Succession Planning - How to future proof your business

Succession planning
How to future proof your business

Table
of
Contents

Chapter
1:
What
is
succession
planning?
................................................................
3

When
to
start
succession
planning?
..........................................................................................................
3

Why
is
business
succession
so
often
neglected?
..................................................................................
4

Aim
for
a
picnic,
not
a
panic
..........................................................................................................................
5

Chapter
2:
Business
succession
war
stories
–
the
good,
the
bad
and
the
average
...
6

Succession
stories
from
the
corporate
world
........................................................................................
6

JPAbusiness
client
succession
stories
.......................................................................................................
9

Chapter
3:
Six
strategies
for
making
succession
part
of
your
business
model
.........
11

1.
Develop
a
learning
culture
in
your
business
....................................................................................
11

2.
Encourage
open
communication
..........................................................................................................
13

3.
Share
your
vision
.........................................................................................................................................
13

4.
Share
responsibility
....................................................................................................................................
13

5.
Identify
key
roles
in
the
business
and
assess
gaps
.........................................................................
14

6.
Identify
potential
leaders
and
provide
professional
development
opportunities
...........
14

Succession
planning
for
mature
businesses
.........................................................................................
15

Chapter
4:
How
to
use
our
Business
Succession
Scorecard
....................................
16

Disclaimer: The information contained in this eBook is general in nature and should not
be taken as personal, professional advice. Readers should make their own inquiries and
obtain independent advice before making any decisions or taking any action.

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Chapter 1: What is succession planning?
Comments by James Price
JPAbusiness Pty Ltd
Many people think of succession planning as an
old person’s problem – something you do once
you decide to exit your business. This is far from
the truth.
Succession planning is actually a young person’s
pathway to building a valuable business. It’s
about creating a sustainable business that will continue to operate
successfully into the future, whether you stay in the business or not.
We’re big supporters of succession planning and having a succession plan,
and we provide advice on this area of business to our clients.
However if you are a business owner or director of a company that has been
operating for some time, and you’re only now saying “we need to create a
succession plan”, you’ve already missed a great opportunity to build
incremental value.
When to start succession planning?
It’s never too early to start thinking about your succession strategy and
developing the skills of your team and business capability.
To explain how this succession thinking should fit into your business I’ll use
the example of today’s professional sporting teams:
Many years ago if you were a reserve in a team you got to carry the
oranges at half-time and that was it – you just made up the numbers.
Today’s reserve bench – or interchange bench – is a critical part of a
sporting team’s success.

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The reserves are part of the team, receive exactly the same training as
the team’s most valuable players, often offer different, specialised skills
and can interchange in and out depending on issues in the team, such
as illness, injury, or a change in strategy.
These highly professional sporting teams actually mirror the workings of a
successful business with an effective succession strategy.
Why is business succession so often neglected?
There are many reasons business succession is neglected but four key ones
are:
• busyness
• lack of foresight
• emotion
• generational differences.
Busyness – Sometimes we’re focused so heavily in the business – in the
day-to-day operations – that we don’t think about the future. We’re so bogged
down we don’t step back and think strategically about opportunities to build,
change and grow the business, nor do we think about ‘life after the business’.

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Lack of foresight – Often business leaders think: “I’m not going anywhere
soon, so what’s the point?” But around half the time the leadership reins
are handed over in small businesses it’s due to unforeseen
circumstances.
Emotion – Most humans don’t like to think about dying or developing a
serious illness and business leaders are no exception. As a result they don’t
address issues like: “If I was run over by a bus today, what would happen to
my business? What would happen to my staff? If I developed a mental illness,
who would service my customers? How would my family earn a viable
income?”
Generational differences – Many of today’s business owners are Baby
Boomers (people born between 1946 and 1964) and this generation tends
to equate succession with retirement. For this reason many Boomers have
not given much thought to business succession planning until recent times.
Unfortunately, as we’ve already mentioned, starting your succession planning
just before you sell or hand over to family members is not a successful
strategy for maximising business value or transitioning smoothly.
Aim for a picnic, not a panic
Read any business blogs or articles about succession and one phrase you will
see repeatedly is ‘succession panic’.
By starting early and employing foresight and planning, we believe you can
enjoy a ‘succession picnic’ instead.

