Are you an SME without a succession plan in place? Read this
There is a great myth that owners of small and medium enterprises (SMEs) can see through all the eventualities that may occur in business. The truth is that while they may run a very successful organisation, they may not have considered the most important issue that they will inevitably face: retirement or death.
Do SME owners consider the risk to their organisation if they were no longer able to work due to injury, early retirement or death?
Neglecting to plan for succession is a problem that the UAE is alone in facing, as a quick look around the world seems to indicate predictably similar issues.
• A study by Nexus Group in 2015 found that 92 per cent of Dubai businesses lack a solid succession plan, or any form of contingency plan.
• According to the MGI Australian Family and Private Business Survey in 2010, some 80 per cent of all small business owners did not have a succession plan in place, while 85 per cent did not have any documented buy-sell agreements which provided clarity on fair ownership and exit options.
• Following an earlier survey in 2009, the Clarkson Centre for Board Effectiveness in Canada ran a survey in 2011 which found that only 54 per cent of Canadian SMEs had succession plans in place for the CEO with a suitable candidate identified, compared to 75 per cent of large firms (helped by the 82 per cent of publicly-traded firms that had plans in place).
• In 2012, the New Zealand Institute of Economic Research looked at business implications of ageing and found that most employers had no succession plans in place.
The SME sector accounts for 95 per cent of all firms registered in Dubai, representing 42 per cent of the workforce and 40 per cent of nominal GDP. The majority of SMEs are family-owned businesses and are often organised around a set of emotionally-charged interpersonal arrangements that have the potential to produce both positive and negative outcomes. This can be the organisation’s greatest strength but also its greatest weakness. Stakeholders in succession The succession process in familyowned businesses involves a number of stakeholders: family members, executives within the business, bankers, suppliers and customers who all have a say in the behaviour and expectations of the SME owner. For the succession process to run smoothly, key stakeholders must be comfortable with one another.
Succession planning should be focussed on ensuring the survival of the business in a form that maintains or improves its level of operation and therefore its ability to create value. This would involve a sea change in thinking about the business, from an entity that provides personal wealth to the owner, to an entity that benefits everyone associated, including the economy in which it operates. The starting point for succession is to start planning early, develop a written plan by consulting with colleagues, friends and family. This allows you to have a procedure to cover planned and unplanned events that could affect the organisation and should be viewed as part of the organisation’s risk management arrangements.
The benefits of planning for succession include:
• Improving the organisation’s operations
• More keenly managing departments
• Identifying weaknesses within the business can be addressed, outsourced or closed down
• Areas of growth can be identified and pursued
• Enabling business valuations to be easier to conduct, helping to understand how to reward shareholders or passing down to family members
• Identifying funding or growth objectives. Once the planning for succession has been agreed and put in place, it is then advisable to look at how succession will actually take place. Unfortunately, due to the number of businesses with no contingency plans, the majority end up with the worst-case scenario where the owner dies before succession takes place.
To protect your assets there are two distinct options: have a clearly defined “last will and testament” — DIFC Wills can protect Dubai assets; or expat company owners should hold assets in an offshore company (BVI or equivalent) for estate planning and hold all personal bank accounts in an offshore banking destination (Isle of Man, Jersey or Guernsey). Muslim owners who wish to distribute personal assets as per their wishes (not standard Shariah law distribution) should use a power of attorney to achieve the desired inheritance outcome.
If an onshore LLC is owned, a security agreement should be put in place with the local partner/sponsor to protect the company shares. A power of attorney should be put in place for the spouse of the company owner to ensure succession takes place immediately. The board structure is very important within an LLC and suitable legal advice should be sought.
Successful chess players like grandmaster Maurice Ashley suggest using retro-grade analysis and states: “To look ahead, it pays to look backwards.” This is useful for chess players because in the first four moves there are a potential 318 billion ways to play. They use various strategies to guide their opponent towards a simpler board with fewer pieces where they know they can win.
In business it can be similarly complicated with micro and macroeconomics pulling you from pillar to post, but the end game is simple; to continue operating the company at a profit. If your end-game is to at some point exit, sell, hand-over or retire then we take this point in time and work backwards to set the milestones and achieve the objectives.
The moral of this story is if you can see your end-game, put in place a robust contingency or succession plans then all your hard work as an SME owner will not have been in vain.
Creating a succession plan is essential, take action now.
The writer is managing partner at UAE Business Solutions. Views expressed are his own and do not reflect the newspaper’s policy.