Succession Planning Is Vital To Avoid A Nasty Shock When You Try To Sell Your Family Business
According to the NZ Herald, 69% of family businesses are forecast to becoming onto the market in the next ten years as baby-boomer small business owners look to retire. But for many, their retirement fund is going to be much less than they had hoped for. Why? No succession planning.
For many family businesses, the main focus or association is with the owner. They are often a strong character that has worked hard to promote and grow the business by sheer hard work and persistence. The owner is seen as the essence of the business. And if you take the owner out, then there is often not much left. There may be a history of profits to show but again, that is often driven by the will of the owner. There is nothing tangible for the potential purchaser to buy.
What does a buyer want in a business?
Most business sellers think that the obvious thing a purchaser wants is a steady increasing profit history. That’s true but they usually want more than that.
A buyer will probably not want to work in the business as much as the current owner but would rather have a management team in place. This is especially the case if they have other business interests. So they will be looking for systems that mean the company can run smoothly on its own without the constant input of the owner. Think of McDonalds. It runs the same everywhere in the world by novice recruits with little training simply because it has systems in place.
How the population shift affects your nest-egg
It gets worse because there is a shift in the age distribution of the population with a smaller number of adults following the baby-boomers. That means fewer potential buyers for a greater number of businesses which can have only one general outcome.
Lower sales prices.
On the other hand, those buyers in the market will be looking to buy those businesses with the best value, good potential and easy to run. They will have plenty of choices.
According to Paul Kane from Grant Thornton, “To maximise the selling price to a third party the business owner needed to present a compelling vision of what the business could become rather than a historical perspective.” Source NZ Herald July 13 2010.
What is succession planning or how to increase your retirement fund?
So after the gloomy scenario, what can you do to protect yourself and increase the sale value of your business?
Simply – you need to have a business succession plan in place.
It can take up to five years to bring your business into shape to maximise your sale value. As most sale prices are based on a value of the profit, it makes sense to maximise the profit in the business. Every dollar of profit is worth 4, 5 or more in a sales price.
This can include, managing expenses, trimming “leakages”, lowering your drawings, marketing systems that don’t rely on the personality of the owner, a strong management structure or executive development, processes and systems that make the business flow.
What can you do about it?
Frankly, most of those issues are not very exciting and revolve around the money side of the business. So having an accountant experienced in succession planning best practice is going to be an essential part of your business continuity plan. We have worked with clients to start them on their way. We also have alliances with other expert service providers in some of the other areas outside of the financial aspect – recruitment and HR strategy, systems planners, marketers and other key service areas.
The most important thing in your business right now
Succession planning is THE single most important activity you can start for your family business.
As others slowly come to the same conclusion, there will be more companies coming onto the market but relatively few that are able to demonstrate, over a longer-term, that they a good purchase prospect. Don’t be in the pack of those with a last minute attempt at making their business sale-able . Put yourself in a position to provide yourself with the pension fund you hoped for.
Call 523 3800 for a free initial consultation to see how your business can be put into shape for maximum sale price. Don’t delay.
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