Succession planning can decrease business risk

Succession planning, or preparing your business for when you leave, is something that many business owners don’t put a lot of thought into. However, not identifying how the business will operate without you is one of the factors that increases business risk for a small to medium- sized enterprise (SME).

Often small to medium business owners are tied up in the day-to-day running of their business and are unable to give meaningful consideration to the risks involved with their business operations. Some business owners are aware of their risks but lack the time or skills to address them. Consequently, one of the three most important business issues that have emerged as a trend for SMEs is “de-risking the business”.  To effectively do this, owners need to think strategically about their business risks and prioritise actions to manage and reduce these risks.

Despite the risks of not having a succession plan in place, research shows that only around a third of SME owners are considering succession planning an immediate priority and only one in ten has a succession plan in place. Most business owners are focussed on growth, not exit, and only about 15% have set a retirement date. As a result, SME owners commonly work long hours, with increasing stress and pressure, which can lead to serious health issues and a more pressing need for succession arrangements.

It is important for SME owners to realise that strategies which can be incorporated into succession plans can also be beneficial with short- to medium-term priorities, such as improving work/life balance. For example, increasing the capability of key employees to assume leadership roles when the owners are ready to exit can also enhance the work-life balance of owners by allowing flexibility in their daily/weekly work schedule. Delegating to key personnel in this way also reduces the absolute reliance on owners, which in turn can increase the attractiveness of the business to a potential buyer when the owners are ready to exit.

Other benefits of ensuring succession plans are in place may include:

• safeguarding the business and the owner’s income in the event of an unplanned illness or absence;
• creating certainty among owners/partners in the event of an unexpected illness or absence;
• creating an alternative income stream in retirement, given SME owners often have insufficient superannuation; and
• ensuring someone is ready to take the reins in the short or longer term.

Business owners frequently say there are barriers to implementing strategies for succession, including a lack of time or skills. However, advice is available to assist SMEs in assessing and potentially removing these barriers to enable them to implement succession plans. To obtain independent and objective succession planning advice, tailored to your specific goals, speak with your usual Mazars adviser or alternatively contact John Kotzur, Tim Taylor or Nathanael Lee.

Please note that this publication is intended to provide a general summary and should not be relied upon as a substitute for personal advice.
*Data Source: 2017 SME Research Report