Where’s the Exit? Succession Planning for Small Firms
INSOL Q1 2014:
By Margot MacInnis, Managing Director, Cayman Islands
Building a business, and making it successful and profitable takes a lot of energy and time, and any owner will tell you, it isn’t easy, but it’s rewarding. At some point in the business lifecycle, the owner will be looking for the exit, whether the desire to ‘get out’ is driven by the pursuit of other interests, more freedom, more balance, or less stress, succession planning must move from a theoretical dream to a real and implemented plan. There are a number of reasons to plan for succession whether it’s to address planned departure or retirement; or to prepare for unexpected events that will significantly affect the business such as death of the owner or leader; or critical illness. The focus of this article is to provide some practical points to consider in building a succession plan, whether that’s for the sole practitioner with no employees, a small partnership or firm with a few partners and some employees.
A good succession plan is necessary to manage the risks and issues that will arise if a key member of staff – whether it’s the owner, or a senior executive member of the team who’s contribution is a driving force in the business. Upon a departure of a key person, expected or unexpected, the business will need to address the impact it has both internally and externally. Some considerations could be: who will be taking over the responsibilities of leading the business? What will your competitors be doing in response, how will your clients react? How will the business continue to generate cash flow?
The biggest issue is by far the level of reliance of the business on a key person for the ongoing operations and reputation. In small firms, the owner is often the rainmaker for new business; the risk manager; the namesake and the one shaping the culture of the business. If a business owner is serious about an exit plan, start now. It may take years for the business to get to a point where it will run beyond the departure of the owner. Many owners are still making key decisions; performing daily administration activities, and it’s important to move, or remove themselves completely, from these activities, and focus on the strategic direction of the firm. A plan is required to shift the running of the business from the owner to others in the organization and to develop strategic and operational behaviors that are less dependent on the owner and will survive the departure of a key person. Then, at some point down the road, the departure, or unplanned event, won’t adversely affect the operational aspects or development of the business.
One other factor to consider in this regard is what steps have been taken to support the legal form and substance of the business after the sole practitioner or senior partner is gone. In the context of succession planning, is there an agreement in place that clearly establishes how the departure will be structured and how the shares of the business are to be dealt with upon the retirement or death of the sole practitioner. This should be done in a way that allows the business to maintain appropriate cash flow and profitability. The formula for the exit should take account of the capital investment in the business, the goodwill and any loan or current account outstanding.
The business should also consider who is positioned to lead the firm when the sole practitioner or key partner is gone. Identifying a person who would be positioned, almost immediately, to step into the role and lead the business.
A key part to ensuring business continuity across all areas of the business, particularly as it relates to primary business functions such as delivery of service to clients, is how to capture the business and institutional knowledge of the departing sole practitioner or partner. A business requires infrastructure, a dashboard, of the key information necessary to run the client matters and the business itself. How the work is documented and maintained for future reference, are there systems in place to identify the status and stages of the work in progress. How are client contacts tracked and updated? If the sole practitioner leaves, would the information still be captured in the business, and would the business be able to access it?
For both small businesses, succession planning is an important element in ensuring the continuity and success of the business. Small firms can meet this challenge by being proactive, putting a plan in place that will enable the business to thrive and navigate beyond the departure of the owner or partner.