SMEs Must Have a Succession Plan

SMEs Must Have a Succession Plan

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The recent news that national carrier South African Airways has lost more than half of 14 board members, including its CEO, shows why an effective succession planning strategy is a crucial part of any company’s risk management plans.

For smaller businesses especially, this is even more critical, as without a succession plan, the business may be forced to close down if an effective plan has not been implemented.

Valerie Hayter, managing director at Lireas, the strategic investment company of Hannover Re Group Africa, says she believes succession planning is one of the biggest risks facing entrepreneurs and other investors in these businesses.

Failure to plan could mean unemployment

Almost 70% of all South African workers are currently employed by small businesses with fewer than 50 people, highlighting the importance to the economy of sustaining this segment of the market.

Failure to address succession planning at an early stage in the development of the business can have dire consequences later on – not just for the business owners, but all stakeholders, including employees. Hayter believes it is vital to give consideration to this topic as soon as possible.

Choosing a successor

In assessing the ideal successor, the small business owner should bear in mind that the attributes of the person who started the business may be quite different to the person who can take it to the next level.

Hayter elaborates, “Continuing the business successfully may need a person with different qualities and skills from the original founder. Depending on how big the business has grown, a more ‘corporate’ approach as opposed to an entrepreneurial mindset may now be required.

“Identifying the right person for this job isn’t easy, especially if the owner-manager started the company. Relinquishing control and responsibility for their ‘baby’ is a real challenge, albeit that the owner manager has already made the decision to exit.”

The company could be devalued

She says the owner-manager also risks not being paid out the full value of their shares if an appropriate succession plan hasn’t been put into action. “In extreme cases where no succession has been put in place, the business may not be worth anything.

“The extent to which succession has been considered and is already in place plays a large role in determining the fair value of the company, as an incoming shareholder would not necessarily pay full value for their shares unless the immediate future of the business was properly secured.”

Creating a succession plan

  1. Establish a time horizon to exit the business.
  2. The owner-manager must identify a person within or external to the business who can be groomed to take over.
  3. An alternative solution to succession planning may be to merge two companies together.
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