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Chapter 2: Business succession war
stories – the good, the bad and the
average
JPAbusiness Pty Ltd
Succession stories from the corporate world
The following business
succession examples
come from the
international corporate
world and have been
well reported in
business advice and
human resources
articles and blogs.
They provide some
valuable lessons in
how to – and how not
to – plan for
succession.
HP – The bad
Over the course of 15 years HP (Hewlett Packard) had seven different CEOs
– each horridly replaced with the next.
At its core, the problem was the incoming CEOs were not adequately
educated on the innermost workings that made HP successful. They came in
with sweeping changes that contradicted the soul of HP.

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For example Mark Hurd, who took on the role in 2005, focused on cost cutting,
which resulted in suffocating employee autonomy and innovation – the very
things that initially made HP successful.
By the time current CEO Meg Whitman took over in 2011, the tech giant was
struggling.
As Whitman told Fortune magazine in a 2014 interview: “Succession planning
is absolutely essential. Bill Hewlett and David Packard founded the company
when they were 25 years old in 1939 and they ran the company for 50
years… When they left the succession planning was not what you would hope
it to be.”
Apple – The middle of the road
Steve Jobs put a lot of time and energy into grooming Tim Cook to take over
his role as CEO of Apple. This included creating a large library of instructional
multi-media materials, which included videos and manuals.
However, Jobs’ decision to continue as CEO until just weeks before his death
meant Cook didn’t have the opportunity to grow into the role with Jobs
standing by as a mentor. As a result, investors got nervous leading to a dip in
Apple’s share price.
In hindsight, Jobs probably should have stepped down earlier.
McCormick & Co – The Good
Spice company McCormick & Co (MKC) enjoyed a very successful transition
from CEO Robert Lawless to Alan Wilson. The transition followed five years of
grooming and a well thought out mentoring relationship between the previous
and new CEO.
Upon retirement Lawless took over as non-executive chairman of the board.
He was aware there was a risk that if he didn’t step back McCormick would
essentially have two CEOs so, to avoid this, he moved away so he couldn’t be
in the office every day.

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At the same time, he scheduled weekly phone calls and monthly catch-ups
with Wilson in order to be an effective mentor to his successor.
MKC’s succession strategy was larger than just the CEO transfer, however.
As Lawless told Bloomberg Business in 2008: “We in management …
determined early on that … we would have succession plans for all senior
executives.
“The company was performing well. We had good, solid strategies. The
younger team participated with the seasoned team in developing the
strategies. So it's not as though we brought them in late in the game.
“We identified five or six or seven individuals who were going to play senior
roles. They were part of the process and thus were invigorated.”

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JPAbusiness client succession stories
Over the years JPAbusiness has been called in to assist with numerous
business succession situations. The following examples come to mind:
Business 1 – This was a large family farming business (beef cattle) involving
a father whose wife had passed away many years earlier and two children, a
daughter and a son. The children both had their own families. The daughter
lived on the farming property while the son lived elsewhere and had his own
business interests.
The intentions of the father with regard to succession issues were rarely
discussed with his children.
The father became mentally ill and passed away. The consequences of his
Will became evident following his death, which led to the son and daughter
fighting the Will through the courts over an extended period.
All parties suffered emotionally, endured stress and were forced to pay
lawyers a lot of money, while the business itself also suffered and needed to
take on more debt as a result.
Once the Will, the restructuring and the buying each other out was complete,
the son and daughter could finally focus on rebuilding the business and
getting on with their lives.
Poor succession planning caused at least five years of uncertainty, with
the result being business stagnation and decline.
Business 2 – This was a relatively young business in the building and
construction sector (established eight years) with excellent growth and
earnings.
The founding director was leading the business and it achieved repeated
25%+ earnings before tax on turnover. The business had a small and focused
team and a strong business order book.

