- 5 days ago
- 6 min read
Step 3: Draft the Plan
Why Clarity Matters in Internal Succession
By Fiona Ettles, Partner at FinConnect
Internal succession conversations often begin with optimism. A long-term employee is interested in equity. The owners are thinking about rewarding key team members, maybe even retirement. There’s momentum, goodwill, and a shared vision for the future.
But where many succession plans begin to unravel is the point where everyone tries to move from “we should do this” to “what exactly does this look like?”
This is where Step 3 matters.
Once you’ve identified the right people and opened the succession conversation, the next stage is drafting a clear, practical plan. Not a vague promise. Not a few numbers on the back of an envelope. And not a complicated technical document that nobody truly understands.
A good succession plan creates clarity. It helps incoming equity holders understand what they are buying, how ownership changes their role, and what the pathway looks like over time.
Because when people are investing significant capital and often making major family and financial decisions alongside that investment, uncertainty quickly becomes a barrier.
When the Plan Creates More Questions Than Answers
We worked on the buyer’s side of a transaction recently. The business had drafted an extensive 10-page document which set out:
How they valued the business; a tangled web of different approaches and averaging;
How they were structuring the transaction; the incoming shareholders would initially participate in a profit-share style arrangement for several years, with the buy-in converting to actual equity once KPIs were met; and
How management decisions would be made; one of the incoming equity owners could become a board representative alongside the existing owners.
On face value, it looked sophisticated.
But once we started asking questions on behalf of the incoming equity holder, it became clear that major gaps still existed.
Questions like:
What percentage of equity was actually being released?
When would the transaction take place?
How would the employee’s role change after buying in?
Would there be opportunities to purchase further equity in future?
What happened if KPIs were not achieved?
Would the upfront capital be refunded?
What if one incoming shareholder met KPIs and another did not?
What was the long-term succession plan for the older shareholders still retaining significant ownership?
The issue wasn’t a lack of effort. The issue was clarity.
Incoming shareholders want to understand how ownership will change their day-to-day life, what the financial outcome looks like both now and down the track, and what risks they're genuinely taking on.
Importantly, they rarely make this decision alone.
Spouses, family members, accountants, lawyers and trusted advisers often become part of the conversation. It can even be an in-law who is a retired Accountant or Lawyer who becomes involved. And when they do, those people bring their own questions. If the pathway to ownership is unclear, overly complicated or inconsistent, that inner circle will naturally grow cautious. Their hesitation has weight.
That caution creates friction. And in today's market, friction has a cost.
Capable future equity holders have options. A strong senior adviser can move to another firm, spend a few years building their reputation elsewhere, and find a cleaner path to ownership somewhere that has its house in order. Loyalty matters, but it has limits. Relying on it as your primary retention strategy is a risk most firms can't afford to take.
Information Overload Isn’t a Succession Strategy
On the opposite end of the spectrum, we regularly see business owners overwhelm incoming shareholders with information.
One vendor we worked with was preparing to release equity to three key employees. He had assembled an enormous collection of documents including an independent valuation, shareholding spreadsheets, five years of financial statements, tax returns, BAS statements, ASIC documents, client reports, and banking information.
Essentially, an entire data room was ready to go. The problem was that none of it clearly explained the actual offer.
The employees still didn’t fully understand what they were buying, how their role would change, what obligations came with ownership, how decisions would be made, or what future equity opportunities looked like.
So instead of leading with endless attachments, we worked with the client to create a detailed Letter of Offer. Not overly technical. Not hundreds of pages. Just clear.
The document outlined the valuation methodology, future treatment of additional equity tranches, management participation expectations, dividend policy, shareholder agreement requirements, governance structures, banking obligations, and estimated payback periods.
But most importantly, it was written in plain English.
That meant incoming shareholders could share it with their spouse, accountant or adviser, and everyone involved could properly understand the transaction.
There is absolutely a place for due diligence and detailed financial information. Those documents serve an important purpose. But what they answer is a specific question: is the offer financially sound?
