Coming to grips with succession planning.
With around 70 per cent of all Australian businesses being family-owned and operated, and an estimated $4.3 trillion of wealth locked up in these firms, having a succession plan to capitalise on this value when choosing to exit the business is crucial.
What exactly does ‘succession planning’ mean?
Business succession describes the process of a business owner transitioning out of the business. There are many different ways this can be achieved, which is why having a plan is essential to ensure the right option is chosen and that the relevant steps are taken to achieve a desirable outcome.
Why is it relevant to you as a business owner?
Building and running a business is hard work. So, it makes sense that when it comes time to exit, you would want to receive the best possible value for your efforts, and the best outcome for the business you have put your blood, sweat and tears into. For this reason, having a succession plan is so important for every business owner.
A succession plan allows a business owner to identify their company’s opportunities for improvement and to scale, but also its impediments to growth, which might turn off prospective new owners and/or diminish the value of the business. Additionally, developing and following a plan will allow you to minimise tax liabilities, plan ahead for life after the business (whatever that may entail) and ensure the transition – for yourself, your staff, your customers and the business itself – runs as smoothly as possible.
What are the different options for exiting a business?
There are a number of different paths owners can choose from when it comes time to exit their business. The most common ones are:
- Sell the business: This is probably the most recognised form of exiting a business, allowing the owner to receive a lump sum payment for the asset they have built up.
- Business merger: Similar to a sale, merging with a competitor can allow for one owner to hand over the reins to another, while simultaneously offering additional value to employees and customers.
- Pass the business down (to children or other relatives): Many businesses retain family ownership over a number of generations, allowing owners to bring in new ideas and enthusiasm for younger generations without losing the family’s connection to the business through a sale.
- Employee or management buyout: It is possible for a buyer or group of buyers to come from within the business itself. This may involve a single or group of employees coming together to take over, or other directors, managers and board members buying out the share held by a co-owner.
- Stock market listing: Many start-ups choose to embark on an IPO to take the business into public ownership once it reaches a certain size.
- Shut the business down: The simplest and most final way of exiting a business is to simply shut the doors and cease trading.
What should business owners know about succession planning?
Many business owners – especially those without a succession plan in place – are often shocked at how long it can take to exit a business, and exactly what is involved.
For instance, business advisers generally suggest that it takes between 18 months to 2 years to properly prepare a business for sale.
This is primarily because of the amount of behind-the-scenes work required. New owners, whether buyers, merger prospects or buyout parties, will want to see evidence of the company’s performance, levels of debt, revenue structure, productivity, staffing levels and turnover rates, supply agreements, customer contracts and more.
In addition, they want the business owner to effectively provide a “brain dump” of everything they know about the business to ensure a smooth transition into operating under new management. This includes operational procedures and process, passwords, relevant contact lists as well as ideas and opportunities to further scale and grow the business.
Having this process clearly documented will substantially increase the level of interest from prospective buyers, and how much they are ultimately willing to pay for the business.
It is also important for suppliers and customers to have confidence in any change in management or ownership. The sudden and seemingly unplanned exit of a business owner can lead both suppliers and customers to question the viability of the business, taking their custom elsewhere.
Business owners should also be aware that their company may hold more assets or value than they realise. For instance, some services firms wrongly believe that without the owner, there is no business. However, their customer base, for example, could be of substantial monetary value to competitors or other parties.
Finally, it is important to note that a business owner will generally be required to continue working within the business for a period of time (generally six to 12 months) to ensure a smooth transition to the new owners. A portion of the sale price is sometimes tied to this requirement being met.
What happens if there is no plan in place?
After spending years or even decades building up a successful business, no one wants to go out on a sour note. While the lack of a succession plan doesn’t guarantee failure, there are some definite risks that a company without a plan may face, such as:
- Accepting a lower offer for the business and/or its assets than what they are really worth.
- Limiting the number of interested parties that the business may otherwise have attracted.
- Scaring off a key customer who gets spooked by the unknown implications of the transition, in turn destroying cash flow and goodwill.
- Discovering that the preferred exit option is unavailable. Sadly, this a growing problem for many business owners who aspire to pass it onto their children, only to discover the next generation either can’t afford or have no desire to take over the business.
- Being forced to delay retirement in order to generate the desired returns from the business.
So, what should all business owners do?
Be proactive and plan for the future sooner rather than later.
The team at Highview suggest using the advice of your business consultant or financial adviser to set these plans in place with future goals.
Chat with your Highview Accountant or Financial Planner today, who can advise the most suitable next steps based on your specific circumstances.