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67% of Australian companies are family businesses.
(KPMG 2008 Family Business Survey.)

90% of Australian family businesses employ less than 200 people and are thus categorized as “small”.
(“Internationalization of Australian Family Businesses: A Managerial Capabilities Perspective,” Jill Thomas, Family Business Review, September 2006.)

About one-third of Australian family firms are expected to change CEOs over the next few years, and while 53% are sure that the successor will be a family member, 83% do not have a succession plan.

In 60% of Australian family-owned companies, the owning families are directly involved.

The 1997 survey indicates that accountants, not lawyers, were the primary source of succession planning advice for family businesses of all generations. However, the 2003 survey indicates that 29% of first generation family businesses use accountants for succession planning and 29% use lawyers. Over the generations, accountants are being used less and lawyers more. (Kosmas Smyrnios, Australian Family and Private Business Survey, 2003)

Mr Costello in his 2008 memoir, refrained from personal criticism of Mr Howard, he did, however, hold him responsible for losing in 2007: “Leadership is not only about winning: It is also about departing. Unlike Menzies, Howard never managed a transition.”

Mr Howard on the other hand blamed Australia’s longest-serving treasurer for mishandling a planned leadership transition. According to Mr Howard, he was planning to hand the leadership to his deputy with the intention of prolonging Coalition rule. But he abandoned this plan, he said, because Mr Costello overplayed the revelation in 2006 that they had a longstanding handover agreement. Under public pressure from Mr Costello, Mr Howard decided to dig in and remained leader until he lost government, and his seat of Bennelong, in 2007.

Either way the succession was bungled / mismanaged / ignored – the result was ultimately the loss of government.

According to John Birt from Radar Results, the number of financial planners seeking advice on selling their business has increased dramatically since the Federal elections. He states that based on feedback, planners believe that Bill Shorten, Minister for Financial Services and Superannuation will be more forceful in getting the reform package through Parliament, which would see the banning of commissions and various other reforms that planners believed would impact on revenues.

Historically buyers of financial planning businesses were focused on revenues, but according to Tony Fenning, Shadforth Financial Group chief executive, he thinks the days of paying a number based on revenue should be over. The group is only interested in the underlying profit of the financial planning business, and a lot don’t have much profit.

While Shadforth was seeing plenty of opportunities for acquisition, they are not willing to to pay vendors what they are asking. Fenning notes that the effects of the regulatory regime are that those businesses are worth less today than they were a year ago, 5 years ago or even 10 years ago, and they’re getting worth less each day or month or year.

Financial planners that are looking to sell their business need to adopt the same principals as other business owners, and have a long term strategic plan that focuses on the profitability of the business.  At Succession Plus, we believe the minimum time frame to maximise the wealth in a business is 5 years.

In terms of Business exit, one of the most important issues facing business owners and their advisers is the equity / wealth extraction to ensure retirement planning goals can be met for the exiting owners. This issue is where many exit plans fall over due to incompatible timetables, simple lack of funding and inadequate structures to deal with the vagaries of ownership styles and structures within SMEs. There is a practical solution available with the use of Employee Share Ownership Plans ( ESOP’s ) as a structured approach for transferring ownership whilst facilitating the smooth exit of current owners. This approach is extremely popular in the United States, with nearly half of all ESOPs there being used by private firms to buy out an owner.

A 1997 survey conducted by the Monash University Family and Private Business Research Unit revealed that over the ensuing decade 60 per cent of private business owners are approaching retirement and the ensuing transfer of ownership of assets and business equates to approximately $607 billion. Only 30 per cent of owners had a succession plan in place. As the paper concludes, “the AEOA is unaware of any widespread use of employee share schemes by privately owned companies for succession planning purposes.” In my view this is an opportunity that should not be missed.

Interestingly, our experience with clients who have implemented an ESOP as part of a business succession strategy has shown considerable benefits apart from the obvious benefit of having a documented and funded succession strategy that matches retirement planning outcomes.