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The founding director wanted to sell the business to spend time with his family
and change direction to another industry sector.
The business was on the market for three years. Many potential buyers
queried the sustainability of the business’ performance, given its young age,
lack of formal business processes and systems, and team structure.
When it finally sold, part of the transaction terms included a three-year,
full-time employment requirement for the founding director to remain in
the business. This was due to the perceived risk associated with his heavy
involvement in so many aspects of the business’ operations.
Business 3 – Three brothers own a large retail business with 15 outlets, a
turnover in excess of $100 million and significant associated real estate
assets. All are aged between 70 and 80 and all continue to run the main
management and financial functions of the business.
The brothers are desperately concerned about how to transition their
business and legacy and the potential impact of possible health deterioration,
however they are procrastinating on a way forward.
They don’t have a succession plan and there are few employees in the
business and/or family members who could adequately take over the reins
held by any of the brothers. Time is ticking.

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Chapter 3: Six strategies for making
succession part of your business model
JPAbusiness Pty Ltd
If you are just starting out in
business or your business is
relatively young, you are perfectly
positioned to make succession just
another part of your regular
operations.
Here are 6 succession strategies
you can employ:
1. Develop a learning culture
throughout the business
2. Encourage open communication at all levels
3. Share your vision
4. Share the responsibility for decision making, day-to-day operational
activities and strategic direction
5. Identify key roles in the business and assess the risk of gaps
6. Identify potential leaders and provide professional development
opportunities that are linked to a career path in the business.
Adopting these strategies will help future proof your business for when and if
you decide to take up an exit opportunity.
1. Develop a learning culture in your business
Having a learning culture means you use every win and loss in your
business as an opportunity for your team to learn and grow.
This is an attitude that must come from you, as the leader, and be shared
throughout the entire staff.

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Here’s an example:
You have delivered a large order to a customer and found that only
80% of the order was delivered on time and in spec. The 20% that
wasn’t delivered on time or in spec cost the business significantly in
terms of reductions in the payment of the final invoice.
When you examine why this occurred you find that there were process
and quality issues, as well as customer communication issues that
contributed to the problem.
In this case you were the sales person and your examination has
shown what you did wrong.
Having a learning culture means you will now sit down with the other
sales people in your team, plus other relevant team members, and
discuss what you learned. Together you can come up with some
different systems and processes to avoid it happening again.
Using every opportunity for the team to learn helps you build a sustainable
business.

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2. Encourage open communication
Being able to share your wins and losses is obviously reliant on having an
atmosphere of open communication where there is no danger of
“shooting the messenger”.
This is easier to say than it is to implement, but staff need to know they can
discuss good and bad aspects of the business, risks and opportunities, in the
spirit of ensuring the business continues to do what it does well. That level of
sharing automatically protects you from people and business risks.
3. Share your vision
Having a culture of open communication will also allow you as a leader of the
business to ensure the business direction, strategy, vision and broad
business objectives are clearly and regularly communicated to the team.
This ensures your team is engaged with the culture and that it will filter
down organically through the ‘layers’ of the team. It also means any potential
leaders in the team are well aware of your succession and/or exit plan (if
you have one) and what it will mean for them.
4. Share responsibility
Imagine that a key staff member leaves your business who, for the past 10
years, has been solely responsible for managing customer relationships with
your top 10 customers. Most of what they know about these customers is
sitting between their ears and has not been shared anywhere.
In this situation you have a real problem in terms of business succession and,
hence, business value. If you were the owner and you were trying to exit the
business with that situation in the background, most purchasers would identify
it as a huge risk and would factor it into their view about the worth of the
business – and not in a positive way!
Even if you were not planning to leave the business, the loss of that staff
member and their accumulated knowledge would represent a massive blow to
your ongoing operations.

