Entrepreneurial Succession : Why and How to Plan Succession?
Small and medium-sized enterprises (SMEs) are the heart of the Canadian economy. Yet, in Canada, less than half of SMEs currently have a succession plan.
While every organization will, at some point, have to deal with business succession in order to ensure its sustainability, the idea of succession planning is quite simple: it involves the considerations and processes related to the preparation of the transfer, sale or cessation of a business from its current owner(s) to a successor(s). Succession may involve a transfer to family members, employees or outside transferees. Successful succession results in the continuation of the business.
The many factors that need to be considered in order to succeed in a succession project are complex and difficult, as these are usually emotionally charged.– Senior Partner, PPTA Financial Services
Regardless of the size of the organization or the industry in which it operates, there are mixed feelings about succession planning. While many executives recognize that a good succession plan is essential to ensure the continuity of their business, there is a common fear, or at least reluctance, about the upcoming change. Indeed, the idea of planning a succession project is one of the most difficult and complex issues that leaders are confronted with. For most companies, it is also a very personal issue. In fact, one entrepreneur I greatly admire says, “It’s kind of like your work continues”.
As a result, many owners may be reluctant to consider succession planning for their business. However, succession planning is critical: not only is it a fundamental determinant of effective transition parameters, it also has a significant impact on the viability of the business after the transition. To ensure a successful succession plan, the transferor(s) must first answer a critical question: why? Is it to sell in order to perpetuate the business, its name and its values; to cash in on the need for retirement; to slow down and take a gradual retirement; or to set up a succession plan to better position the business in the medium/long term? These questions prevail and will determine the modalities of succession planning later on.
What is Succession Planning?
Succession planning covers issues related to the procedures necessary for a successful transition, including legal and financial aspects, psychological factors, succession leadership development, and short, medium and long-term exit strategies. Overall, it is the process by which executives plan for the future transfer of ownership and/or management of the company.
While planning is a difficult process, some elements are more complex than others. For example, recent research shows that business valuation has been identified as a barrier for 48% of business leaders in Canada at the time of business succession (Wayland, 2019). Therefore, a common agreement on the value of the business is essential to a successful transition between each party, as are the legal and juridical terms that frame the transition. Furthermore, the alignment and definition of expectations, objectives and vision between the two parties must be clearly established to ensure a confident transition.
That being said, it is the search for a suitable successor that is generally identified as the main obstacle to the transfer of the business. To address this issue, a carefully thought-out succession planning process will help to ensure proper leadership development, including the profile of the successor(s) and the development of managerial skills. The following is an outline of the framework.
Determining Factors for Identifying and Developing the Next Generation of Entrepreneurs
It is possible to identify four key elements to consider when retaining and developing entrepreneurial succession, namely:
- Leadership focused on the company’s sustainability
Obviously, identifying the right succession requires recognizing the individuals for whom the company’s sustainability is a priority, even a core value. The success of a company is determined by the managerial skills of its leaders and by their strategic leadership, which is based on the involvement of the right people in making critical decisions for the organization. Therefore, it is essential that the company remains in the hands of leaders who are not only able to understand and implement the vision of their successors, but also to read and adapt to changes accordingly.
Leaders are known for their intuition and ability to read the business environment around them. The entrepreneurial instinct that allows leaders to define their plans and objectives according to the evolution of the economic environment is a critical element for all businesses. In this sense, entrepreneurship can take many forms, each adapted to specific contexts. In general, two major factors determine the preferred style of entrepreneurship: strength and direction.
First, entrepreneurial strength indicates the extent to which an individual is willing to expend the energy necessary to achieve their goals. People with entrepreneurial strength are proactive, results-oriented, self-confident and do not hesitate to take risks in order to achieve their entrepreneurial goals. They are in control of their environment and persevere despite difficulties. They are able to navigate in stressful and ambiguous environments and they invest a lot of effort to create a network of contacts that will allow them to carry out their projects. Entrepreneurship direction, on the other hand, indicates the extent to which an individual is motivated to implement an entrepreneurship project. People who demonstrate a strong entrepreneurial direction are optimistic and visionary. For them, entrepreneurship is the way of life they favour above all else. They like to stand out and want to innovate and offer new products or services that will meet the needs of their customers.
While the key to a good succession is to find the entrepreneurial profile that meets the needs and mission of the organization, it becomes crucial to evaluate the succession according to the main characteristics that distinguish the different types of entrepreneurs. This is done by looking at all the important aspects of entrepreneurship, namely the conditions for success, the ability to take risks, the motivation and interest in becoming an entrepreneur, the personal characteristics that are necessary to carry out such a project and the concrete intention to start/be in business.
- Alignment with the company’s values and culture
Organizational culture is rooted in the values that underlie the management of an organization. A well articulated and widely communicated definition of a company’s culture serves as an anchor to guide behaviour and decisions fundamental to the conduct of business. The leaders of a company play a critical role in defining, adapting and transmitting the values that guide action and interaction in an organization. An effective leader demonstrates and practices the articulated values to encourage all employees to do the same. In this sense, valuing and aligning with the elements of the company’s culture are central to identifying the next generation of leaders. Not only do they contribute to harmony during the transmission process, they also ensure the continuation of the company in line with the mission and values inherited from its founders.
- A well-structured succession management process
A successful business succession requires careful planning and, most importantly, time! Indeed, when companies do not establish a defined succession plan in advance, they may find themselves without viable candidates to take over and lead the company into the future, with necessarily disastrous consequences. Of course, there are a number of factors that are equally important to consider before, during and after succession planning. This is why companies are encouraged to devote sufficient resources and attention to business succession to ensure their long-term survival, growth and prosperity. To guide organizations through this process, we offer a brief guide to business succession planning. The figure below, based on a report released by the Ontario Ministry of Economic Development, Job Creation and Trade, outlines considerations for the context, planning and potential outcomes of business succession.
Finally, for the past three years, I have been closely following a business succession planning process. It can be a steep road, with questions, fears, second-guessing, and days of wondering if you’ll ever find the right formula. However, with the right resources and support, it can lead to promising continuities. For leaders and future leaders who are about to experience entrepreneurial succession, you must take all the time you need to ensure that your vision, values and expectations are aligned with those of your partners. Identify and clearly define your objectives: what are you really targeting, and above all, why? Finally, surround yourself with the right people who understand your reality and who will be able to listen to you and support you throughout this process of yours; your life project.
I would like to thank the entrepreneurs who took a few minutes to share their personal experience for the writing of this article. A very sincere thank you for your valuable advice.
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Shore Consulting. (2018). Study on Succession Planning for Small and Medium Enterprises prepared for the Ministry of Economic Development and Growth https://www.onebusiness.ca/sites/default/files/Study-on-Succession-Planning-for-SMEs-EN.pdf
Wayland, S. V. (2019). Saving small business: the urgent need for improved business succession planning and how immigrant entrepreneurs can help. Papers in Canadian Economic Development, 18, 57–57.