One of our clients from L J Hooker Commercial Central Coast highlights the following benefits: “The succession plan offers another dimension and long term outlook for key staff that often they never get. The result is truly a WIN / WIN outcome for exiting owners who want the best for the business and to achieve the best sale price for the asset, and for their employees – the people they need to make the results consistently improve.”

Involving the key people within the business in management has also led to improved performance – “New ideas and interesting approaches to areas that the business was ready to grow into, but where we were being held back for some reason, seemed to flow in a more open way when the key people were encouraged to see themselves with part ownership of the business.”

In summary, director, Ty Blanche concludes “We have created a more understanding team of people, and added value to the individual’s performance congruently.” 

In terms of real business benefits another real estate client focuses on the sales people who are now able to state that they are owners ( often vendors want to deal with the principal of the business not “just an employee” )  – “there was a strongly positive response from our staff.  One of the great advantages to this scheme is the power that it gives to the employee in their negotiations.  They can represent themselves as having ownership in the business, which is something that most competitors cannot offer.  It’s like a trump card to a high performing sales consultant in their winning the listing in a competitive environment.”

Interestingly, in this business, internal referrals between departments have also increased – “both financial services and property management referrals from employees participating in this scheme increased at a higher level than before.  I put this down to their seeing value in contributing to the company’s bottom line because they will share in the profit.”

Principal Brett Greensill, is a strong supporter and based on the improvements in business performance and valuation his view is that all business owners should be looking at a similar plan – “the introduction of this scheme is entirely positive”

• ESOP companies are more likely to continue operating as independent companies over the course of several years. (Drs. Joseph R. Blasi and Doulas L. Kruse, School of Management and Labor Relations, Rutgers University).

• ESOPs appear to increase sales, employment and sales per employee. (Drs. Joseph R. Blasi and Doulas L. Kruse, School of Management and Labor Relations, Rutgers University).

• ESOP companies that combine employee ownership with a participative management style grow 8-11 percent per year faster than they otherwise would have been expected to grow based on pre-ESOP performance. National Center for Employee Ownership. Harvard Business Review. September/October 1987).

• ESOP companies outperformed competitors on job growth measures 49 percent of the time and 50 percent showed the same growth rate. (Northeast Ohio Employee Ownership Center and Kent State University. 1993).

• ESOP companies showed a cumulative four-year Total Shareholder Return (“TSR”) 6.9 percentage points greater than industry peers for each of the four years following adoption (26.1% versus 19.2%). In addition, the surviving companies at the end of the four-year period performed 12 percentage points greater than peers. (“Unleashing the Power of Employee Ownership: A Research Report.” Greenslade, Shelli, Hewitt Associates LLC. July 1998).

• ESOP companies had sales growth rates of 3.4 percent per year higher and employment growth rates of 3.8 percent per year higher in post-ESOP periods than otherwise expected. (“Employee Ownership and Corporate Performance.” The National Center for Employee Ownership. Quarrey, Michael; and Corey Rosen. 1996).

• Compared to 500 private non-ESOP companies, ESOP companies paid better benefits, had twice the retirement income for employees, and paid higher wages than their non-ESOP counterparts. (“Wealth and Income Consequences of Employee Ownership: A Comparative Study from Washington State.” Kardas, Peter A., Scharft, Adria L., Keogh, Jim. November 1998).

• Studies between ESOPs and productivity growth have found greater productivity and profitability in the first few years after a company adopts an ESOP. (Dr. Doulas L. Kruse, School of Management and Labor Relations, Rutgers University. 1995).

• In the United States, more than 11,500 companies have an ESOP covering almost 9 million employees. (“An Introduction to ESOPs: How an Employee Stock Ownership Plan Can Benefit Your Company, Its Owners, and Its Employees. Third Edition.” Scott Rodrick. The National Center for Employee Ownership. October 1998).

• Of the estimated $8 trillion of corporate equity in the United States, employees own about $213 billion through ESOPs and similar stock plans. (“ESOPs, Stock Options and 401(k) Plans Now Control 8.3 Percent of Corporate Equity.” The National Center for Employee Ownership. 1997).