By BILL HOVEY
“It is ridiculous,” he says, “for people to spend a lifetime building their business then one day simply turn the key in its door and go home never to return. But obtaining a fair price and ensuring the continuing success of one’s business really isn’t a do-it-yourself task.” In this article he outlines the business of getting out of your business – successfully!
Business Succession is becoming an increasingly important issue for baby boomer entrepreneurs. Paradoxically it is also an issue which is either ignored, deferred, or both. Why?
One reason is that entrepreneurial owners are emotionally engaged with their businesses. They find it difficult to acknowledge their tenure coming to an end. Even worse, they cannot imagine their future life without their business.
While interest in business succession has heightened partly because the boomers are aging, one of the great impediments to successful business succession is the failure of owners, especially those in small and medium enterprises, to do anything about it.
In a 2006survey of its membership, NSW Business Chamber found the following:
|
Age of business owners |
% with no succession plan |
% with a documented succession plan |
% with an undocumented succession plan |
|
45-49 |
41 |
17 |
24 |
|
50-54 |
36 |
12 |
24 |
|
55-59 |
65 |
22 |
43 |
|
60-64 |
56 |
20 |
36 |
|
65-69 |
67 |
0 |
67 |
|
70 or above |
60 |
40 |
20 |
The Sensis Business Index Survey of February 2007 reports that only 39% of business owners have a succession plan. The most significant reason for this failure to plan, is that owners simply don’t know what to do and they don’t ask for help!
Business Succession means different things to different audiences. Firstly it implies an orderly hand-over by a CEO to a successor. Secondly, it suggests an owner’s exit through total or partial divestment of ownership. Thirdly, it recognises the passing of the management baton.
Good succession planning comprises transfer of both management and control and is accompanied by a desire of the existing owners to exit within a time-certain period.
Succession is triggered by a range of possible alternatives including age, health, fatigue, financial performance, competitiveness, a change in family circumstances.
In most cases it would be expected that the exiting owners would transfer a portion of their ownership in exchange for a fair value capital sum that might best be described as their aspirational price.
If fair value is in fact represented by the aspirational price, then many owners will be disappointed by what they actually get.
There are two main reasons for this. First, few owners invest the time or resources to undertake the housekeeping necessary to tidy-up their business so it is sale-ready at any time.
The second reason is that the SME/family business sector – like others populated by the boomers - is about to experience an age-driven shock.
Recent surveys have revealed alarming statistics. A study by CPA Austr
Yet for those who do not devote time, care, and resources to housekeeping, disappointment is bound to be in store while their peers who have taken the issue seriously will receive premium prices in a market that will undoubtedly be awash with businesses for sale.
Are there other reasons for succession planning?
Worldwide statistics reveal that only 30 per cent of family businesses make it to the second generation while 10-15 per cent of those businesses make it through to the third generation and a mere 3-5 per cent last the distance to the fourth generation and beyond.
The lifecycle of a typical private business is around 24 years and taken together with the 75/85/95 per cent failure rates in successive generational transitions this indicates that most business owners:
§ often fail to recognise the importance of planning their succession;
§ fail to recognise, hire, and nurture the talent needed to run the business from one generation to the next;
§ see succession planning as an event rather than a process.
Clearly those owners who recognise succession is a carefully planned process should expect better exit rewards than those for whom it becomes a crisis.
Further, it should also be appreciated that succession is a complex journey with many twists and turns, and represents much more than a “transactional destination”. The multi-dimensional complexity of succession means that it requires multi-disciplinary solutions, and a clear head by owners who are often required to filter multiple strands of (sometimes conflicting) advice.
The keys to a successful planning process include detailed consideration of the following:
§ structuring so that the incumbent, the successor, the family (owners) and the business are all prepared for the succession
§ flexible enough to accommodate a variety of hard and soft issues that can arise
§ inclusiveness - of all relevant stakeholders
§ relationships, psychology, and economics that will influence the scope, style, timing, and success of the succession
§ clues in the business history that may indicate problems for succession
§ clear communication to all involved;
§ business analysis including its marketing, competitive, regulatory, and environmental context;
§ employee retention and engagement – especially where key staff are vital to ongoing success
§ analysis and
§ preparation of the exiting owners for their exit; including mentoring the successor;
integration and coordination of input from existing external advisors.
It is important to recognise that there is no potential for succession without a viable successor and an incumbent who is ready to relinquish control.
When looking for a direction, it is useful to consider the following eight key steps to navigating your way to a successful exit
1. Determine the Strategy
§ Timing how much time do you have to plan and implement?
§ Type of exit: Total or partial divestment?
§ Business value: What can you get for the business? How to increase that?
2. Benchmark the Business
§ Is the business a turnkey operation, easy for a new owner to run?
§ How does the business look and perform relative to others in the same sector?
§ Is the business in the best possible health?
3. Risk Analysis
§ What are the risks to the business of a change in ownership?
§ How can those risks best be managed?
4. Option Analysis
§ What’s the best exit option? - Trade sale, management buy-out, generational/family transition, stock exchange listing, or private equity investor?
§ Is there an ongoing role for you in the business e.g., non-executive director?
§ Is there a requirement for you to stay with the business for a while? Will this work? In what role?
§ Some options require financing. Would you provide vendor finance?
5. Ownership and Structure
§ Are there issues in relation to your current ownership structure which will compromise your exit?
§ If a partial divestment is an option, how much are you prepared to give up? At what cost and with what constraints?
6. Personal Planning
§ Take the time to structure your personal financial planning and estate planning matters
§ Take advice from your tax adviser the tax issues arising from your exit
§ What is your personal vision of yourself once you have left your business?
7. Implementation
§ How will you deal with the complex emotional issues and personal agendas which arise during a succession exercise?
8. Mentoring and Support
Successful exit is usually achieved through collaboration of your advisers and the best advice. This will often require the intervention of accountants and speci
Who can you turn to? Who can you trust? Points to look for when choosing a speci § Experience in the succession management environment § Appropriate skill-sets and disciplines § Exposure to a range of business environments – size, sector, complexity § Clear methodology and processes § Flexible approach § Ability to interact happily with your existing advisers § Able to help you with balance sheet and the people issues.