Succession Planning and Management Blog

At Virgin, we have never had to struggle with the typical problems of big corporations, probably because we never really got big – we just diversified. Our growth was once described as “vertical disintegration” because our new businesses frequently appear to be tangential or even completely unrelated to our core mission. When Virgin was known for producing and selling records, for instance, we started up an airline.

We see a uniting factor in our dedication to customer service. Instead of becoming a huge, bloated entity locked into a single sector, these tangential forays have kept our company fresh and different – we are always learning new businesses and recruiting smart new people. Each Virgin company is run by its own largely autonomous management team that relies on the same small-business principles we’ve employed since the very beginning.

Whatever route you decide to take as you expand your business, make sure that it builds on your company’s past successes, and that it fits with the corporate culture and the vision for the future that you and your team have created. If someone says, “That’s not the way a big company would do it,” take it as a compliment!

One of the most common questions we get asked is “what is my business worth?” and whilst there are certainly some financial and accounting formulas that could be applied to answer this question there is also a hell of a lot work that needs to be done that is nothing to do with finance or accounting but rather with the commercial and operational issues within the business largely utilised to determine risk.
Risk is an important aspect of this equation – as like any investment – risk and reward are directly related -in other words the higher the risk the lower a valuation versus comparative businesses.
EBIT multiples (earnings before interest and taxes) are a commonly used tool to estimate the valuation of comparable businesses, occasionally EBITDA multiples are used (earnings before interest tax depreciation and amortisation) this method also removes the non-cash expenses of depreciation and amortisation and therefore gives you a realistic picture of the cash which might be generated by the business over a period of time – in other words the reward you can expect for your risk.

The most common way to utilise an EBIT multiple to calculate the value of your business is to find a comparable business and see what EBIT multiple it is currently trading at – whilst this information is often difficult to find with small privately held companies it is quite easy to obtain for larger listed companies – in fact these numbers also called P/E ratio (price to earnings) are published in most of the financial newspapers. The issue though is that there is a substantial difference between most listed companies and small privately held businesses which inherently involve significantly more risk (and therefore a reduced EBIT multiple).

One method is to take the multiples for listed companies that are as similar as we can possibly find (although this in itself is often difficult) and then discount that back to account for the increased risk in the small privately held business. In other words a listed company may will be trading at need multiple of 9 or 10 times and we would discount that back to account for a number of factors (see some examples below) so the small private company may well be trading on a multiple of 3 or 4 times.

Some of the common discounting factors relate to management experience and expertise (including the risk of key man dependence), geographic risk (often small businesses are based in one location only), financial and capital risk (small businesses are often restricted their ability to raise capital or debt to fund further growth and expansion of the business). There are a number of other issues that we would examine when undertaking the valuation but as you can see in most cases small privately held businesses can be discounted substantially from the EBIT multiples we see on listed corporates.
In order to maximise the value of your small privately held business – it needs to look and feel as much as possible like a large listed corporate and that is often about reducing risk in as many areas as possible.

When Vanessa Troyer and Chris Farentinos launched MailBoxes4Less.com in 2000, they didn’t give much thought to how they would exit the online mailbox distribution company.

All that changed in 2006.

Recognizing the huge growth potential in manufacturing high-end mailboxes for builders and retailers, the Los Angeles couple decided to channel all their efforts into a second business, Architectural Mailboxes. This meant selling the highly profitable MailBoxes4Less.com to free up the necessary funds.

It wasn’t a scenario most entrepreneurs envision when they think about exit strategies.

“No one was sick,” says Troyer, 45. ‘We didn’t want to retire. Investors weren’t saying ‘I’m done.’ There was no reason to sell the business.”

But sell the couple did, garnering more than $1 million for the venture they’d founded eight years earlier with just $25,000.

It was the right move: Today Architectural Mailboxes continues to grow, with products in every Lowe’s store in the nation and more than half of Home Depot’s locations. Amazon carries 140 of the company’s products. And, Troyer says, the business is on track to grow by 38 percent by the end of 2011.