They do not answer the question that matters most to the person making the decision: is this the right opportunity for me?
Those are two very different questions. And conflating them is one of the most common mistakes firms make when bringing on new equity holders.
Succession Planning Improves Over Time
One of the things we openly acknowledge at Accru Hobart and FinConnect is that succession planning is often learned through experience.
The first equity offers are rarely perfect. The first shareholder discussions often uncover issues nobody had previously considered. Our experience helps shape a better offer for others.
When I received my own equity offer back in 2020, the document covered many major points well. But later conversations uncovered practical details that had simply never been documented. Things like allowances, operational expectations, and assumptions that everyone thought had been discussed.
The next incoming shareholder received a more detailed offer. And the next one improved again.
Now, there is a far more comprehensive Investment Proposal document used consistently across incoming shareholders. It includes organisational structure, reporting lines, meeting rhythm, values, and expectations, governance structures, and equity pathways.
The result is consistency, transparency, and fewer misunderstandings. Importantly, it also creates fairness between shareholders. And we’ve seen other businesses improve in the same way.
One professional services firm we dealt with years ago presented a very basic equity proposal to an Associate. The valuation was vague, the documentation minimal and the process felt ad hoc.
By the next succession round, that same Associate had become a shareholder herself, and every question she wished had been answered previously was now fully documented for the next incoming equity holders.
That is how succession planning matures. Each experience creates better processes for the next.
"I've Been Offered Equity… But There's No Offer"
This is one of the most common conversations we have.
A potential equity holder comes to us and says: "I've been offered 10% equity for roughly $300,000. Does that sound reasonable?"
Our first question is usually: "Can we see the offer documents?"
Too often, there are none. A brief email. A verbal conversation. A valuation with very little explanation attached. This is more common than it should be, and it creates real problems. Because without proper documentation, neither side has clarity. The incoming shareholder is being asked to make a significant financial and personal commitment based on a loose understanding. The existing owners are assuming goodwill will carry the process through.
It rarely does.
Tim Lane puts it simply: communicate, communicate, communicate, communicate. And he's right.
The businesses where succession works well are almost always the ones where conversations happen early, openly, and consistently. The ones where it breaks down tend to share the same patterns: delayed conversations, ambiguous promises, poor documentation, unclear timelines, changing goalposts and assumptions that were never properly tested.
Some common succession problems we regularly see include:
Sometimes equity that has been discussed for years eventually happens. Sometimes it never does. But people deserve clarity.
Future equity holders should also set their own timelines. Is ownership important before a certain age? Within a certain number of years? Is there a genuine pathway, or simply ongoing promises?
The Real Issue? Communication
More often than not, when succession goes badly, communication is the underlying issue. Sometimes owners assume staff are not interested. Sometimes employees assume owners are not serious. Sometimes both parties are simply uncomfortable having the conversation.
But communication is the responsibility of both sides.
If you’re a business owner, regular succession conversations should form part of your leadership discussions with key employees. And if you’re a future equity holder, sometimes you need to knock on the door and ask the question directly.
One of our former business partners at Accru Hobart used to say:
“You should knock on the door and demand it.” Not because entitlement is the answer, but because ownership pathways rarely happen by accident.
They require initiative, planning, and honest conversations.
We’ve written previously about the importance of future equity holders advocating for themselves in succession conversations. You can read more here.
Final Thoughts
Drafting the succession plan is where good intentions become practical reality. The best plans are not the longest or most technical. They are the clearest.
A strong plan helps incoming equity holders understand what they are buying, why the valuation is reasonable, what their role looks like, what opportunities exist, and how decisions will be made. Most importantly, it removes uncertainty rather than adds to it.
If you have only been through this once or twice, that is completely normal. But succession planning does not need to be reinvented each time. We have worked through hundreds of these transactions, and that experience consistently produces better outcomes for everyone involved.
If you would like help drafting or refining your succession plan, get in touch with the FinConnect team.
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