Succession planning is the smart thing to do

Businesses now have the support systems in place to effect such a transition

Image Credit: ©Gulf News
Gulf News

There is a great myth that SME owners 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 owners consider the risk to their organisation if they were no longer able to work due to injury, early retirement or death?

This problem is not one 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;

The Clarkson Centre for Board Effectiveness in Canada ran a survey in 2011 which found that only 54 per cent of Canadian SME`s 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 majority of SMEs in the UAE are family-owned and 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 organisations’ greatest strength ... but also its greatest weakness.

The succession process in family-owned 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 owner. For the succession process to run smoothly, key stakeholders must be comfortable with one another.

Succession should be focused 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.

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 organisations’ risk management arrangements.

The benefits include:

Improvements to the organisations’ operations;

Departments are more keenly managed;

Weaknesses identified within the business can be addressed, outsourced or closed down;

Areas of growth can be identified and pursued;

Enable business valuations to be easier to conduct, helping to understand how to reward shareholders or passing down to family members; and

Identify funding or growth objectives.

Once the planning 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;

Option A; Have a clearly defined “last will and testament”. DIFC Wills can protect Dubai assets.

Option B; 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 Sharia 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 retrograde 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, handover 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 put in place a robust contingency or succession plan, 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.