Succession

Why the urgency for business owners to act now?

If you are a business owner you probably have expectations of what your lifestyle will be like after you leave your business. However if you intend to fund your lifestyle from the sale of your business, and you don't have a well considered succession plan in place now, when it comes to departure time you may well be disappointed with the opportunities and financial options available to you.

The scenario could be even worse if you are a business owner without a sound succession plan and you intend to retire in the near future and expect to sell 100 percent of your business up-front. The expectations you have for your proposed retirement and lifestyle could be seriously hampered.

The benefits of having time on your side

The earlier you develop your business succession strategy the better - it is never too early, but it can definitely be too late. It does not matter what size of business you operate, or in what industry, ultimately you will leave the business. It is not a question of ‘if' but ‘when', and planning for this eventuality helps give you some control over how the future unfolds for both you and the business.

It is simply sound business sense to make time in relation to your future business exit, to examine where you are going and how you are going to get there. Don't be tempted to put off if you can't see an immediate reward, the key is to have time on your side. Leaving your planning too long can jeopardise all that you have built and hoped for. Effective internal succession planning is ongoing and the earlier you start planning, the more viable you can make the business.

The penalties of not acting now

It doesn't matter whether you are running a successful business now, its size or what industry you are in, without a well considered succession plan in place there is a strong likelihood that you are exposing the business to a catastrophe. By putting succession planning in the ‘too hard basket', or only planning to act when retirement is on the horizon, you could experience monetary losses, and even loss of the business itself through any number of factors.

These can include:

the degradation of the brand
failure to keep pace with the competition
loss of customers
loss of sales
staff attrition and loss of key talent
a fracturing of stakeholder relationships and goodwill
a gradual decline in the value of the business

Think of your business as a financial asset

Your business is no different to a share portfolio. If you manage it properly its value can grow over time. Your business succession strategy is an important element of your management process and you need to develop it to balance and protect all aspects of the business. Your strategy should:

ensure the business continues to operate soundly into the future
protect the interests of employees
protect the quality of the services received by clients
increase the monetary value of the business for you as the owner

Having a succession management strategy allows you to develop and review the direction the business is taking whilst considering a range of market factors. It also allows you to take the appropriate time to invest the necessary resources and to undertake the required ‘housekeeping' so that your business is investment-ready or sale-ready at any time.

Beware of the risks ahead

More than 70% of Australian businesses are family owned and typically small to medium size businesses.*

This sector, like others populated by the ‘baby boomers', is about to experience an age-driven shock. The age profile of SME owners in Australia today consists of those aged 50 years or older at 33% and growing at 3.7% per annum, those aged between 30-50 years are at 58% and those aged younger than 30 represent 9.4% *

The number of business-owners who intend to sell their business on the open market as an exit strategy has more than doubled from 16 percent in 2004-05 to 38 percent in 2005-06.*

A quarter of family business-owners intend to retire within the next five years. *

There is a disproportionate number of people between 45 and 65 years old (24 percent of the Australian population) when compared to the number of people in the potential buyers category 35-45 years old (15 percent of the population). *

This demographic mismatch means that only truly profitable or professional family businesses will attract premium pricing, with the prospect that the ‘also-rans' will be difficult to sell.

* A Survey of Family Business Needs 2006 KPMG, Family Business Australia and Deakin University

Bill Hovey, Linchpin Group. Bill Hovey, the author and CEO of the Linchpin Group Australia and Practice Executive Director of Linchpin Succession Management, has amassed more than ten years advising and counselling business in all aspects of business succession. Bill has built a strong reputation among his Australian clientele, assisting a broad range of clients spanning most industry sectors and business types and sizes, making him one of the most respected and sought after experts on the complex issue of business succession. For further information Ph: +61 2 94680 180 or visit the web sites: http://www.linchpingroupaustralia.com/ or http://www.successionmanagement.com.au/.
First published: 27 September 2007.
Last updated: 27 September 2007.