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5. Identify key roles in the business and assess gaps
As a business leader ask yourself:
• What capabilities does this business need to run effectively?
• How lean or covered are those capabilities?
6. Identify potential leaders and provide professional
development opportunities
Sophisticated corporate businesses usually have board meetings on a once-
a-month or once-a-quarter basis.
Part of their governance process involves looking at the senior positions
within the business and then looking for bright stars in the lower ranks
who have the aptitude and potential to move up.
These business people actively plan how they will nurture those ‘bright
stars’ within their business through to a point in time where they could take
over from the CEO, general manager, head of sales and marketing, and so on.
They do this by ensuring
each individual has the right
professional development
program and is involved
and engaged in the
process of creating their
own career pathway.
It should be no different
when small or mid-sized
business owners plan their
own succession strategy.

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Succession planning for mature businesses
The succession strategy outlined above is for the best-case scenario: a
new or young business that can make succession part of its long-term
planning.
Unfortunately that can’t be the case for existing businesses, but it’s better to
start late on succession planning than not start at all.
The first thing the leader of a mature business should do is sit down with
senior staff and/or family members and talk about their succession
goals.
Of course, sometimes the business leader may not know what their objectives
are. This may be because they’ve worked in the business and grown it from
scratch for 30-plus years, and it has been all-consuming. Pondering the future
just hasn’t been a priority.
In that situation it’s wise for
the business leader to sit
down with an advisor first, to
tease out what might be
reasonable lifestyle,
succession and business
objectives, before meeting
with senior staff and/or
family.
Just what those objectives
turn out to be will, of course, be influenced by things like health, lifestyle
expectations, financial and other commitments related or unrelated to the
business, and tax considerations.
Once your objectives are established, share them openly, to the extent
they are relevant, with senior people in your business that you count on for the
business’ sustainable performance, family members with an interest in the
business, joint shareholders, and so on.
That discussion and ongoing open communication will lead to a plan about
how succession will happen in your business.

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Chapter 4: How to use our Business
Succession Scorecard
JPAbusiness Pty Ltd
In this chapter you will find our Business Succession Scorecard which asks
you to rate your preparedness for succession based on several key
parameters:
• Leadership
• Decision making
• Operations
• Culture
• Communication
• Forced exit
• Business transition.
The final items in the scorecard – Forced Exit and Business Transition –
are really the acid tests for determining the sustainability and value of
any business i.e. will it survive without me, and let’s see what the market
thinks!
If you have future proofed your business by having a well thought out and
implemented succession strategy, the business should thrive even if you’re
not there, and the market should reward you.
You can use the checklist on the following pages or download a copy from our
website.

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©"2016"JPAbusiness"Pty"Ltd" This"work"is"licensed"under"the"Creative"Commons"Attribution"4.0"International"License.""
ABN"62"150"534"099" To"view"a"copy"of"this"licence,"visit"http://creativecommons.org/licenses/by/4.0/."
JPAbusiness"Business"Succession"Scorecard"
s a business owner, company director or board member, you can use this scorecard to assess
your business’ succession preparedness by answering the following questions on key criteria
which demonstrate business succession planning.
Choose the answer that most closely matches your business, tick the related check box and tally up
your score. Make sure you answer the questions honestly – your business value and future depends
on it.
A
Business'
succession'
themes'
Rate"your"preparedness"
Your"
score"
Leadership'
What is the strength
and diversity of
leadership, planning,
direction, strategy,
vision, drive and
motivation in your
business?
These functions are shared by two or more people,
including you, and there are also documented business
plans, budgets and targets that are shared, managed
to and monitored regularly (at least monthly) within
the business. ! (1 point)
!These functions are shared by two or more people,
including you, although not documented or monitored.
! (2 points)
You are solely responsible for at least 75% of these
key business functions. ! (3 points)
Decision'making
Which of the
following best
describes how day-
to-day and important
decisions (relating to
cash flow, treasury,
sales, team
performance, quotes,
estimates, tenders,
recruitment and
people management)
are made?
There are well-established delegation and management
processes in place that provide individual team members
with responsibility for their functional area. ! (1 point)
!
Decision making is reliant on a couple of key senior
people with few established business systems and
processes. ! (2 points)
Over 75% of decisions are made by you alone. ! (3 points)

