Leaving a Legacy: Ensure Your Business Survival with a Succession Plan
“A leader’s lasting value is measured by succession.” (John C. Maxwell)
Succession planning is preparing for the future of your business, ensuring the people and resources are available for its ongoing success beyond the lifetime of the current key players. It is especially critical in small businesses where the loss of a key person can bring the business to a sudden halt.
A formal succession plan details exactly what happens if the owner or a partner or another key individual in the business is no longer there, for both expected and unexpected reasons. These reasons range from the sudden or unexpected death or disablement to a planned and expected exit, for example, due to retirement.
Some of the options for succession include grooming the owners’ children and heirs to take over the reins; training loyal employees to take over key roles; bringing in high level expertise from outside the company; or selling the stake in the business to family, to the other partners, to a loyal employee or a group of employees, or to an outside buyer.
Why is succession planning so important?
Succession planning is crucial to ensure the viability of the company over the long term, and to unlock many benefits in the short term.
A good succession plan can secure a business owner’s legacy, and their retirement or their family’s well-being, instead of the business simply becoming one of the estimated 70% of inherited businesses that don’t survive.
It also ensures that what happens after the loss of a key person is planned and structured, rather than forced on the business by circumstance or by the courts.
A clear and fair succession plan can also:
- Prevent confusion and uncertainty after a sudden and unexpected loss
- Avoid family disharmony and conflict between heirs and employees
- Allow for continuity and a smoother transition, reducing the impact on the business and its stakeholders
- Ensure that successors, whether a promoted employee, a newly appointed manager, or a son or daughter or another family member, or a buyer, are qualified, skilled, and groomed to take over
- Provide opportunities for employee career growth internally
- Ensure you can get fair value if selling the business or a stake in it
- Prevent the forced sale of assets to settle the estate.
How to plan
Succession planning involves a combination of financial planning, estate planning and wealth planning and therefore requires the expertise of qualified advisors including your accountant.
The details of a succession plan depend on a range of issues, such as the ownership structure of the business, whether succession involves handing over to the next generation or an employee or an outside buyer, and the unique financial and legal aspects of the business.
As just one example, many businesses are sold to family or staff who may not have cash up front, and this requires special planning, for example, staggered payments over time and a slower transition.
However, here are a few common characteristics of a successful succession plan:
- All stakeholders are included in the planning and decision-making process
- Suitable, practical and gives the best outcome from a family and business perspective
- Documents and puts in place formal mechanisms and clear procedures for governance, conflict, and dispute resolution
- Contains a short-term emergency plan for each key position
- Details a full long-term succession plan for each key position
- Considers the financial, estate duty and tax implications of the decisions
- Takes into account legal compliance and commercial and practical considerations
- Ensures continuity by providing essential liquidity through, for example, key man insurance, life insurance for the partners and contingency policies
- Creates a viable and sustainable business operation now and for the future through modernised business systems, clearly documented and automated processes, fully trained people, and accurate up-to-date financial data – all of which will add immense value to the business now and in future.
If you consider for a moment what your death or retirement could do to the business’ success and to your family’s livelihood, you will realise how important it is to put in place a well-structured succession plan.
It will ensure that your time, effort and investment to grow a business in South Africa is not lost in a statistic, but rather that your legacy lives on, surviving beyond the current key players into the next generation.
Your Tax Deadlines for November 2020
- 6 November – Monthly PAYE submissions and payments
- 16 November – D-date for taxpayers filing online
- 25 November – VAT manual submissions and payments
- 27 November – Excise Duty payments
- 30 November – VAT electronic submissions and payments
- 30 November – Company Provisional Tax Payments where applicable.
SMMEs: Preparing for the Second Wave
“Forewarned is forearmed” (Samuel Shellabarger, Prince of Foxes)
The daily Covid-19 infection rate has decreased considerably over the last month or so. South Africans have found a way to live with the risk of infections and have in the recent past become generally more active. This has increased the fear that there might be a second wave of high Covid-19 infection and mortality rate. Western Cape government, for example, has warned a resurgence is highly probable considering the second wave of mass infections sweeping across internationally.
