This article was kindly provided by Craig West of Succession Plus
Business strategic succession planning was never heard of 10 years ago – however business owners now understand that succession is a significant aspect of the success of their business. Steven Covey’s habit number two is Begin with the End in Mind – Covey says if you want to have a successful enterprise, you clearly define what you’re trying to accomplish…. the extent to which you begin with the end in mind often determines whether or not you are able to create a successful enterprise.
What is Strategic Succession Planning?
Strategic succession planning covers all aspects of the business, but importantly focuses all attention on the end outcome –what are we actually trying to build within our business – is it something to fund our retirement? To list on a stock market? To raise further capital and grow? To pass on to other members of the family?
Strategic succession planning means we have a detailed and documented plan covering every aspect of our business that continually moves us closer to our ultimate exit outcome. Most business owners are so caught up in running the business at a day-to-day level they do not have time, effort and attention focused on the end outcome.
Why Strategic Succession Planning?
In Australia more than 50% of business exits are currently a failure i.e. bankruptcy, liquidation, death or serious illness, divorce or simply walking away and closing the doors – this is largely because no succession planning has been undertaken by the business owner.
A survey conducted by the Monash University Family and Private Business Research Unit revealed that over the ensuing decade 60 per cent of private business owners are approaching retirement (the first baby boomers actually turn 65 in 2011) and the ensuing transfer of ownership of assets and business equates to approximately $607 billion.
Approximately one third of Australian family businesses are expected to change CEOs over the next 3 to 4 years and whilst 53% are sure that the successor will be a family member, 83% do not have a succession plan. Most people go into business not only to earn income but also to build the value of their equity and to sell – the statistics tell us the majority do not get to that point.
In my view, strategic planning is all about time – the simplest analogy is to ask whether you would consider approaching a real estate today with a view to selling your property this Saturday – most real estate agents could actually achieve this; though without any time to market, prepare the property and review their buyers database – the price they achieve will not be the real value of the property. Most of the businesses I work with require a minimum of five years to maximize the value and prepare themselves to extract that value successfully.
We often see stories in the business media of well-known wealthy entrepreneurs making substantial money “trading” in businesses – they invest, build or grow the business, reduce the risk and then exit profitably making substantial gains on the investment over a few years – this is the best illustration of getting the exit strategy right – it is the ultimate test of success for these investors – if they don’t exit correctly they make no money!
Our 16 step process begins with simply reviewing the position today, by undertaking due diligence, benchmarking, structural review and valuation we can determine what exists in the business today and where there are opportunities and challenges which may affect the ultimate exit strategy. On most occasions, business owners do not have an exit strategy and are not aware of all the options and so our strategic planning process identifies which option/s is most suitable and what we need to do to maximise the opportunity. In many cases there are several areas within the business, both financial and non-financial that need to be addressed prior to any exit plan being implemented.
As a part of this review we can usually determine the most appropriate exit option for the business owner given the business, personal and financial goals we have outlined. Then our work is designed to continually move the business down the path towards exit:
We have had considerable success with implementing a management buy in – where key people within the business are retained and incentivised with a vehicle in place (Peak Performance Trust – a special kind of employee share plan) to purchase shares based on a profit share arrangement with those funds being reinvested into the equity of the business rather than taken at as cash payment.
This plan operates over an extended period and has the added benefit of attracting, retaining and motivating key staff within the business who now have a vested financial interest in maximizing the value (as does the owner).
This may not be suitable for all business owners but has had considerable success with some of our clients (see breakout box below). In any event just knowing which exit is the most suitable and what can be done to get a better result can focus business owners attention and efforts on making the business more efficient, profitable and less risky – all of which add to the value. In several cases we have worked with clients who subsequently decide not to sell the business as in its “new form” it is less stressful and better matches their lifestyle and retirement planning needs.
In all cases, business owners must be prepared to make every decision considering whether it brings them closer to or further away from the ultimate exit strategy – i.e. begin with the end in mind – investing the time to develop a strategic succession plan is one of the most important financial decisions business owner may ever make – without one the value in the business will retire when you do!
BREAKOUT BOX – CLIENT CASE STUDY
In terms of real business benefits this client ( a real estate agent in Queensland ) focuses on the sales people who are now able to state that they are owners ( often vendors want to deal with the principal of the business not “just an employee” ) – there was a strongly positive response from our staff. One of the great advantages to this scheme is the power that it gives to the employee in their negotiations. They can represent themselves as having ownership in the business, which is something that most competitors cannot offer. It’s like a trump card to a high performing sales consultant in their winning the listing in a competitive environment.
Interestingly, in this business, internal referrals between departments have also increased – both financial services and property management referrals from employees participating in this scheme increased at a higher level than before. I put this down to their seeing value in contributing to the company’s bottom line because they will share in the profit.
Principal Brett Greensill, is a strong supporter and based on the improvements in business performance and valuation his view is that all business owners should be looking at a similar plan – the introduction of this scheme is entirely positive
Succession Plus has been advising businesses in management, taxation and accounting issues for over 15 years. They specialize in business structuring and succession planning and have had extensive experience working with clients to improve their financial performance – with proven results.