your organisation. These positions may include senior executives, founders, key salespersons, or individuals with specialist knowledge critical to the company’s operations. Assess the impact of losing such individuals and identify potential successors or development plans to develop and nurture future leaders.
Implementing Key Person Insurance
Key person insurance is a risk management tool that protects a business from financial loss due to the death or disability of a key employee. It provides a financial cushion to help the company manage the transitional period, recruit and train replacements, and mitigate potential losses. Consult with insurance professionals to determine the appropriate coverage and ensure the policy aligns with your succession plan.
Developing and Preparing Successors
Once key positions and personnel have been identified, it is essential to develop and prepare potential successors. This may involve offering training and mentoring opportunities, assigning stretch assignments, and gradually increasing their responsibilities. Creating a structured development plan can help nurture the skills and expertise necessary for a smooth transition once the time comes to step up.
Shareholders’ Agreement
A shareholders’ agreement is a legally binding contract among the shareholders of a company, outlining their rights, responsibilities, and mechanisms for resolving disputes. In the context of succession planning, a well-drafted shareholders agreement can provide clarity on the process of transferring ownership and management control. It can establish guidelines for buying and selling shares, setting valuation methods, and outlining the roles and powers of shareholders.
Engage Professional Advisors
To ensure a robust and legally sound succession plan, it is advisable to engage professional advisors such as lawyers, accountants, and financial planners. They can provide valuable expertise in drafting shareholders agreements, assessing insurance needs, conducting valuations, and navigating legal and tax implications associated with succession planning.
Fortunately, our expert advisors are always on hand to help you with succession planning, especially when it comes to Key Person Insurance and Shareholder’s Agreement. If this sounds of interest, or you’d like to know more, get into contact with Nordens’ Company Secretarial Manager, Natalija Rynkevic, where we can go through your options.
Regularly Review & Update the Plan
Succession planning is not a one-time exercise but a continuous process. It is crucial to review and update the plan periodically to account for changes in the business environment, personnel, and organisational goals. Regularly assessing the effectiveness of the plan ensures its relevance and adaptability to inevitable evolving circumstances. Leaving it to gather dust for a while may lose its relevancy once the plan needs to be set into action.
Succession planning is a strategic imperative for businesses seeking long-term sustainability and smooth transitions. By effectively planning for the succession of the company, UK businesses can protect their financial interests, establish clear guidelines for ownership and control transfer, and mitigate potential disruptions. Through careful consideration of these elements and the engagement of professional advisors, businesses can successfully navigate the complexities of succession planning and secure future growth.
We hope this has outlined to you how to successfully navigate a succession plan and the importance of it. If you’d like to know any further information on anything mentioned, or anything accounting related for that matter, please do not hesitate to get in contact with us at Nordens, where one of our trusted advisors would be happy talking you through your query.
