Succession planning in your business
Shop Management
As the proprietors and managers of a shop get older, the need to provide for the future grows, not only for them but for their families and employees. Succession planner Leon Jacobs lifts the lid on a sometimes uncomfortable subject.
More than 90 per cent of all Australian businesses are small. They employ over half our workforce, with family enterprise comprising a major sector. However, the creativity, strength, determination, drive and dedication that propelled many business owners to begin their companies can be the very characteristics that prevent them from passing the final test of entrepreneurship: succession planning.
What is succession planning?
In the past, business owners may have relied upon advice from accountants and other professionals. However, today they are fast realising the need for a specialist succession planner. These professionals can assist you to:
* Structure your business to enable you to leave it when and how you want
* Prepare your business for a smooth transition to your children or other people
* Minimise taxes by estate planning
* Preserve wealth to ensure the continuity of your business
* Set up a management team to ensure your business success
* Protect against forced liquidation in the event of your incapacity or death
* Plan transfer of ownership and control of your business to ensure stability
* Include a retirement income component without selling your business.
Do you have a succession plan?
Recent research reveals that Australia's baby boomer generation is reluctant to let go of the business reins, with the average age of business owners increasing from 52 to 56 in the last six years. According to a 2004 CPA survey, in which 600 Australian businesses as well as 105 CPA accountants were interviewed, 50 per cent of business owners plan to sell their business and use the funds as a primary source of retirement income, yet only 38 per cent claim to have a succession plan in place.
It is obvious therefore that the longer you wait to implement a succession plan, the fewer options you will have, the amount paid to the government in taxes will increase and it is more likely that the plan will not meet your goals. Finally, and perhaps most important, control of the process will shift from you as a business owner to the government and lawyers.
The truth can hurt
Of our many clients, bodyshop businesses around Australia provide some interesting insights into the delicate process of succession planning. When clients were asked to describe the current key issues of their industry during recent Australia-wide workshops, their answers revealed:
* Gradual industry decline due to fewer accidents and speed cameras
* Pressure from work providers to reduce hourly rates
* Rationalisation of the industry
* Retention of insurance accreditations
* Difficulty finding quality technicians
* Future ownership
* Conflict between personal/family and commercial values
* Profitability
* Technology and other costs associated with maintaining business
* Increasing the value and viability of the business
* Professionalising business management systems.
Further, some of the likely succession issues to arise in a bodyshop or similar business where various family members and partners may be working together include:
* Marriage break-up
* Death or disablement of the owner
* Retirement - who gets the business?
* Sale of the business - who to?
* Second generation inheritance issues
* Claims on the business by the second generation possibly not currently working in the business
* Grandchildren
* Key employees who want to have a say
* Perceived favouritism to family members and the impact on morale.
Communication is the key
Family businesses are unique in that most business decisions ultimately affect the family members and their relationships. It is therefore vital to ensure you forge strong communication channels to balance what's good for the business with what's fair to the family.
Succession is a slow and gradual process that goes beyond drafting wills, buy-sell agreements, valuations, and purchasing insurance. And, human nature being what it is, the process can often be confronting. It is not unusual therefore for advisers to facilitate family workshops or meetings where there is screaming, shouting and quite often tears. However, uncomfortable as it may be, the process should be structured to unearth those feelings.
Nine steps to success
At Business Succession we have developed a unique nine-step system to help business owners through the succession process.
1. Determine your objectives
* What are the objectives of all the owners?
* Are they consistent and understood by everyone?
* What are the needs of the owners, their families and the business?
2. Identify your exit options
* What are the options available to you as business owners?
* Should you continue to trade and employ an external chief executive officer?
* Can you transfer ownership to the next generation?
* Are there other key senior employees who could be potential business owners?
* Are you ready to sell?
* Would the business realise its true value if an opportunity knocked tomorrow?
* Could a management buyout be comfortably funded?
3. Determine what the business is worth
* 65-85 per cent of the retirement net worth of business owners is tied up in their business
* There are many varying methods for valuing businesses, however determining an approximate value for the business is critical if you are to undertake the planning necessary for life after you exit the business
4. Make the business a better buy
A number of factors that a prospective purchaser will look for in a business include:
* Company history
* Successful transition
* Operations
* Employees
* Equipment
* Financial performance
* Accounting and record-keeping systems
* The owners' involvement in the business
* Location, market and competitors.
5. How to maximise the value of the business
There are 4 ways to grow your business:
* Increase the number of customers
* Increase how often they come back
* Increase the average dollar value of each sale
* Increase your effectiveness.
At Business Succession, we focus on 'what you can measure you can manage' and 'what gets measured gets managed'.
Any business's performance can be related back to the quality of the decisions it makes which, in turn, is completely reliant on the quality of the information it has at its disposal. We know business is getting tougher - how do you respond?
Traditional view: Cost + Profit = Price
New Age view: Price - Cost = Profit.
To succeed in this environment we must recognise that more often than not our price is being determined by outside influences such as competition or work providers and we must understand our costs and have a continual focus on improving our activities to be successful.
6. For your financial security after exit you must ask:
* Do you have enough to retire if you leave the business when you choose?
* What are your retirement goals and needs?
* Have you adequately funded for your own retirement?
* Is most of your net worth tied up in the business?
* Have you channeled enough funds over time to growing non-business assets?
7. Questions about contingency plans:
* What if something happens to one or more of you?
* Are systems in place?
* Are contingencies in place?
* Does a shareholder agreement exist?
* Is it backed up by sufficient contingency funding?
* Is there a medium for dispute resolution?
* Are buyouts optional or mandatory?
* Who are the key employees and how is the business protected if something happens to them?
* How are your families protected from financial hardship?
8. Estate planning
* What happens if you die?
* Are wills in place?
* Have the wills been reviewed recently?
* Do you have appropriate tax minimisation structures?
* Are you using testamentary trusts?
* Do you have enduring powers of attorney?
9. Next steps
* Preparation of a formal succession plan
* Key stakeholders' workshop reviewing key issues identified in the succession plan
* Commencement of the implementation process including completion of action plans and project management
A process that works
Once we have prepared a succession plan to suit the needs of a particular business, we encourage clients to commit to and follow an implementation process, during which our adviser works with whichever professionals are required to deliver satisfactory solutions for clients.
Whether succession planners work together with professional advisers who already have an established relationship with clients, or whether there is a need to make new introductions does not matter - it is the co-ordination of these services to deliver an optimum result that is critical.
Our trained and experienced advisers have prepared hundreds of succession plans and completed the process for many clients Australia-wide. We tackle important issues that are often neglected by other professionals who may have a vested interest in maintaining a relationship and have therefore not made the tough decisions. Being an 'outsider' allows us to be the 'bad guy' if a tough call has to be made.
The ultimate reward
As a successful business owner, you have proven yourself by creating a strong business. The final test therefore is to manage and control the transition from your ownership and leadership to someone else's. This is a tricky process because it means you must ultimately give up control. Although this can take a long time, it is worth the effort because it creates stability for the family and secures the business for the future. And in the end, this might be the greatest connection to immortality that you may have: taking care of your family and a business that lives on for years after you are gone.
You can contact Leon Jacobs, client relationship manager of Business Succession, on (03) 9791 9099.