Succession Planning and Management Blog

The exit rate and preferred exit options are key issues to family businesses. The quickening approach of the baby boomers bubble and the fact that family owned businesses represent $1.6 Trillion in value correlates to a large number of business owners searching for an exit strategy to ensure the return on their equity in their business.

Employee share plans (ESOP) provide an effective equity extraction strategy for the business owner in terms of:

• Funding an exit;
• Compliance and corporate governance issues;
• Delivering improvements in performance; and
• Achieving business continuity after the owners exit.

An ESOP provides a practical solution to an exit strategy fraught with incompatible timetables, lack of funding and inadequate structures. It is the structured approach for transferring ownership whilst facilitating the smooth exit of current owners. A study conducted by KPMG in 2006[i] on family businesses indicated that selling businesses to employees, management and other owners was the second most popular choice following selling in the open market. There is thus a great need for the use of ESOP’s as a vehicle for transferring ownership to facilitate smooth exit of current owners.[ii] This tool is very popular in the United States, with nearly half of all ESOPs there used by private firms to buy-out an owner. It also positions the business as a more competitive employer and attracts and retains key staff. 50 % said securing the right talent / finding competent staff was the number one issue and retaining them was also highly ranked with 16 %.

How does it work?

The decision to implement an ESOP is not for every business, however, if found to be suitable provides a viable exit strategy for the business owner and enables the business to continue operation. The plan provides a structure and mechanism for a profit share to be provided to staff solely for the purpose of purchasing equity in the business with those funds being reinvested into the equity of the business rather than taken at as cash payment.

“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.” LJ Hooker Commercial Central Coast has had a Peak Performance Trust (ESOP) in place for four years and was recently awarded 2010 Employee Share Plan of the Year by the Australian Employee Ownership Association. This plan operates over an extended period and has considerable success in attracting, retaining and motivating key staff within the business who now have a vested financial interest in maximizing the value of the business for the owners and the staff.

The preference of implementing an employee share plan as opposed to other exit strategies ( or in fact as stage one of an overall exit strategy )  is gaining momentum in Australia and is equally gaining popularity amongst SME’s. The reason -  great benefits are realised to the business owner, the employees and the business through improvements to retention, motivation, performance, productivity and profitability.

Succession Plus is pleased to announce that we have founded the Exit Planning Institute, Australian and New Zealand Chapter in conjunction with the Exit Planning Institute in the United States. The Exit Planning Institute® (EPI) is the premiere international membership organisation serving the educational and resource needs of the exit planning profession. Formed in 2005 to bring together business brokers, M&A advisors, accountants, financial planners, lawyers, management consultants and other business advisors, the Exit Planning Institute’s members, include  some of the most highly recognized leaders in the industry, who draw upon their combined expertise to better serve the needs of small and mid-sized business owners worldwide. The common thread uniting these different professionals is their commitment to helping clients exit their companies successfully. We look forward to working with EPI here in Australia and New Zealand. For further information on the Exit Planning Institute check out their website – http://www.exit-planning-institute.org/, and keep your eyes on our website and newsletter for further details of our inaugural conference in Sydney in July and other events and membership details.

Often we work with clients whose uncertainty about which phase their business is actually in ( or should be in ) – expansion or efficiency – causes difficulty and confusion. One of the most difficult aspects of strategic business planning, especially around succession or exit transition planning, is this aspect of efficiency or expansion. In my view, businesses simply can’t do both effectively – that is you can’t successfully grow and expand whilst building within the business, systemised processes and efficiencies. The two require a different mindset, different focus from team members and deliver vastly different business outcomes. In many cases, where businesses have been able to focus only on expansion they can actually achieve that phase of the business, only to find customer complaints increase, staff turnover becomes an issue simply because they haven’t built any efficiency into the system – there are no structured policies and procedures, the processes are not documented. As the business grows it actually becomes more and more inefficient, this combined with the fact that growth requires funding often causes cash flow and financial difficulties within the business.

A good strategic succession plan must combine and manage timing of the phases between expansion and efficiency and ensure the business is never doing both at the same time. I have one client who has an entirely different management style (for example the agenda at monthly management meeting changes) depending on which phase the business is in. When the business is in expansion phase the focus must always be on sales and marketing – new clients, new contracts, new-product development, new networking relationships, new referral agreements et cetera et cetera. In efficiency phase, whilst we don’t ignore any of these we certainly don’t focus our attention on those areas – our attention must be focused on building systems, documenting policies and procedures and ensuring every aspect of our process is as efficient as possible. The board’s role is to advise the CEO / management team on which phase they should be in and how to transition between the phases over time. Effective management of this aspect of strategic succession planning alone can dramatically improve the business outcome and value.

Proposals from shareholders on how Apple should plan for coping without Steve Jobs were rejected at the company’s AGM, but the Laborers’ International Union of North America has vowed to keep up the pressure.

In a subsequent press release, the Union cited its members’ pensions as a need for Apple to do all it can to guarantee good stock prices.

Detailing its commitment to continue to push Apple to release its CEO succession plan, LIUNA General President Terry O’Sullivan said that “the men and women who invest in these plans do back-breaking work all day building this country – they deserve to have their retirement savings invested in stable, responsible companies”.

“We’ll continue to demand Apple’s board behaves responsibly and does right by its shareholders. It’s good for the company, investors and the economy for Apple to demonstrate that it’s prepared,” said Mr O’Sullivan.

Despite Steve Jobs’s key role at Apple, recent market reaction to his need to take sick leave was however less extreme than some analysts had suggested it might be.

The company had publicly opposed the shareholder proposal, which was initiated by the Central Laborers’ Pension Fund. Apple claims that disclosing detailed plans would give competitors “an unfair advantage” and “undermine (Apple’s) efforts to recruit and retain executives.”

Investment advisory firm ISS, however, supported LIUNA and the proposal earlier this month.

- Matt Warman

© Telegraph.co.uk

One of the world’s best know business authors Michael Gerber – the E-Myth – has stated again recently the importance of exit planning – ” HAVING AN EXIT STRATEGY IS THE BALL GAME FOR ANY ENTREPRENEUR … the idea is simply to build, grow and sell – whether sells means list, pass on to family, merge, sell to employees or trade sale there has to be a strategy ! ”