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Business Continuity and Succession Planning – Part I

We recently published a brief summary of an article on the buying and selling of financial services practices that appeared on an Australian website. The owner of Centurion Market Makers discussed the two most prevalent questions from buyers and sellers.

In response to the question, “What are your reasons for wanting to buy a business?”, potential buyers indicated that, “…, after evaluating the strategies and investment required for organic growth against the alternative of acquisitive growth, they arrive at the decision to ‘buy growth’ rather than nurture or farm it.”

The question, “What do you find to be the hardest thing about buying a business?”, elicited the following response: “Inadequate preparation of the right information by sellers is one of the most common mistakes we see when transactions are taking place. It is also the number one reason why practice owners fail to maximise value, minimise transaction risk and transact in less than six months.

Centurion Market Makers are currently planning a webinar on succession planning which they believe is imperative if you want to realise the best price when you sell your practice one day.

“Many only think about ‘Succession Planning’ when they want to realise value and exit their business – often they leave it too late and it becomes a trade sale. The difference is a succession plan is where the current shareholders work out a plan for exit and entry of new shareholders well in advance – usually with employees or people they will work with for a period of time before the transaction takes place.”

Alan Holton, an associate of Moonstone Compliance, wrote an article on the subject of business continuity and succession planning from a South African perspective. In Part I he discusses the theme in general terms, and next week we look at it from a sole proprietor’s perspective.

The annual Compliance Reports have traditionally enquired whether or not the FSP has “a business continuity plan and procedures in place to ensure that their clients will be serviced if the business is terminated for any reason”.

The General Code of Conduct requires every FSP that ceases to operate as an FSP, to immediately notify all affected clients accordingly. You are also required to take, where reasonably necessary or appropriate, and in consultation with the clients and product suppliers concerned, reasonable steps to ensure that any outstanding business is completed promptly or transferred to another provider. (“Termination of Business – S 20 of the General Code of Conduct”.)

In industry parlance, this has become known as succession planning.

Section 8(3)(j) of Part VIII (Operational Ability) of Board Notice 106 of 2008 (Determination of Fit and Proper Requirements for Financial Services Providers, 2008) provides that every FSP must ensure that internal control structures, procedures and controls are in place which include at the least a business continuity plan.

It is, I believe, important to distinguish between business continuity planning and succession planning.

Business continuity is defined in International Standard ISO 22300 as “the capability of the organisation to continue delivery of products or services at acceptable predefined levels following any disruptive incident”. This is arguably a subset of disaster planning – part of the normal risk management procedures required of every FSP. In the normal course of business activities, there is no standard requirement that the business establish procedures to ensure that clients or customers will be serviced, should the business be terminated for any reason. In fact, this would be unusual.

Succession planning, on the other hand, is defined as a process for identifying and developing internal people with the potential to fill key business leadership positions in the company. (https://en.wikipedia.org/wiki/Succession_planning )

This applies particularly to larger practices with two or more Key Individuals, and where the business is a juristic entity such as a close corporation, company or trust. Succession planning normally includes provisions to ensure that, should one or more Key Individuals be, or become, unable to act as such, a suitably trained substitute Key Individual can take the place of the one no longer able to do so.

Succession planning can be considered a subset of business continuity planning. It must be said again, there is not normally any requirement when conducting succession planning, to ensure that clients or customers will be serviced if the business is terminated for any reason.

By ensuring proper business continuity and succession planning, you enhance the true value of your business when the inevitable day arrives when you depart the scene

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