In New Zealand many business owners look to exit their business every year; to extract some monetary value from decades of hard graft. Succession is arguably the most satisfying process for doing this, but the key is to do it right and allow plenty of time.
The six biggest succession mistakes owners make
The most common mistakes we see business owners making include:
- Not thinking about succession until a rushed approach is all that is left, or not letting go quickly enough.
- Picking the wrong people to succeed themselves.
- Not realising just how much of the business relies on them as long-term owners, often holding the majority of client relationships and deep IP around how to get stuff done.
- Insisting on passing the business to staff when sale to a third party might be quicker, easier and more beneficial for everyone.
- Assuming the business is worth more than it is – and letting that influence decision making.
- Allowing new shareholders to buy in without actually putting real skin in the game. Because of limited disposable income, letting new shareholders buy their way in by using future dividend streams – or by giving interest-free loans to buy shares. Both are bad moves for owners, although it happens all too often due to circumstances.
Start Planning Now!
If you’re a business owner, it’s inevitable that one day you’ll want to say goodbye to your business for good, which could involve one of two scenarios: an exit (or sale) through natural succession in the normal lifecycle of a business, or one through forced circumstances. Clearly the latter of these two exits can trigger distressing scenarios.
But here, we’re focusing on a better planned, more considered, exit strategy. One that has a likelihood of a much more satisfactory outcome. It’s called succession, and it requires some serious planning.
Succession planning is a step-by-step process that cannot be rushed. At business advisory Management Response Ltd we know from experience that there is much to consider.
For example:
- Is the particular market buoyant and sustainable?
- Are client relationships long-lasting and does the company have a great reputation?
- If the owner is also ‘the business’ then a successor or buyer must weigh up the business’ value without his or her contribution.
- Other considerations include any potential management or key personnel gaps. How best can these be filled?
- Are the business’s processes and procedures fit for purpose?
- Can the business continue to run well without the owner’s direct and day to day involvement?
- Will the departure of the owner mean that other loyal staff or family members also depart?
The successor or buyer must also examine the business structure. That structure should separate governance (where the emphasis is on the long-term interests of the shareholders and strategic planning) from management (which places emphasis on the short term, day-to-day operations).
Owners need to plan to make their business ‘sale-ready’, and that usually requires someone who is independent to help see what’s needed. Someone who understands the business and the sector it operates in. There are many business owners, particularly Baby Boomers, who are ready to realise value from their long-held businesses. Kiwis aren’t particularly good at exiting our businesses, and we’re not unique in that respect. But then why should we be? For most of us it’s the first, and only, time we’ll do it. Most businesses are worth something to someone else, but perhaps no more than they are to the current owner. Nevertheless, owners should be able to reward themselves for all those years of hard work and risk-taking.
What can possibly go wrong?
If you’re on the brink of deciding to exit your business, check out our ‘six biggest succession mistakes owners make’ above and then seek some expert advice, because a lot can go wrong.
Just as the British Royal Family (aka ‘The Firm’) passes on the mantle to the next-in-line, business owners too usually look to the next generation of people in their business, or sometimes family members, and desperately want them to take the business on.
This gives the owner a legacy, and those buying in a chance of ownership, control and potentially increased wealth. The new owners are people, ideally in their 30s to 40s, with great experience, key client relationships, and the drive and energy not just to maintain the business but to take the company to the next level. But they are also building their own lives, with young families, mortgages and limited disposable income. They often have limited experience of ownership, and what that entails, or little understanding of balance sheets, investment and profitability.
There are some who think every bit of profit goes straight into the owner’s pocket every year. They can also be people who are happy to take the upside, but who have little appetite for risk or the idea that there are inevitably business cycles of up and down.
When it all goes right
At Management Response our Senior Advisors and Directors have multiple successful business succession cases to draw upon for lessons and knowledge, including a large Australian multi-discipline engineering consultancy looking for a foothold in New Zealand; and privately owned engineering companies being sold progressively to their staff.
On a final note, if you’re unsure about the timing of your exit, our best advice is to talk to your peers. They’re likely on the same ultimate journey as you, although they will, of course, be dealing with different circumstances.
Get some advice from people who’ve gone through the whole process themselves or have taken at least two or three business owners through the succession process.
Most important of all, start early as it’s never too soon to start planning for a successful succession.
If you want to explore what a Succession Plan would look like for you, please click here to arrange a time for a no obligation call or if you want to talk now give us a call on 0800 674 763.
