More than half of companies today cannot name a successor to their CEO should the need arise. A study conducted by the Canadian Financial Executives Research Foundation (CFERF) found that, “only 40% of Canadian private companies have a clear business ownership succession plan in place.” This lack of planning could be very problematic for the person leaving as well as the person expected to fill those shoes. Though many Canadian companies should be preparing for a significant shift in private company ownerships, they are not. The critical issue of succession planning is still taking a back seat to billable work. Indeed, retirement can mean losing key members of an organization, but key employees can leave at any time, with potentially devastating results if a succession plan is not in place.
An old Chinese proverb says, “The best time to plant a tree was 20 years ago, the second best time is today;” Canada Business Network advises that succession planning should be started five years before the CEO plans to retire. Organizations without a succession plan run a tremendous risk of not having the knowledge and/or infrastructure in place to drive the business forward in the long term. Being proactive ensures up and coming talent have sufficient knowledge and experience to step in and assume the full range of responsibilities; have the opportunity to build their leadership abilities and practice management, business development, marketing, strategic planning, and client services. It will also enable you to plan for any infrastructure adjustments that may be necessary.
Other risks or consequences of not having a succession plan in place include:
- owners failing to realize the full value of their business during the exit process;
- alienating potential successors (be they senior staff, family, or outsiders);
- putting the business at risk;
- increased difficulty in obtaining long-term financing if lenders perceive inadequate business planning;
- naming a successor who lacks personal drive, commitment, skills, training and education; and,
- owners taking a significant tax hit.
The importance of tax planning is well established. One participant in the CFERF study aptly noted that every deal has three parties: the buyer, the seller, and the government. One of the key recommendations from the study related to tax planning was to, “Make sure that the tax people have their role, but they don’t drive the process.” Without a well implemented succession plan that is strategically integrated with the business processes, tax issues tend to take a pivotal role rather than becoming the piece at the end of the transaction once all the other key decisions are made.