July 14, 2021

Succession planning: what you need to start thinking about today 

Want to maximise the chances of a successful transition from your professional services business? Then you need to start work on a succession plan today. Here’s how. 

Benjamin Franklin’s oft-quoted adage, “If you fail to plan, you are planning to fail”, could well and truly have been coined in reference to business succession. 

“Partner-led professional firms take a long time to build,” says Kerry Boulton, CEO of The Exit Strategy Group, an Australian-based consultancy with extensive experience in the professional services sector. “You need to put a succession plan in place so you have an ongoing viable operation.”  

NAB Customer Executive of Professional Services Andrew Loveridge agrees, adding“Succession planning is key in any organisation. That’s why it’s incredibly important for professional services firms to get it right – for the clients they advise but also themselves.” 

Effective planning can help a firm guarantee its long-term survival; preserve wealth and harmony; reduce or eliminate estate and income taxes; and retain control of the succession process, rather than having it transferred to a third party.  

For all these benefits, it’s still something that business owners too often overlook. In Australia, where family businesses account for around 70 per cent of all enterprises, a 2018 KPMG report found that 54 per cent of family businesses had no retirement plan for the current CEO or managing director and no documented strategy for succession.


Too busy to plan 

It’s often the case that “everybody is too busy working ‘on’ the business” to focus on the future, says Boulton. “Most people are up to their armpits in alligators in the day-to-day stuff.”  

Boulton could well be talking about law firms, where the demands of running a busy practice often keep principals from planning their eventual exit. Sam Coupland, a director of Sydney-based legal advisory firm FMRC, says that many lawyers start to think about succession when their lease is due for renewal – “They pause and take stock as to whether they’re keen to go around again for another five-plus years.” 

Locking in an exit plan in advance will provide more options. Owners should allow 18 months to two years to finalise a sale or merger, says Coupland. Succession – transferring ownership to a new owner – requires a greater investment of time. “If your timeframe is two or three years and you don’t already have internal successors, the likelihood of finding some is pretty remote,” he warns.  

The questions you must ask 

When it comes to actually exiting a business, there are four main strategies available to business owners: liquidation; closure; sale to a direct buyer or a merger; and succession, either to an employee or other interested party or to a family member.  

No matter the route you take, succession planning is a complex process, with Boulton also emphasising that it requires a significant and ongoing investment of time. Steps include, but are not limited to, identifying likely successors, valuing the business, understanding tax implications, and reviewing contingency planning, timelines and the business structure.  

“If there are multiple principals, do they have an equity and/or shareholder agreement which identifies their roles and responsibilities and the steps to follow if they buy out an exiting party?” Boulton asks.  

“What’s the method they are using to value any equity interest and terms that might apply to any payment? Is there a buy/sell agreement that deals with planned and unplanned exits? Can they put in place insurance policies that are triggered by certain events?” 

 For Boulton, these issues are better dealt with “when there’s no immediate need for it because it can be done without any self-interested agenda”.  

When business becomes personal 

On a more personal level, succession planning often requires asking difficult questions about one’s career ambitions, retirement and mortality. In family-held businesses, extra layers of emotion and interpersonal politics can add to the complexity of planning for the future.  

Yet a failure to prepare opens a firm to unwelcome and unnecessary risk and can lead to a crisis in the case of an unexpected event.  

“Sometimes people have a falling out. They’ve decided they’ve had enough, and they want to move on,” says Boulton.  

“If something happens to one of the major partners or principals in the business – it could be a health event or something else – and they have to step out of the business, that’s a real hurdle.” 

Finding the next generation 

If your exit strategy involves an anointed successor, developing the next generation of leaders who will eventually take the reins of a business is vital. “When so much equity, knowledge and relationships are tied up in the principals and senior leaders in professional services firms, there’s a real risk when those people move on,” Loveridge points out.  

Boulton agrees. The challenge, she says, is to make sure that knowledge and experience is passed on to potential successors. “If education of leaders is overlooked, you’re devaluing the business. You need everybody – including future leaders – to be on the same page.”  

That advice – all being on the same page – holds equally true for whatever exit strategy you ultimately choose if your succession journey is to be a successful one, Loveridge says. “The great news is there are tried and true approaches to succession planning and, when approached calmly and ahead of time, there’s every chance of success.”