Succession planning is vital to the long-term survival of any organisation. Unless businesses make a conscious effort to develop internal talent and identify potential successors to key personnel, a sudden departure at C-suite level can cause major disruption, not to mention loss of revenue, and in the case of smaller companies it can even lead to the sale of a business. Vital though it may be, in recent years many Irish companies have been so busy simply trying to survive from day-to-day that any longer- term planning was put on the back-burner. However, with businesses now beginning to return to profitability, and asset values and tax rates on the rise, succession planning is now firmly back on the business agenda. Brian Walsh, director of financial planning at Davy, says succession planning has become a “huge issue” in the SME sector over the last two to three years.
Many small companies are owned by an older generation who are now starting to think of retirement, either by means of a trade sale, or passing on the mantle to one of their children. However, handing over the reins to a son or daughter can present challenges if they don’t have the same business ability as their parent. “It’s a bit like football,” Walsh says. “Just because you played for England doesn’t mean your son is going to play for England.” Another alternative is to let an external successor take over the running of the business, but Walsh believes that a clean break is often preferable. “In my view it will ultimately lead to a trade sale,” he says. In some cases, if the child lacks the necessary experience, they could decide to spend time training away from the family business in an outside company, before coming back and working their way up to the board. However, the risk is that the child goes away to gain experience and never returns to the family business. “We’re seeing a bit of that with emigration, so it’s a challenge for the parent,” Walsh says.
John Byrne, partner at the accountancy and business advisory firm Crowe Horwath, has also noticed a lot more enquiries about succession planning on the SME side. “Owners have kept the business afloat and they’re now going into growth,” he says. “They’re able to plan for the future a lot more actively.” He says that if a member of the next generation is not ready to take over the business, a key executive within the firm may sometimes be selected as the successor. However, retaining key personnel in situations where the owner is approaching retirement isn’t always easy because of the uncertainty that often comes with the territory. “A lot of larger organisations can offer defined career paths, and more defined benefits,” Byrne explains. “So therefore somebody in their 30s may think, ‘If I make a move now [from an SME to a larger firm], I’ll have a good career, whereas if I stay here I’m not sure what might happen. The business may be sold.’” He says that in such cases, the owner sometimes decides to give key employees a small stake in the business, perhaps 10-15 per cent, to incentivise them to remain with the company. By ensuring that vital staff members will benefit even if the owner decides to go down the trade sale route in the end, SMEs can succeed in holding on to a strong management team.
Byrne notes that one of the key differences between succession planning for SMEs and large corporations is that bigger firms tend to have much more formalised governance structures, for example meetings with the entire board involved, whereas smaller companies take a much more ad hoc approach.
One of the downsides, though, of having such formal processes in place is that succession decisions can take longer to make. In a global succession planning study carried out by executive search firm Merc Parters last year, 80 per cent of senior executives surveyed said that it would take at least 12 months to find a suitable replacement for them if they were to leave. And even after a key position is filled in a large organisation, there can be fallout. Unsuccessful candidates often end up leaving within six months or a year of a new managing director or chief executive being appointed, Byrne says.
In order to have the succession process managed in an objective way, large companies not only task human resources staff and senior executives with assessing their “bench strength” for key roles, but now often draft in the help of external consultants too. John Glenny, partner at Merc Partners, explains that they are often brought in to assess the talent pool available. Unlike in SMEs, where the heir apparent is often obvious to everyone in the business, bigger organisations very rarely have one person earmarked as chief executive-designate. “For C-suite positions the key decision makers may want to see a field of candidates, comprised of internal and external candidates,” he says. Another trend organisations need to prepare for is the rise in executive mobility which, according to the Merc study, is set to increase, meaning that the average length of time served by senior executives will fall. In order to prepare for the prospect of multiple chief executives within the same decade, a strategic succession plan is set to become more essential than ever.