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Business'
succession'
themes
Rate"your"preparedness
Your"
score
Operations
Which of the
following best
describes who is
responsible for
operational functions
and tasks
undertaken in your
business?
These functions are shared by two or more people,
including you, and there are effective business systems,
processes and monitoring to ensure individual team
members achieve the desired outcomes. ! (1 point)
!Operational performance is reliant on a couple of key
senior people with few established business systems
and processes. ! (2 points)
Over 75% of operational activities are conducted
by you alone. ! (3 points)
Culture
How well does all the
team (from the
lowest paid to the
highest paid)
consistently
understand and
engage with the
vision, direction,
purpose and
business' plan and
requirements?
There is a documented business plan, budget and
forecasts that are actively updated by a large number
of team members. There are also well established and
clearly communicated and tracked targets associated
with these plans. ! (1 point)
!
Plans and business direction are largely set by a small
number of senior managers (including yourself and
at least two others) and communicated periodically
in a structured way. ! (2 points)
You set the plans and direction of the business. The
business team, including other shareholders or family
members, and the various business functions operate
independently of these plans, focusing on conducting
day-to-day activities. ! (3 points)
Communication
How do you
communicate your
business culture to
your team?
There is open communication and an achievement-
driven culture where employees regularly and actively
identify risks and issues important to the team
and business achieving its goals. ! (1 point)
!Plans and business direction are known by a couple
of key people and are communicated periodically in a
structured way. ! (2 points)
You rarely communicate your business plans with
your team. ! (3 points)

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Business'
succession'
themes"
Rate"your"preparedness" Your"
score
Forced'exit'
If you died or were
incapacitated
tomorrow, what
would be the likely
impact on your
business?
There would be little impact on the business earnings
in the ensuing 12 months (no more than 10% reduction)
and minimal senior management team changes. ! (1 point)
!
The business would suffer a decline in earnings in
the ensuing 12 months of 20% or greater and there
would need to be an ownership restructure and/or
recruitment of additional senior management team
members to replace you. ! (2 points)
The business would probably cease operating as you
alone are responsible for at least 75% of the key
business functions. ! (3 points)
Business'transition'
Imagine a
circumstance in
which you are
looking to acquire a
business and you
identify one just like
the business you
currently own.
Knowing your own
level of involvement
in your business, and
the risks and issues
associated with that
and the business,
what transaction
acquisition terms
would you seek to
negotiate during the
purchase to manage
transition risks?
A three-month transitionary arrangement from sale
completion, where the current owner is required to
be available to advise on aspects of the business
including key customers, relationships, broader
market issues, and the transfer of all senior staff
(subject to interviews and satisfaction of all parties
prior to completion). ! (1 point)
!
A 12 to 36-month full-time employment arrangement
from sale completion, where the current owner is
required to work in the business and also transition
knowledge and relationships. A 25% discount to the
purchase price (relative to current market multiples
and values) and/or a percentage of the sale purchase
price paid 'at risk' (i.e. contingent upon the business
achieving certain criteria post a completion) to
account for risks associated with the business
being heavily reliant on one person. ! (2 points)
You would walk away from the opportunity to
purchase the business as it is too risky to buy
based on risks associated with the business
being heavily reliant on one person. ! (3 points)
Your'total'score:" !

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What your score means
If you scored 7 your business succession plans are well progressed and developed – keep focusing
and fine-tuning them.
If you scored between 8 and 11 your business succession plans are evident, however they need
some serious focus and attention. Seek advice to identify the areas of deficiency and focus closely on
addressing these.
If you scored 12+ your business succession plans are likely to need some work. You are potentially
diminishing the value and value potential of your business by not acting. Seek advice on how best to
address this issue.
If you would like to learn more about the business advice, valuation and
transaction services offered by the team at JPAbusiness, visit
www.jpabusiness.com.au or call 02 6360 0360.
Please"feel"free"to"post"this"template"on"your"blog,"or"email,"tweet"and"share"it"with"your"network.""

Succession Planning - How to future proof your business

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