The vast majority of businesses in Australia are small businesses and many of those are family owned operations or partnerships.
Unlike large companies, small businesses and partnerships without solid succession plans often fail when the owner or a senior-level partner retires, becomes incapacitated or dies. What’s more, problems can arise when partners no longer get along and decide to their own ways.
That’s why proper succession planning is essential, in particular, for family businesses, which will have to either identify family members who are qualified for leadership positions or consider other contingencies beyond the family. Succession planning for family-owned businesses, however, involves the nuances of family relationships and can be a difficult process.
Starting and growing a business usually involves a fair amount of sweat and sacrifice. Yet many entrepreneurs who have spent years building successful businesses would rather have a root canal than undertake the often-painstaking process of succession planning.
A succession plan is essentially an exit strategy, ideally one that ensures that the current owner of a business, or that person’s heirs, will be able to cash out at a fair value under certain circumstances. In many cases, succession plans are also designed to ensure that businesses survive and prosper when their current leaders are no longer in charge—because they either retired, have died or are unable to work.
A small business is often the largest asset belonging to its owner. Yet many owners procrastinate when it comes to succession planning, if they bother to do it at all.
Some avoid succession planning because they don’t ever expect to fully retire or, like many people, haven’t come to terms with their own mortality.
Having devoted a good chunk of their lives to building a business from scratch, some founders are reluctant to face the fact that they will eventually have to hand over the reins if their companies are to go on without them. Others may be loath to make certain hard choices, such as whether to pick a grown child or a long-time employee who is not related as their successor.
Given the complex issues involved, succession planning can be very time-consuming. In some cases, it can take a year for a business owner to draft and begin to implement a succession plan.
Small-business owners tend to be very busy people, and many figure they don’t have the time to address certain long-range issues. Others balk at the notion of paying thousands of dollars in fees to business coaches, lawyers, accountants etc.
But the absence of a succession plan leaves a lot to chance. Squabbles between the heirs of a deceased owner, or between heirs and employees, can sink a business.
Although succession planning isn’t an exact science, the process typically involves a fair amount of soul searching, fact finding and goal setting. Business coaches who work in this field usually have lengthy discussions with new clients about their goals and values, both personal and businesswise.
Clients often must wrestle with emotionally charged issues, such as whether to eventually sell a given business to a loyal employee or an outside buyer. Succession plans may detail how ownership interests will be transferred—such as through an immediate buyout, a stock transfer or a so-called “earn-out provision”— and over what time period the transfer should take place. Some owners even decide to provide financing for a buyer.
Determining what a business is actually worth is usually a critical part of succession planning. Business coaches advise clients work with professionals who specialise in valuing businesses. Potential buyers, including internal successors, tend to look more favorably upon valuations prepared by an objective third party. Valuations are based on a number of factors, including the worth of hard assets, such as real estate and machinery, and the ongoing cash flow of a business. The latter is usually given a good deal of weight when it comes to valuing service-oriented businesses.
Sometimes, the valuation process is a wake-up call for business owners. Some owners find that they aren’t likely to net enough from the sale of their businesses to maintain their current lifestyle during retirement, even after investing the proceeds. That realisation may prompt some to take steps to improve cash flow while they are still calling the shots.
In the eyes of many investors and clients, a business with a succession in place, particularly a plan that has been updated periodically, has more appeal than one that isn’t likely to outlive its current owner.
As a business coach specializing in SME’s and family business I am well equipped to assist you with this often ignored, but critically important issue. As the column’s heading indicates, ‘prepare and prevent’.