Letting go of a business on retirement will take careful planning

Handing over a business to a successor after long years of building it up is never easy and requires careful planning.

An analysis by Pricewaterhouse­Coopers estimates that one-third of the 1.54 million private business owners in June 2024 will be aged over 55. More than 1.4 million owners employing more than 7.9 million staff and contributing almost $500 billion in gross domestic product are expected to retire in the next 10 years, it says.

Developing effective succession plans in private businesses is critical, given present demographic and economic trends. Considering these factors, it is increasingly important to develop an effective succession plan sooner rather than later, and it is never too late to get started.

Often thought of as a practice for larger organisations, succession planning is particularly important in smaller companies, family-owned businesses and the increasing number of highly specialised businesses that provide support for larger firms.

For many, the loss of key individuals would jeopardise profitability or even the ability of the business to continue operating.

Owners of smaller firms often say they do not have the time to develop and implement a comprehensive succession plan. However, some type of succession planning is vital, especially considering the ageing workforce and potential skill shortages.

Approaching and understanding succession as a series of change processes across time, rather than a single event, will help smaller businesses to undertake the process. Identifying successors early will allow sufficient time for the successor to develop under the watchful eye of a more experienced owner or manager.

While succession to a family member or existing management can inject new ideas and innovation into a business, finding a willing and capable candidate to take over the reins can be difficult, which is why it is important to start the process early.

Finding a successor who can take over a business and buy it may be a good viable alternative to an open market sale.

The capture and transfer of important, often tacit, knowledge is an important component. By approaching succession planning as a tool for knowledge management, businesses not only can retain key employees and their expertise but also build on it to create value, cost efficiencies and improved morale.

Whether a decision has been made to move on from the business or not, succession planning provides a degree of control over when to leave a business and how. It provides an opportunity to identify value gaps and allow sufficient time to close them.

A succession or exit plan means every aspect of a business is mapped out to achieve the desired exit outcome, ensuring correct legal structures are in place to take full advantage of taxation planning as well as a smooth transition for staff.

According to a 2011 study by Canadian firm Built To Sell, patterns emerged in certain age groups that affected attitudes towards succession. Owners aged 25 to 46 generally saw their companies as a means to an end and expected to sell within the next five to 10 years.

Baby boomers aged 47 to 65 felt selling the company was akin to selling out their staff and their community. They were torn between selling to finance retirement and the agony of where that would leave employees.

With few hobbies and little other than work to define them, business owners in their late 60s, 70s and 80s felt lost without their business — a reason so many refused to sell or experienced depression after they did.

While there will always be exceptions to general rules of thumb, frequently — more than industry type, nationality, marital status or educational background — an owner’s birth certificate will define their succession or exit plan.

Kerry Boulton is founder of The Exit Strategy Group.