Succession Planning and Management Blog

More than half of family businesses do not have a written strategic plan – over 62% of respondents do not employ a formal process for constructing strategy and 57 % noted that their company does not have a written strategic plan.

More than half of regional family businesses do not have a buy / sell agreement – 52% of CEO’s indicated they do not have a buy / sell agreement in place for company shareholders.

68 % of businesses do not have a board of directors.

78 % do not have an advisory board.

41 % of CEO’s plan to retire within 5 years.

Research undertaken by the Society for Executive Wisdom during the first quarter of 2011 collated the results of what Australian organisations felt would be their greatest business challenges for the financial year July 2011 – June 2012.

Here is a snapshot of the results in order of magnitude:

1.Cost-cutting strategies to maintain profitability – 38%
2.Faster financial growth – 35%
3.Government threats through policy and taxation – 29%
4.International competition caused by weaker Australian government regulations – 27%
5.Low-cost competition via internet – 26%
6.Competitor threats to market share – 22%
7.Requirement to expand into new markets – 17%
8.Requirement to launch new products and services – 15%
9.Requirement to refresh senior management – 11%
10.Coping with market changes – 9%

These results were obtained by interviewing 143 business owners or CEOs of Australian-based organisations with a turnover of more than $1M p.a. and more than 5 years in operation.

Baby Boomers wave – a change in ownership and transfer in value

There is a sea change in the family business marketplace. About 40% of family businesses in 2 respected US based surveys expect the leadership of their companies to change hands within the next five years. Well over half (56% in the MassMutual study, 71% in the CFIB) expect a leadership change within 10 years. More than four out of five businesses are still controlled by their founders (MassMutual). About a third of the companies surveyed have a chief executive who’s older than 60, and the average age is 54. Only about 11% are younger than 41, and only about 11% are older than 71 (MassMutual). About 88% of the survey respondents believe the same family or families will control the business in five years. But succession statistics undermine this belief: about 30% of family owned businesses survive into the second generation, 12% are still viable into the third generation, and only about 3% of all family business operates into the fourth generation or beyond.

Family Business Estate Planning

The state of estate planning among family business owners is probably better than ever before. Having said that, other than preparing a will, almost 20% have no estate planning! Almost two-thirds of significant shareholders in the family company know of the senior generation’s share transfer intentions, but that’s a surprising drop in the figure of 76% from a survey six years prior. Even worse, over one in three respondents have no knowledge of the senior generation’s transfer plans. Senior generation family business members struggle mightily with how to fairly divide up their life’s work product. For example, a 2006 PriceWaterhouseCoopers survey found that 53% of the chief executives of the fastest growing U.S. private companies don’t address the disposition of their business in their estate plans at all. In addition, only 22% of owners surveyed have revised the plan in the past five years.

Exit Strategies

The surveys tell us that, for company owners who are considering their exits, the most common method is to attempt to sell to non-family members (CFIB). 26% intend to transfer their business to family members, and 26% of the others have created no plans at all. Since the surveys indicated that approximately 40% of family companies will transition within the next five years, to have no plan at all for how that’s going to happen is a significant cause for concern.

Part 1 – What Makes a Business Valuable

While every business certainly is different, there are a few trademark characteristics that we see time and again in high value businesses. Any business with good backbones can have these same winning characteristics woven into the fabric of the business: This is music to the ears of succession planning clients who are getting ready for an exit from their business, as it means they can realise a higher price for their business … provided they have the right planning, knowledge and execution of a strong strategic succession plan.

Weaving these winning characteristics into a business is the focus of Step 8 of our Strategic Advisory program, which is all about Value Enhancement.

First, let’s get a grip on some business value basics. Rest assured, I’m not about to launch into valuation theory or talk about the different profit multipliers across industries. These things all come out in the wash and don’t really make a particular business stand out from the crowd: By ‘high value’, I mean those businesses that stand ahead of the pack in their arena; ahead of the competition in their industry, their market.

To be ahead of the pack; to have a really valuable business, it helps to view the business from the perspective of a potential purchaser. The purchaser would be crazy (or ill advised) if they only consider the past performance of the business: after all, they’re making this purchase because they expect a return on the investment. So a well educated purchaser will analyse the business in a way that helps them formulate a view of what the business is likely to return in the future. A purchaser will probably ask themselves, ‘how certain are the future earnings of this business?’. If the business has a high degree of uncertainty (ie. risks), and it doesn’t show any history or potential for increased future earnings (ie. growth), then the purchaser will be less certain of the future earning potential, and therefore less willing to pay a good price.

This translates to:

Business Value is High where Growth is High and Risk is Low … or

Business Value = Profit x (Industry-based Profit Multiple adjusted for Growth and Risk)

So now we understand that fewer risks and stronger growth make a business more valuable, would you like to know what the Big Ugly Risks and the Gorgeous Growth Attributes are? Hit these in your business, and you’ve found some real sweet spots when it comes to making your business more valuable.

In my next article on succession planning, I’ll share with you the Big Ugly Risks … and later, the Gorgeous Growth Attributes.

Generation Y is often portrayed as difficult to deal with, overly-demanding and the bane of a manager’s life. Yet, according to new research by Leadership Management Australasia (LMA), Gen-Y is looked upon favourably by most workplace leaders and employees across generations.

Among 14 L.E.A.D. Survey questions, participants were asked which generation they would prefer to work with and which generation they would prefer to report to in the future.

Only 4% of both Gen-X and Gen-Y chose Baby Boomers in the “Work With” question with 14% and 8% respectively nominating Baby Boomers in the Report question.

Those findings:

In the future, to work with –
•ONLY 17% of Baby Boomers prefer their own generation, 40% prefer Gen-X, 27% Gen-Y
•57% of Gen-X prefer their own generation, 32% Gen-Y, 4% Baby Boomers
•53% of Gen-Y prefer their own generation, 29% Gen-X, 4% Baby Boomers

In the future, to report to–
•41% of Baby Boomers prefer their own generation, 33% Gen-X, 5% Gen-Y
•71% of Gen-X prefer their own generation, 14% Baby Boomers, 6% Gen-Y
•50% of Gen-Y prefer Gen-X, 24% their own generation, 8% to Baby Boomers

(Remaining percentages in all categories covered Gen-Z and declarations “not to work with or report to anyone else”.)

The results are weighted to reflect the latest Australian Bureau of Statistics Labour Force data (2011): Pre-boomers (born before 1945) – 2%; Baby-boomers (born 1945-1962) – 26%; Generation X (born 1963-1980) – 39%; Generation Y (born 1981-1995) – 32%; Generation Z (born 1996 or later) – less than 1%.