Succession planning a must for small business
Did you know that 75 per cent of business around the world is family owned?
And about 70 per cent of those businesses have no formal succession planning.
As a result only about 10 per cent of them survive into the second generation.
Don’t be part of that 70 per cent with no future plans.
Taking action now on your succession plan will save mounds of heartache down the track (yes, heartache in addition to the sorrows of your passing!)
And guess what, business succession planning is in your interests, too.
Succession planning enables you to “exit” the business in favor of the next generation – at a price and time of your choice.
It sets up your retirement funds and enables the next generation to finance the purchase, plan for the future and make decisions with a degree of certainty. In effect, it’s good news all round – so join the 30 per cent who are making it work.
These are the issues you need to address:
- Your own feelings about whether a child will divorce in the future and if the business will be split.
- Who to hand over to if there are equally competent siblings?
- Are your children interested in the business?
- Do you really want to let go?
- Are you able to let go?
- How to value the business?
No wonder succession planning is often in the too hard basket!
The first thing to do is contact an independent, experienced advisor.
They can help you delineate the emotional issues from the financial. They will clarify the achievable exit options (such as handover to family, trade sale, merger, management buyout or liquidation). They will draw out what each family member really wants. (And uncover the hidden issues that are always there.) They will objectively assess whether some are more suited to the business than others. They can assess how non-suitable members can be given other value. Lastly, an outside professional can look at the Will structure and the tax implications of the decisions to be made.
Many people will feel uncomfortable as they read this. The conversations and emotions that a difficult succession dredges up are incredibly hard to deal with.
But the reality is they become so much harder for everyone else to deal with when you’re just months away from retirement or, perish the thought, out the door permanently.
Planning now will deliver you a financially stable and stress-free retirement. Succession plans in place now also protect all the family members should you unexpectedly depart
Some common issues that may arise include ownership, technology, systems, goals, culture, attitudes, values, feelings, politics, products, new innovations and so on. They aren’t just words on a page, they are the real factors which can destroy a family and a business at a time when it is most vulnerable.
Having the issues out in the open and being resolved in a professional, timely manner with good input from all concerned is a much healthier option than the “‘behind the scenes” gossip that many business without succession plans have to contend with.
The key elements of a good succession plan include:
- Defining the business direction, setting clear goals and clear expectations
- Answering the who, how, when questions around ownership
- Addresses value for those not intimately involved in the business
- Setting management (versus ownership) goals and roles and responsibilities, investing in the right people
- Planning around business operations; cash flow, fundamentals, value
- Developing wealth strategies (so that wealth is built outside the business)
- Tax and asset protection
- Estate planning
In summary, succession planning lets you put in place an agreement that keeps the business going after you depart. It frees up cash for you now and helps keep the family together after your death. It should be a main priority.
*Andrew McCombie is an experienced business advisor with a background as a Chartered Accountant and Tax consultant. As the founder and managing director of Cornerstone Consulting, Andrew created an advisory firm which helps small to medium businesses by providing practical and insightful strategies for success.
Ph: 02 99653772