Explaining why it is still important to be cautious against Covid-19 for the next few months, the National Institute for Communicable Diseases (NICD) warns that “Coronavirus is not going away any time soon”.
“We are seeing second waves in European countries three to four months after their first wave. We don’t know if this will happen in South Africa, but it is possible, and even likely. Also, we know that once you get Coronavirus you are not immune from it for life, and you could become re-infected in the future,” it says in a statement on its website.
SMMEs, like the citizens, have to protect themselves from the possible re-emergence of high numbers of infections, which have crippled a considerable number of them earlier this year.
Based on advice from a collective of experts, here are some tips for SMMEs looking to prepare for the possible second wave of high Covid-19 infection rates:
- General working conditions and workplace policies have to be reviewed
According to the Centres of Disease Control and Prevention in the US, the working conditions and policies must be reviewed in order to best assist companies in protecting themselves against the full blow of the virus. Companies are advised to “examine” working conditions and policies in order to protect employees, and ultimately themselves.
“When possible, use flexible worksites (e.g. telework) and flexible work hours (e.g. staggered shifts) to help establish policies and practices for social distancing (maintaining distance of approximately 6 feet or 2 meters) between employees and others, especially if social distancing is recommended by state and local health authorities,” said the organisation.
- Consider remote working more as an option than a forced situation.
On the local front, Accelerate CEO, Ryan Ravens, recently spoke on a survey conducted on remote working due to Covid-19.
He told radio station Cape Talk, that “increasingly, it (remote working) works better for companies as well as employees. I think there has always been a resistance by our very traditional corporates because they felt employees would not be as efficient and/or wouldn’t deliver more, but I think that notation has been turned on its head. Employees have actually showed up and shown that they can work far better when working from home.”
- Inventory and stock Consider stocking up on supplies and raw material reasonably, knowing that replenishing them can’t be guaranteed ahead should the stricter lockdown regulations be reimplemented by government. The stockpiling process should be ideal to each business, considering aspects like expiration dates in certain goods, for example, and access to market. Careful management of the inventory is necessary.
- Insurance
The importance of having quality insurance in general can never be overstated, and the same thinking prevails in business. Policyholders are encouraged to relook at the fine print of their business insurance policies to refresh their memories and for better understanding, bearing in mind the unusual circumstances the world is operating in. Insurers on the other hand are encouraged to “pick-up the pace”. However, the global scourge is seen as a challenge that should motivate insurers to put customer-care first.
A jointly authored blog by Price Waterhouse Cooper’s global insurance advisory leader, Abhijit Mukhopadhyay, and leading practitioner in “customer experience”, John Jones, expounds on this narrative. The two expert authors express that “Policyholders will want to know their claims will be paid. But it doesn’t always work out that way — especially with a pandemic, which is not generally covered by insurance (except possibly through costly business continuity insurance). Customers are bound to be confused and anxious, and they need to feel that their questions and concerns are addressed with honesty and empathy.”
- Understand the seasonal cycle of business Businesses prepare and operate with attention to their annual business cycles. They are advised to prepare knowing that the unidentified length of the possible viral resurgence might overlap their business season, i.e. quarters and other periodic demarcations of business.
- Minimise spending SMMEs are advised to minimise spending in order to have as much in the piggy bank as possible. Reserves will be critical in a period where there is minimal income. Careful budgeting could be the possible rabbit out of a hat for successful businesses during the dreaded possible re-emergence of stricter lockdown restrictions.
- Get familiar with the government’s Covid-19 Relief Fund for SMMEs
This could be critical for SMMEs. Understanding the qualification process and benefits described by the Department of Small Business Development (DBSD) can be the determining factor between relief aided continuity and capitulation. The current amount given to businesses that qualified for the Covid-19 Relief has eclipsed R500 000, according to the department.
The department supposedly updates information related to the relief fund on its website for entrepreneurs to peruse, according to the set business classifications of the SMMEs.