Hoping to follow in Troyer and Farentinos’ footsteps? Experts say the best way to ensure you leave your company when and how you want–with money in hand–is to start plotting your exit strategy now, even if you’re still developing the business plan. Sadly, study after study shows that a majority of entrepreneurs have no exit strategy whatsoever in place.

If this sounds familiar, don’t fret. You’re about to get a crash course in preparing for two of the most common ways to successfully exit a business : turning the reins over to a relative and selling the company.

Succession Planning vs. Selling to an Outside Party

Planning your exit strategy is about making “a proactive series of decisions” instead of merely reacting to unexpected events like a heart attack or an economic downturn, says Ted Thomas, managing partner of Sun Exit Advisors, a business transition planning firm in Chicago.

“It’s almost like the military: Before you go in, you want to know how you’re going to get out,” Thomas says.

The idea is to put in writing when you see yourself leaving your business, how much income you need to walk away with and how you see yourself transitioning out. Do you envision yourself eventually downshifting to consultant? Growing the business to sell it? Grooming an heir to take your place?

If your hope is to keep the business in the family, experts say the time is now to have the tough conversations with your spouse and children about whom you want to succeed you–and if they’re even interested in the job.

“If you have buyers coming to look at your business, one of the first things they’re going to ask is ‘Have you talked to your family about this?’” says Terry Mackin, managing director at Generational Equity , a Dallas-based firm that helps middle market companies plan their exit strategy. “They don’t want to come into a situation where the family is at odds about whether the business should be passed along.”

“One of the greatest mistakes people make is assuming that a family member will want to or be able to take over the business,” says Jack Garson, business attorney and author of How to Build a Business and Sell It for Millions . “Rather than trying to fit a square peg into a round hole,” he says, sometimes the best way to provide for an heir is to “sell the business to somebody else and give the money to your kid.”

If you do see selling as your exit, you need to focus your energy on creating a business that buyers will want. This means working on your profitability, competitive edge (so you stay profitable), sustainability (so you survive economic downturns), scalability (so the business grows) and corporate culture (so you hang onto good people), Garson advises.

“If you’ve got all this,” he says, “people will be banging down the door to buy the company.”

Finding the Right Advisors

As glamorous as selling your business may sound, entrepreneurs who’ve been there will tell you that it’s an incredibly stressful, time-consuming process fraught with dozens of moving parts and truckloads of paperwork. If you don’t hire the right financial, legal, tax and business advisors to help shepherd the sale through, you’re doing yourself a great disservice.

“The mistakes you could make just getting the tax part wrong could cost you 50 percent of the proceeds of the sale,” Garson says.

Along with an accountant and attorney well-versed in business sales and acquisitions, as well as a personal wealth manager, you’ll probably want an experienced professional in your corner who can broker the deal–namely, a business broker or an investment banker.

“If you’re selling the business for $500,000, you’re using a business broker. If you’re selling the business for $50 million, you’re using an investment banker,” Garson says, adding that the cutoff point between the two falls in the $5 to 10 million range.

Besides helping you set a realistic asking price and assembling the necessary marketing materials to entice sellers, brokers and investment bankers will discreetly contact potential buyers on your behalf.

“In general, sellers do not want anybody to know that they’re selling the business,” says business broker Sally Anne Hughes, owner of Hughes Klaiber a New York brokerage firm for midsize businesses. “If a client finds out the business is for sale, they might be concerned. Employees might also be concerned. Vendors might be concerned that they won’t get paid.”

To find a reputable broker or investment banker, get recommendations from your business advisors or entrepreneurs who’ve sold their business, Garson says. Be sure to vet any brokers or investment bankers you’re contemplating working with as they predominantly work on commission.

“Ask them the average size and price of the businesses they’ve sold,” suggests Architectural Mailboxes’ Troyer. “If your company is worth $1 million and most of their sales are $7 million, you’re not going to get much attention. You want to be with somebody who’s selling businesses right around the price of yours.”

