Business Succession Planning It s Never Too Soon. Kate Ahern Partner, Deloitte Private Wednesday 21 October 2015

Transcription

1 Business Succession Planning It s Never Too Soon Kate Ahern Partner, Deloitte Private Wednesday 21 October

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4 Agenda 1. Overview - What is succession planning? - Why plan? - Goal setting - Legacy 2. Planning actions - Immediate approach year approach 3. Succession planning in family business Family Governance 4. Development of the next generation of leaders 5. Succession traps and lessons from experience 6. Questions 4

5 Overview 5

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7 Succession planning What is it? More than just retirement this is the outcome of a succession plan, not the purpose Succession is the process of ensuring the continuity of a business beyond its current management. This is achieved through identifying and understanding the capital value drivers of the business, the elements that allow it to compete effectively in its markets, and growing and investing in those drivers It s a comprehensive and strategic approach to the process Requires a clear and early focus critical for long term survival of the business. Involves many business disciplines such as leadership development, corporate advisory (due diligence and valuation), family counsellor, lawyers, strategic planning, governance and tax strategy to name a few By 2020, the estimated value of Australian private businesses in the process of transferring ownership from baby boomers is approximately $3.5 trillion this is a sleeping giant 7

8 Why plan? 40% of businesses expected to change hands in next 10 years As per a family and private business survey, 45% of business owners see themselves working in the business beyond 65 years of age, whilst 66% indicated that their business was not exit or succession ready Many closely-held businesses fail to complete the transition to the next generation Many owners want to retire and sell their business, but have not adequately considered the steps required to do that A long-term program to identify and groom future company executives/next generation family members must be undertaken In a family business it is important to transition the business and wealth to the next generation now while the patriarch is alive to deal with the issues. Families make the mistake after the patriarch has passed away and this can cause the business to disintegrate and lose value if family members cannot agree 8

9 Why businesses don t plan for succession? Not sure how to start or who to call for help The owners worry about being fair to all potential successors/family members and don t want to have to chose now The patriarchs are too controlling and don t want to let go of the business Can be often too confronting for owners as they want to keep working and love what they do, wonder what they would do without the business They fear the possibility of straining their interpersonal relationships They have difficulty discussing financial matters and personal goals with others (or outsiders) They struggle to disconnect from the day-to-day urgencies to focus on long-term planning They assert that because successors are not yet ready to assume control, nothing can be done Owners perceive that it s a cost to be incurred with no immediate benefit 9

10 The art is in the planning The approach should involve drawing on the experiences and expertise of several advisors who work together as a team Succession planning can be made more complex due to the interweaving of family interests with business concerns, this process can take time for the family to work through the issues and agree S Should the business owner keep the business or sell it? If kept within a family, who will lead it? Will the selection of a new leader create family animosity or bitterness? Perhaps the business will be sold. If sold now, is the current business operating strategy maximising value for the shareholders? Are there steps that can be taken to enhance the value of the business in the short term while planning a later sale? 10

11 Legacy In the recent survey 1/3 of private business owners indicated that they are likely to rely on either continuing family business ownership or the sale of their business for the cash to fund their retirement Continuing role of the business founder consideration: Outside consultant to the business Company board of directors Advisory board role The share transfer plan must be coordinated with: - The business owners retirement plans - Estate plans - Timing of the company s management-grooming program - The company s compensation arrangements - The buy-sell agreement - The proper corporate structure and related elements of corporate finance 11

12 Planning actions 12

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14 Possible approach - Immediate 1. Design a specific management grooming process 2. Build an incentive based compensation program 3. Develop an active board of directors, including independent representatives 4. Devise a tax strategy plan, which dovetails with the plans above 5. Review the owners wealth creation strategy to identify strengths and weaknesses 6. Review insurances 14

15 Possible approach Two to five years 1. Restructure the corporation and related entities to be more tax efficient and meet estate planning objectives 2. Consider scaling back current active role in management 3. Reassess adequacy of insurance coverage for company 4. Finesse the owner s wealth creation strategy to provide the cash flow and capital sums for a dream retirement 5. Plan for what you will do after, whether its to still be involved, or travel or whatever 6. Communicate and be transparent 15

16 Succession Planning in Family Business Family Governance 16

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18 Succession Business and family challenges and best practice Challenges Best practice Intergenerational divide Uncertainty over the successor s role Unwillingness by first generation of owners to relinquish control Tendency to prefer the oldest child as successor Sibling rivalry Entrepreneurship Education Internal education External experience Governance structure Family constitution 18

19 Family Governance Private family businesses often a complex balancing act between: - - the trading business THE MANAGEMENT TEAM - - the ownership of the business THE BOARD OF DIRECTORS - - family issues THE FAMILY COUNCIL 19

20 A typical Family Governance Structure FAMILY PROPOSED STRUCTURE Family Board (meets monthly initially then quarterly) Family members Independent Chairman Executive Board (meets monthly) CEO, CFO, COO, Deputy CEO Independent Chairman F - Pa Business Family Office Tier 1 - Passive assets - Property Tier 2 Family member 1 Family member 2 Family member 3 Family member 4 Family member 5 20

21 Choosing and managing external advisors to the Family Board Don t look far Choose confidants Map out your expectations Reward your board members appropriately Prepare for meetings Stay in touch Distribute your business plan Maintain a professional edge Create short term goals 21

22 What issues are addressed in the Family Constitution Personal and family vision Family employment remuneration Roles and responsibilities Family board Family strategy Family Constitution Family investments Philanthropy Exit strategy 22

23 Development of next generation of leaders 23

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25 Preparing the Next Generation Opportunity or birthright Attitudes required Outside experience Educated to be a great owner Considerations Formal polices Working together Challenges Responsible ownership 25

26 Common leadership and succession challenges in private companies Talent value proposition Attraction, retention, fit with culture - why would talented leaders want to work here? Family business control Future ownership vs. management - are heirs the leadership team for the future? NextGen leader profile Will the leadership that got us here take us through next phase of growth? Acquisition/IPO considerations How should we position our leadership bench to increase sell-side value? 26

27 Succession planning addresses questions regarding leadership supply and demand What leadership do we need to drive the business forward? Where are the biggest risks (retirement, flight risk, etc)? Who is ready for promotion now? Who has potential for future senior roles, yet needs development? Who has topped out? Where do family-owners/heirs fit in? Leadership Demand Leadership Supply Calibration & Action 27

28 Three step process Determine leadership Evaluate leadership Mobilize to take 1 DEMAND 2 SUPPLY 3 ACTION 28

29 Succession Traps Lessons from Experience 29

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31 Common succession traps Focus only on top leadership positions without attention to backfill options for second tier roles Sudden shortfall in the pipeline because they did not identify and develop of high potentials Secret lists and processes; led to no communication to high potential leaders Significant turnover in the director ranks leading to senior roles; direct quote: I had no idea I was seen as having a strong future Board members with no experience with succession planning; therefore not on the radar and CEO not held accountable Three CEO s in 5 years; problem was misidentified as poor selection rather than a failure in succession

32 Additional lessons from experience Succession planning should be linked to the objectives of the business -ie talent review becomes a lever for broader strategic execution Getting good takes time and patience; the first few talent review meetings will be challenging, but you ll get better with time Some organizations have instituted training for senior leaders and HR in identifying potential and in communicating that potential. The talent review facilitator, who is typically the senior talent / HR leader, should continually push the group to stay focused Leaders can become hesitant to raise concerns with other leaders talent so as not to be challenged themselves. Communications to high potentials are an issue some organizations choose to inform individuals of their status as a high potential while others do not; organizations who do not typically are concerned about the ramifications

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