South Africa, 08 July 2021: The global economy was flung into a state of uncertainty with the advent of the novel Coronavirus. For the small-to-medium enterprises (SMEs) who managed to survive the initial stages of the pandemic, continued pressure due to the extended lockdown and the increased risk of illness served as a wake-up call to the reality that succession planning is an important determinant of business longevity, particularly in turbulent global circumstances.
This is the perspective of René Botha, Stellenbosch Area Manager at Business Partners Limited. “The sudden onset of the pandemic has opened our eyes to the fact that things can change in a second and highlighted the importance of formal planning within a business. Succession planning helps with risk of sudden death, early retirement, or dread disease. It serves as a kind of ‘human resource insurance,’ where SMEs make plans to thrive even if the unthinkable were to happen,” she explains.
Just a few years ago, Deloitte conducted a study that showed that while just over 85% of business leaders believe that leadership succession planning should be a priority, only 14% believe they do it well. However, as Botha advises, there are few decisions in the life cycle of a business that are as important as replacing an owner or director.
She says that more often than not, in an SME certain roles and responsibilities are filled exclusively by specific individuals (such as the business owner themselves) – which means that losing them for any reason can lead to a significant skills and resource gap that’s not easy to fill. Whether it’s their technical knowledge, their relationships with key clients or their talent niche in the business, key replacement players can be critical to the survival of that particular SME, and so, this should be a key consideration when planning for the future.
“SMEs face significant risks related to not planning effectively for succession. These smaller businesses can lose valuable knowledge and experience when they lose key employees. Added to this, there is the negative emotional impact on staff, customers and suppliers that needs to be mitigated,” says Botha. “As these instabilities have the potential to lead to loss of market share in the long run, succession planning will ultimately help SMEs with long-term survival.”
Research has shown that only 30% of small businesses survive into the second generation. As such, in the case of family businesses, while it might be naturally assumed that the children of the founder or business owners will take over – especially in cases where they are involved in the day-to-day operations of the business, it is important for business owners to plan for this.
For a family run small businesses to survive into the second generation, there should be a sound succession plan in place which includes training and preparing the next generation for running the business. “Entrepreneurial talent within a family needs to be identified and nurtured from an early age, in order to give the child the best possible chance of success in running a business,” adds Botha. “While it can work successfully, it’s important to confirm upfront that your children are interested in taking over the business.”
“Even in cases where children are involved in the running of a business, it might be a good idea to involve other key staff members who can also play a role in the succession planning. Over and above this, I advise owners to take the necessary steps to prepare to sell the business, even if their children are interested or involved – as preparing for a sale can take years. Other options include selling to employees, your management team, other entrepreneurs or even liquidation,” Botha advises.
While there is no rule of thumb for when an SME should start planning for succession, Botha advises that it be considered as early on as possible to allow for the time it takes to train new employees and leaders, develop the systems to support the transition, allow for the formation of a new culture and to manage the uncertainties that come with change.