Posts Tagged ‘Entrepreneurship’

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 ! ”

Business strategic succession planning was never heard of 10 years ago – however business owners now understand that succession is a significant aspect of the success of their business. Steven Covey’s habit number two is Begin with the End in Mind – Covey says “ if you want to have a successful enterprise, you clearly define what you’re trying to accomplish…. the extent to which you begin with the end in mind often determines whether or not you are able to create a successful enterprise.”

What is Strategic Succession Planning ?

Strategic succession planning covers all aspects of the business, but importantly focuses all attention on the end outcome –what are we actually trying to build within our business – is it something to fund our retirement? to list on a stock market ? To raise further capital and grow ? to pass on the members of the family ?
Strategic succession planning means we have a detailed and documented plan covering every aspect of our business that continually moves us closer to our ultimate exit outcome. Most business owners are so caught up in running the business at a day to day level they do not have time, effort and attention focused on the end outcome.

Why Strategic Succession Planning ?

In Australia more than 50% of business exits are currently a failure i.e. bankruptcy, liquidation, death or serious illness, divorce or simply walking away and closing the doors this is largely because no succession planning has been undertaken by the business owner.
A 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.
Approximately one third of Australian family businesses are expected to change CEOs over the next 3 to 4 years and whilst 53% are sure that the successor will be a family member, 83% do not have a succession plan. Most people go into business not only to earn income but also to build the value of their equity and to sell – the statistics tell us the majority do not get to that point.

When ?

In my view, strategic planning is all about time – the simplest analogy is to ask whether you would consider approaching a real estate today with a view to selling your property this Saturday – most real estate agents could actually achieve this; though without any time to market, prepare the property and review their buyers database – the price they achieve will not be the real value of the property. Most of the businesses I work with require a minimum of five years to maximise the value and prepare themselves to extract that value successfully.

How ?

Our 12 step process begins with simply reviewing the position today – by undertaking due diligence, benchmarking, structural review and valuation we can determine what exists in the business today and where there are opportunities and challenges which may affect the ultimate exit strategy. On most occasions business owners do not have an exit strategy and are not aware of all the options and so our strategic planning process identifies which option/s is most suitable and what we need to do to maximise the opportunity. In many cases there are several areas within the business, both financial and non-financial that need to be addressed prior to any exit plan being implemented.
We have had considerable success with implementing a management buy in – where key people within the business are retained and incentivised with a vehicle in place ( Peak Performance Trust ) to purchase shares based on a profit share arrangement with those funds being reinvested into the equity of the business rather than taken at as cash payment.
This plan operates over an extended period and has the added benefit of attracting, retaining and motivating key staff within the business who now have a vested financial interest in maximising the value (as does the owner).

This may not be suitable for all business owners but has had considerable success with some of our clients.

In all cases business owners must be prepared to make every decision considering whether it brings them closer to or further away from the ultimate exit strategy – i.e. begin with the end in mind – investing the time to develop a strategic succession plan is one of the most important financial decisions business owner may ever make- without one the value in the business will retire when you do !

The HR Quarterly Index Dashboard report for October 2010 by HR Coach shows improvements in almost every area in terms of business confidence ( up 2 % since May 2010 ) . The report also highlights  increased expectations – for growth  – up by 8 % to 42 % of businesses expecting growth in sales, 37 % expect an increase in profitability and 3 % ( up 6 % from -3 % in May ) expect an increase in capital.

Job advertisements have again risen by 2.6% in August 2010 – the 4th monthly increase in a row – with a 36.1 % increase over the last 12 months.

In the executive summary the following key points are highlighted – “With an unemployment rate of 5.1%, businesses are readjusting their projections in preparation for the looming battle for talent in 2011. This will impact both profitability and cash flow…. attracting and retaining employees will become the next critical issue ahead. ”

Interestingly the conclusion states “…. and 41 % have no planning structure at all ” – not a great indicator of our professionalism in running businesses.

58 % are first generation, 31 % are second generation and 11 % are third to fifth generation.

47 % are tertiary qualified, 91 % are married and 11 % are female

27 % are wholesale / retail, 24 % are in manufacturing, 11% are construction and 4 % are technology based.

The average age of family business owners is 55 years and …

61 % would seriously consider selling if approached   31 % do not have an adequately funded retirement program.

The FBA has recently released survey results of FBA’s next generation members examining the dynamics of generational succession in family businesses. As an overview nearly 2 in3 respondents to the survey said that working in the family business was where they “always wanted to be” and fewer than 1 in 10 appeared to be reluctant participants in the business.

30% reported that formal conditions are in place dictating the entry to the family business - most focused on gaining a formal territory qualification and also gaining outside work experience. More than 75% of participants had completed some vocational territory training (significantly higher than the population at large).

A significant 85% of respondents believed that family members should compete fairly with non-family members for both promotion and career opportunities.

Virtually all survey respondents (approximately 96%) believed governance was an important element in the future of the family business, with 60% saying they would be implementing changes to the existing governance structure.
Half of all participants to the survey said they had firm plans to hand over the business to the following generation in due course, of the remainder 25% needed a trade sale, a little under 2% a management buyout and the balance (just under 24%) nominated” “other” exit option.

Half of all respondents said they intended to remain the business more than 20 years, a further 23% indicated they would be staying around for another 15 to 20 years and almost 75% of respondents will spend the majority of their career and perhaps even end their career.