Lack of succession plan putting mid-market businesses at risk

Australian mid-market business owners tend towards handing the reins of a business to someone they know, rather than pursue a sale, but many are risking a turbulent or failed transfer through the absence of a detailed plan. 

The latest Pitcher Partners Radar Report revealed that 20% of business leaders lack a succession plan or are unsure if one exists, highlighting a strategic planning gap that could lead to potential disruptions during leadership transition.  

In addition, parts of the business community are likely underestimating the challenges in maintaining business continuity, with 4% of leaders responding that they don’t believe a succession plan is even needed. 

The Radar data indicates that Australian middle market business owners expect the pass the keys over to a family member, an internal candidate or a co-owner. 

Smaller businesses are more likely to hand over to family (28%) while mid-sized businesses are more likely to hand over to an internal candidate (25%).  

Non-service businesses, such as manufacturers or retailers, are more likely to replace existing leaders with internal candidates (30%) compared with service businesses (9%).  

“A non-service business will have an associated facility to manufacture products, meaning less flexibility for external candidates,” says Robert Prince, Executive Director, Pitcher Partners Perth.  

“By contrast, a service business has a book of clients or customers that they can ‘sell’ for a multiple of what that book generates, which is a more attractive option. 

“Smaller middle market businesses will have less capital but also fewer people in the mix – they know who will take over and can map that to a succession plan more easily.” 

Larger businesses tend to pursue a corporate sale, as they have a more quantifiable value that allows them to get a higher multiple, or possess the capital to make strategic hires if they decide to pursue a different plan. 

“Bigger organisations are more likely to be managed by an executive team who don’t own or have a financial stake in the business, so there is a need for a formalised plan to facilitate a sale,” says Mr Prince. 

Despite these expectations, 43% of businesses don’t have even a rough plan in place to ensure a successful transition, which may lead to disruptions in operations, the loss of key personnel, and diminished stakeholder confidence if a change of ownership occurs unexpectedly. 

What is more concerning is that 27% of businesses expect to change owners or senior leaders within the next 12 months – rising to one third for businesses turning over more than $10m.  

“These businesses could be facing a huge risk to their future,” says Mr Prince. 

“Perhaps an owner has already identified in their mind an internal candidate who they believe could carry the business on and have relied on a handshake agreement, or it’s assumed that a family member will take over. 

“The absence of a formal, well communicated plan is a high risk strategy.  

“Succession planning is often the result of impending change but doesn’t need to be, and starting conversations early means that succession becomes less a what-if, and more a long-term strategic tool.” 

Low business confidence can be an overlooked factor in succession planning, particularly when it comes to potential internal candidates who are not clear about any plans. 

“Uncertainty about the company’s future may cause key talent to seek opportunities elsewhere, leaving a business struggling to retain the best candidates for leadership roles,” Mr Prince said. 

“An effective succession plan is almost a living thing. It should outline how the business will support and upskill incoming leadership, hand over key supplier and customer relationships, and protect staff morale and company culture.” 

Akubra, the iconic Australian brand, had seen five generations of family ownership and internal leadership succession, backed by a six-member board, before it merged with RM Williams in early 2024.  

“One regular topic of conversation was – what does the future look like and what does succession mean to Akubra?” says Grant Parish, a Partner at Pitcher Partners Sydney, who was involved in negotiating the sale of the iconic brand. 

“The family recognised the need for fresh ideas and additional infrastructure to sustain the Akubra legacy. It was important they found someone who would protect the company, support longstanding staff, create jobs, and invest in its future, ensuring the growth of Australian manufacturing.”  

With guidance from Pitcher Partners Sydney, Akubra established a solid framework and plan, ensuring they were ready to seize the right opportunity when it came along.