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CLIENT PROFILE:

The client approached us for a meeting after a business succession planning seminar. His business, which had been trading for over 10 years, was owned 75 % by the CEO (48 yrs old) and his wife (47) and 25 % by his brother (50). He was the only shareholder working in the business (as the CEO). The business turnover was approx $4M and the business was quite profitable with solid growth.

STAGE ONE REPORT:

Our initial stage one report included a full review of the business, structural review, benchmarking, due diligence and valuation. Several issues were identified:

  • Structural issues – shares were owned by individuals, all three shareholders were directors and guarantors, the trading entity owned the business property ( a substantial asset ), the trading entity also held appreciating assets ( in this case a vineyard ) which was unrelated to the business, there was no structure for intergenerational transfer of assets ( including the business ), SMSF was not being utilised to build assets for retirement.
  • Risk management – no key man insurance was in place for the working director – upon whom the business relied heavily, the business had no insurance to cover existing debts, and no buy sell arrangement was in place.
  • Due Diligence – HR issues had become common – recruitment and retention of key staff was key to the business but no policy was in place, regular appraisals were not conducted, the business had been previously sued for wrongful dismissal, some OHS procedures were outdated or nonexistent, recent changes to laws had not been reflected in agreements, several agreement had expired (and no one had noticed).
  • Benchmarking – financially the business was performing well but gross margin % was below industry averages and costs relating to staffing were higher than normal (largely a result of the costs attached to recruitment and training new staff) – these both represented a profit gap of over $350,000 per annum.
  • Valuation – the business was valued at $3M but with some of the issues above being handled this valuation could easily increase by at least $1M.
  • Succession /Exit planning – Shareholders had no exit planning in place and thought a trade sale most likely, the business was not in a position to be sold at present, owners exit timeframe was approx 10-12 years ( key person wished to leave at age 60 ).

STRATEGY:

  • There were several key staff ( 6 ) the business were dependent upon ( as well as the owner )
  • The focus on improving profitability would deliver significant increased value over 10 years.
  • The structure was modified to have shares held by a family trust and only the CEO remained as a director/guarantor.
  • The business premises & vineyard were transferred to a newly set up SMSF.
  • HR specialists were engaged to resolve the various HR issues and introduce comprehensive policies and procedures throughout the business.
  • The HR system of recruitment and appraisals was closely linked to a new bonus structure – focusing on profit growth.
  • A Peak Performance Trust (Employee Share Plan) was introduced to retain key staff, attract future employees and provide an equity based incentive to key people to build wealth within the business, whilst providing a funding mechanism for shareholder exit over a 10 year timeframe.
  • A business coach was introduced to up skill key personnel with a view to having them be in a position to run the business within 10 years and to streamline business operations for maximum efficiency and profit.
  • A new accountant was appointed who took a proactive approach to the business and had regular meetings with the senior management team to review performance.

OUTCOMES:

  • Business valuation has increased and will continue to improve.
  • Staff retention is dramatically improved.
  • Systems and policies are in place throughout the business.
  • The PPT provides a predetermined sale of the business to staff over a 10 year period.
  • Assets have been protected and wealth is now accumulating outside the business.
  • Insurance is in place to protect all shareholders and the assets.
  • Unplanned events (death, sickness etc) have been handled by a buy sell agreement and corresponding life cover.
  • Key staff are being constantly coached and performance is continually improving.
  • Profit targets are being met and the business is not reliant on any one person.