Succession planning continues to be a topical subject and for good reason. The bubble of the baby boomer generation pushing towards retirement and exit will only continue. What is unclear is when the bottleneck will tighten to the extent that exit becomes problematic and business values decline.
Certainly those who leave the planning and execution of their exit strategy to the last moment may find themselves with nowhere to sit when the music stops.
The succession problems encountered by business in general are accentuated in smaller businesses, particularly those businesses that have been built around a single person or family. Effective succession planning can require three or more years to ready a business for transfer and in reality succession planning should commence the day the business is opened.
What Is Succession?
Succession is a very deceptive term and can have many different meanings, often turning upon the circumstances in which an individual finds themselves.
Having a clear definition of what succession means in your individual circumstances is important in achieving a successful outcome. If you don’t know where you intend to go, then how do you expect to get there?
We find that when you dig behind the driving motives for succession and identify the final goals being sought, the following commonly arise with varying levels of importance:
- Maximise the capital value of the business and the sum that is withdrawn on retirement
- Provide for the continuity of the business to ensure ongoing employment of staff and servicing of clients
- Provide sufficient income to fund retirement
- Enable a continuing involvement in the business post-retirement at a reduced level (many business owners find it extremely difficult to go “cold turkey”)
- Crystallise individual wealth built over a lifetime of work and provide for its transfer and continuing growth to future generations
- Formulate a plan to ensure an equitable distribution of wealth within a family to ensure family unity
- Bring to life long-term dreams of retirement, travel and self-development
- Initiate a lasting legacy through contribution to society, often in such a way that it is not publicly recognised
- Cap off a successful career and lifetime contribution to the industry
Your individual starting point in the business succession process is one of identifying and writing down what it means to you personally. There are three questions you should answer:
- What are the goals you seek to achieve?
- Why are they important to you?
- What outcome or result must be achieved
In the box below is an example:
| Goal |
Compelling Reason |
Outcome Sought |
| Sell my business at fair value |
Realise capital value and provide for my staff and customers |
Full transfer by (date) |
| Retire with total wealth of ($ amount) and an annual income of ($ amount) |
Enjoy the retirement life we dream about and provide for my family |
Assets liquidated and all debt retired by (date) with income stream established |
| Continue support of local community welfare fund |
Give back to the community that has provided my family with so much |
($ amount) annual contribution |
The “Business Evolution” Process
When your mind turns to creating a business succession plan for your business there are seven questions that need to be considered and answered:
- What goals and outcomes are you seeking to achieve from the process?
- How does your family factor into the process? If there are family members in the business, then careful consideration must be given to their place and role in the evolution process. Many successful businesses fall apart because family and evolution was not thoughtfully managed.
- Where and by whom is wealth held, how is it encumbered and how may it be realised and allocated to achieve the evolution goals?
- Is there any realisable capital value in the business – how can it be built, maximised and realised and how will continuity of the business be achieved?
- What legacy or footprint do you wish to leave your industry and the community
- Who will be an appropriate advisor to guide you through the process and challenge you to consider and answer the difficult questions that will arise?
- How do you draw all of the above into a cohesive plan that you can follow and that will deliver the desired outcomes?
Building Value
A core focus of the succession process is building capital value in your business. Don’t just assume your business is worth a particular amount and that someone will be willing to pay it. Capital value must be earned and will be assessed against market returns from alternate businesses and opportunities.
Capital value lies in quantum and certainty.
- Quantum: If your business does not deliver a fair wage to its owner(s) and a return on capital, then its value is probably nil.
- Certainty (and opportunity): If a prospective owner has a high level of confidence that the income earned in prior years will continue, then they will be willing to pay a stronger price. If you can add to that an expectation that they will be able to grow that income by expanding the business, introducing new products, reducing costs etc then the expectation / opportunity can add a premium to the price.
Taking Action
Business succession should be a part of your long term business management. A plan should be developed as a matter of priority and form part of your ongoing competitive strategy.
Value is not built overnight, and will only grow as with anything enduring and worthwhile through the compounding benefit of continuous focused effort.
Start today, benefit tomorrow.