Read more: http://www.entrepreneur.com/management/operations/article205816.html#ixzz1QEv9qLaP

As a kid, I remember my father’s efforts to dodge Mum’s attempt to lock our family into a weekend visit with friends Dad regarded as “difficult”. Intense effort was focused on ducking weekends until the start of the football season. He then used the entire season of Saturdays and my Sunday junior football comp to shield against even the possibility of a visit. But by October, even he recognised the visit could no longer be avoided. His tactics shifted from evasion to a quick afternoon tea. In this and only this respect, Wayne Swan reminds me a lot of Dad. He agreed to a full-on tax summit, but under sufferance to satisfy a difficult friend in Rob Oakeshott. Rob thought he was getting a re-run of the 1985 Hawke-Keating tax summit, which lasted a full week and discussed structured reform options. It was all going to happen by the end of this month “at the latest” — but Swan delayed it until October, and diluted it from a “summit” to a 48-hour “forum”. While Swan’s been imitating my Dad, many in the business community have been expending considerable energy trying to rebirth the disappearing summit into some kind of a new millennium version of a “tax Oktoberfest”. This is noble but futile. The meeting will occur, but it won’t achieve anything because Swan’s aim, like Dad’s, is to survive. As our family Valiant pulled into the dreaded destination all those years ago, the sound of the handbrake being engaged was quickly followed by Dad saying “we’re leaving here by 4pm”. It’s now time everyone recognised that Swan will arrive at the forum with the same attitude. Accepting this reality does not mean abandoning discussion about the future of our tax system. Instead it means having a dialogue about the future reform options around and outside the shrunken Swan seminar, and looking to the taxation incentives needed to drive enterprise and productivity in our economy. There are many worthy topics. Some receive a lot of airplay -others just a trickle. Of the latter, employee share ownership deserves greater focus. Using the tax system to help spur a revolution in employee share ownership has the potential to deliver significant benefits. The story of the post-war Australian economy has been one of a steadily growing ownership and enterprise economy — in three waves. First, the home ownership wave, which accelerated markedly in the Menzies years. Second, the small business wave, which steadily brewed during the same period, but was then turbocharged by the economic reforms of the 1980s and 1990s. Third, direct share ownership -the wave of the last 20 years. Paul Keating got the ball rolling with privatisations. The Howard government kept it rolling with the sale of the final tranche of the Commonwealth Bank and Telstra. The result quickly extended share ownership to mums and dads who had never owned shares. To keep injecting petrol into the engine, Peter Costello effectively halved capital gains tax. Between 1990 and 2000 the percentage of adult Australians directly owning shares increased fourfold. Within the context of tax reform we should be looking at the incentives and architecture needed to bring on the next wave. Encouraging more employers to offer employees “a stake” in the business they work at and in, is the next great opportunity in the ownership enterprise project. Employees with shares are more likely to be in tune with and part of, its mission and success because they have their effort and initiative rewarded, not just with pay and/or bonuses — but also with a stake in the outcome. For the enterprise, it unlocks the restrained human capital of employees — which can drive improvements and greater success, bridging the traditional divide between employer and employee. In the longer term, there is the potential for ownership planning that includes the employees becoming owners or co-owners. As we look to the challenges in the decades ahead, we know our capacity to do better will be built on a more productive economy. A revolution in employee share ownership has the potential to add a couple of cylinders to our economic engine. There have been diverse champions of employee share plans in the past, from Brendan Nelson to Mark Latham. Now is the time for the idea to get the priority it deserves. Many other worthy reforms have had long gestation periods before acceptance and implementation. Now is the time to start talking about and planning a new tax framework to spur and build the next wave of the ownership and enterprise revolution for the decade ahead and beyond.

• Tony Smith is the shadow parliamentary secretary for tax reform.

To put the number of retirees in Australia into perspective, consider the number of Australians turning 65 each week between 2000 and 2030

As you can see, the number of retirees has been on the rise since 2000. And this trend is expected to continue for another 15 years or so. The first baby boomer ( born in 1946 after World War II ) turned 65 in 2011.

Accordingly, the proportion of Australia’s population aged 65 or above is projected to rise from around 14% currently to 24% in 2050. Similarly, Australia’s median age is expected to increase from around 38 years of age currently to 43 years in 2050.

Interestingly, many of this generation own and run businesses – some small some large, some family owned, some larger corpoates with hundreds of employees – this reporesents a large body of wealth that needs to be carefully managed as a substantial transition is about to occur.