Research suggests the majority, 61%, of UK SMEs are unprepared when it comes to succession planning. Whether it’s the threat of a key employee leaving. Or the transfer of ownership. Most SMEs have no tangible succession plan. This is a huge threat to their businesses. Furthermore, when it comes to an owner of an SME exiting their company, most aren’t realising the true value of their business.
SME succession planning | Intro
The recent business environment has created a rise in new startups, micro-businesses and SME’s. There’s approximately 3.4 million SMEs in the UK. This number is likely to continue to grow.
SMEs are defined as a business with less than 250 employees. These small and medium enterprises (SME) make a significant contribution to the UK economy. However, failing to create succession plans, as the report suggest most are, is a huge risk. Both to the business. Perhaps to the wider UK economy also.
What is succession planning?
If you’re asking yourself, “what is succession planning”? Succession planning can be defined as:
- Planning ahead for a key figure within the business leaving.
- Planning the exit strategy of the business owner.
The Aldermore Future Attitudes report found 61% of SME’s have no succession plan in place, to ensure the business doesn’t suffer if a key person left.
Similarly, according to Legal and General, 58% of family run businesses, also have no clear succession plan for the owners retirement or exit.
Succession planning for key staff leaving
Every organisation has key people within them. Who, if they left, would cause the business problems. However the loss of a key member within an SME, has the potential to hit the business much harder, than in larger companies. As Carl D’Ammassa, Group Managing Director of Business Finance at Aldermore, says:
‘It is concerning to find that the majority of SMEs do not have any succession plans in place despite being conscious of the adverse consequences that may result should crucial employees leave the business.”
Planning for the loss of key staff is important
The current fierce competition to attract top talent, has led to the recruitment process becoming longer. The loss of key personnel for a sustained period of time can put real pressure on the business. Particularly within SMEs, with fewer staff to pick up the reigns. As a result businesses struggling to recruit for the vacant role, may become increasingly desperate. This can lead to poor hiring decisions. In turn, a revolving door of expensive mistakes. Additionally it could lead to paying over the odds to recruit someone just to take the pain away.
Creating a succession plan for key personnel ensures continuity should they leave. It also benefits staff retention and your employer brand. Training and development plays a major role in both. Those being nurtured feel valued and motivated by their career development. Furthermore your company’s training and development program makes you a much more attractive employer, when you recruit externally.
Finally, companies with a clear succession plan for key employees, including the owner, are more attractive to potential buyers. If you wish to sell your business, now or in the future, succession planning will increase its value.
Planning for the exit of a SME owner
In my experience, some SME owners feel nurturing a key team member to be able to fill their own shoes is a threat to their business. To some extent I agree. Afterall, training them to become capable of running your business, what’s to stop them setting up as a competitor? Equally you may not want to provide full disclosure of the commercial aspects of the business.
This is one of those classic cases where there’s a risk attached to developing future leaders as well as not. Only you can decide which risk you take.
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Well into a three hour meeting, I said
“we should have started your succession planning three years ago”.
He replied,
“I did!”
We put the success into succession planning for an SME owner
I would suggest however, if an individual is going to leave, setting up in competition or to join a competitor, they will regardless.
Furthermore I’d suggest someone with future aspirations of running their own business, would find the option of taking over ownership of an established one they know, far more attractive than setting up from scratch.
In conclusion, nurturing future leaders becomes less of a threat than not.
In my opinion the benefits outway the risk of not.
Succession planning for an owners exit
Succession planning for an owners exit is far more complex than for a key member of staff leaving. The process becomes more complex still, if you haven’t created a succession plan by identifying a future leader. Generally, if your exit strategy is to sell, then the complexity of the process increase further.
Quite often the case with SMEs, the business is owned, managed and ran by one main, or a small number of, shareholders. If all shareholders are wanting to exit at the same time, again this adds further complications, unless the owners exit strategy has been well planned, agreed and documented previously.
Put it this way. If you wake up one day and think “I’m going to retire this year”. You could be left disappointed and frustrated.
As a rule of thumb, succession planning for an SME owners exit, can take in the region of three years. Of course it can be done sooner. However if you want to realise the true value of your business, and efforts creating and running it, planning ahead will deliver you far better results and financial rewards.
If you’re exit strategy is to sell your business, as an MBO or on the open market, things to consider include:
- Identifying future leaders in the business
- Training & Developing future leaders
- Valuing the business
- Ways to increase the value and attractiveness of the business
- Packaging up the business to sell
- Creating a transfer of ownership strategy and managing a robust handover
- The emotional impact of walking away from the business you’ve created.
Final word
By the very nature, and structure, of SMEs they operate with a small headcount. Often with a flat management structure and without the various departments found in larger companies. As such SMEs simply don’t have the same resources of larger companies.
Where there’s less resources, there’s usually less time. Often meaning little time for an SME owner to focus on much more than the day to day challenges of running a small business. As a result, when it comes to succession planning, its likely to get pushed down the priority list by SME owners. Certainly the results mentioned above would suggest this.
In conclusion, most SME owners recognise the importance of succession planning. However they don’t have the resources or time to commit to it.
Above all, by ignoring the importance of succession planning, you not only risk losing good people, you risk devaluing what is most likely to be your best asset.
To discuss how we can help you create a robust succession plan, contact us to arrange a confidential meeting.