If what they consider is ‘fair value' is, in fact, represented by the ‘aspirational' price, then many owners will be disappointed by the actual price realised for their business.
Why is this the case?
There are two main reasons. First, few owners take the time, or invest the resources, to undertake the ‘housekeeping' which is necessary to tidy-up their business in order to make it investment or sale-ready at any time.
The type of ‘housekeeping' to be done depends on each individual business. Generally, however, there are significant gaps in the planning, financial, human resources and operational areas of the businesses.
Why this is important leads to the second reason many SMEs and family business owners will be disappointed when it comes to disposing of their business on exit.
This sector - like others populated by the Baby Boomers - is about to experience an age-driven shock.
Consider the following age profile of SME owners in Australia today:
- Aged > 50 33% (growing at 3.7% per annum)
- Aged 30-50 58%
- Aged < 30 9.4%
Business exits from the SME sector (7.5% per annum) currently account for a loss of 3-5% of GDP, and 10% of job losses. The economic impact of a discontinuous SME sector in the next few years is almost too frightening to imagine.
Where is the danger ahead?
The number of business-owners who intend to sell their business on the open market as an exit strategy has more than doubled.
A quarter of family business-owners intend to retire within the next five years but many do not have adequate structures or even basic plans for finance, business risk or business operations in place.
Another risk factor is that there is a disproportionate number of people between 45 and 65 years old when compared to the number of people in the potential buyers category 35-45 years old.
This demographic mis-match means that only truly profitable or professional family businesses will attract premium pricing with the prospect and that the also-rans will be difficult to sell.
For those who do not take the time, commit the care, and devote the resources to doing the ‘housekeeping', disappointment is bound to be in store. They will realise less from the sale of their business, and therefore less for their retirement, than those of their peers who have taken the ‘housekeeping' issue seriously and who - as a result - have been able to command a premium price for their business in a marketplace which will undoubtedly be awash with businesses for sale.
Other important reasons for succession planning:
Succession planning is important where there is to be the transfer of both management and control and is especially important in cases where ‘ownership' will remain continuous.
The lifecycle of a typical private business is around 24 years - about the same time a founder of a family firm will spend managing his business before considering passing it on to the next generation or selling it. It would appear that most first generation businesses don't see any urgency in planning for the future or planning succession of the business.
Worldwide statistics reveal that only 30% of family owned businesses make it through to the second generation, while 10-15% of these businesses make it through to the third generation and a mere 3-5% last the distance through to the fourth generation and beyond.
The 24-year lifecycle coupled with failure rates of between 75% and 95% in successive generational transition, indicate that most business owners:
- More often than not fail to recognise the importance of planning for 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 that succession is a process should expect to be better rewarded on exit than those for whom succession becomes a crisis.
A logical, strategic, implementable approach
Ownership and management succession is a process which takes time to complete. It can be more successfully achieved if the process is approached as a logical, strategic, and implementable series of steps which take full account of the dynamics of a number of intersecting environmental pressures confronting a business.
These intersecting pressures can include the human and commercial relationships, ownership, management, staff and often family agendas, personal goals and ambitions, human resource talent and capabilities, stakeholder expectations, business drivers, business models, and so on.
True succession planning begins with an evaluation of business performance. This allows for a range of sensible options to be developed - including an assessment of the financial benefits of a succession as opposed to an exit through other alternatives.
Once the business evaluation has been completed, the central aspects of succession planning need to be negotiated, followed by a period of post-transition management.
Forget the ‘cookie cutter' approach
Succession needs to be supported by a holistic and strategic process which, whilst structured, is adaptable and flexible enough to deal with a range of issues and complexities. These will often be unique to each business, each individual business owner and successor. Methodologies, tools, and processes used must be robust and the outcomes must be individually tailored.
SMEs and family businesses can benefit greatly from seeking advice from a succession planning advisor who can provide a balance and act as a sounding board to both incumbent and successor. Succession can often run into difficulties - arising as much as from the ambitions and expectations of the successor as the reluctance to embrace change by the owner. The succession adviser is crucial here to ensure that neither of these issues is further complicated through poor communication.
A Survey of Family Business Needs 2006 run by KPMG, Family Business Australia and Deakin University