Posts Tagged ‘Succession Planning’

Focusing on business succession and exit planning is often a matter of facilitating solutions to other more pressing problems first. We often ask our clients what’s keeping you awake at night? What’s worrying you ? what are the issues that you are finding difficult to solve within the business (or otherwise)?

If these pressing issues are unsolved then there is little point in trying to provide strategic solutions or an exit strategy.

With several clients in the last few months we have had to stop our normal process and introduce one of our referral partners to solve specific issues; to complete a valuation for example, we often ask for three or four years financial statements – occasionally “these haven’t yet been completed by our accountant” is the response we get. This highlights a much greater problem – in my view business owners must be surrounded by proactive advisers in the case of an accountant someone is prepared to meet on a quarterly basis to review their current financial position and provide proactive advice. On this basis we recommended a change of accountant prior to finalising our strategy, this has led to substantial improvements in financial performance within the business and we are now able to use accurate and reliable information to complete our business valuation and introduce an employee share plan to fund succession planning within the business.

In another example, the business owner was very stressed and completely unable to focus on key business issues as both he and his wife were working ridiculous hours within the business, he was stressed and worried and this uncertainty and distraction had rubbed off on the staff. The business was leaderless and was basically wandering around aimlessly, as a result again, we had to stop our process and introduce a business coach who is now working on resolving these issues to allow us to have the strategic conversations we need to have in the future.

One of the greatest traps for a business adviser is to be so focused on their solution they lose sight of the fact that something else is keeping the business owner awake at night and therefore unable to even see the solution or how it might pan out within their business.

Whilst the research undoubtedly shows an increase in employees looking for equity in the business they work for – Australia lags behind on the world stage in providing a mechanism to achieve this. According to recent research in both the United States and Europe a little over 30% of employees have some kind of equity interest in the business they work for, whilst in Australia that number is around 8%. In my view a simple mechanism to manage the transition through various stages is the issue – it is not simple, nor smart, to simply take an employee and provide them with equity – and thus the ladder becomes important.

A ladder simply means a step-by-step climb through the various stages to ownership and ultimately even control:

1. Employee – earning income (salary/wage/hourly rates etc ) – this is where most employees sit ( and stay ).

2. Income model – the first step on the ladder then is to boost that income and this is quite common – we often see companies paying bonuses, commissions on sales, incentives etc to increase an employee’s income and this I believe is the very first step on the ladder.

3. Profit share – most equity plans begin with this simple step and in fact many end at this step – simply providing a share of profits to employees is a great additional incentive as they are directly rewarded as a result of the financial performance of the company in the same way that a business owner typically would be.

4. Equity – whilst there are many equity plans available our Peak Performance Trust provides a formal structured mechanism to incorporate stages three, four and five into any business succession plan - this allows employees to transition into an equity ownership position within the business they work for.

5. Control – often this step is never utilised though on occasion has substantial benefits in terms of succession not only of business management but also ownership. Ultimately control means that employees can be transitioned through the earlier four stages and end up in a position of control – this may be that they take over general management or CEO of the company, it may be that they end up with a seat on the board at some future date however this step is not to be rushed.

As you can see there are logical steps on the ladder for employees to climb and where we miss steps or fast track is often where these types of plans fall over - the transition should be managed carefully with KPI’s and performance criteria to proceed to the next level. If managed correctly this is a great methodology to successfully retain and motivate key employees over the longer term.

In the recently released family business survey 2009 prepared by KPMG & Family Business Australia supported by Bond University’s Australian Centre for Family Business a number of very interesting issues have been highlighted. Based on a survey of 613 family owned businesses in Australia conducted in June 2009, the survey, which is conducted annually, is an interesting insight into family business and some of the key issues surrounding the structures and mechanisms they employee,  growth and progression, economic views and of course succession planning and the next generation.

Some of the key findings are that many respondents to the survey are concerned about balancing family concerned with business imperatives retaining family control and ownership and arranging fair compensation of the family members with active business involvement. These concerns give rise to a variety of structures and governance processes designed to hopefully reach a balance between the competing interests. For example only 28% of respondents have established formal family councils. A third of the surveyed businesses possess a board or other formal governing body or structure and a further 43% say they rely on less formal structures.

A little more than 40% of the respondents planned to pass on the business to their children or other family members and interestingly now 20% intend to eventually sell the business to other owners or key employees. 45% of the respondents already have someone from the next generation working within the business.

In terms of succession planning again some interesting findings come to light  – for many family businesses the act of succession planning is much more complicated than who and when. It can raise very sensitive issues about the future of the business, the potential crystallisation of substantial tax liabilities, the distribution of wealth accumulated within and around the business, individual mortality and relations between family members. Careful strategic planning is obviously essential. However only 15% of the survey businesses reported having any formal succession plan in place a further 30 odd percent said they were currently working on one ( not sure exactly what that means).

A variety of exit options were identified and prioritised as outlined in the table below:

We often find with clients  a “time lag” approach to succession planning – for most surveyed businesses the proposed handover or sale of enterprise remains some years off. Of course, illness, sudden death or accident can throw long-term plans into disarray, leaving both business and family unprepared for the changes facing them. Business succession or disposal plans can and do often change:

Several influences on the succession process were identified and prioritised in order however the businesses ability to generate adequate financial returns was regarded as the most important influence on their succession plans ( in order of impact / priority ) :

Recent work with clients has again highlighted the need to coordinate business succession planning and estate planning to achieve client outcomes. Much of our work is focused on identifying and then maximising business value and wealth - we are often able to dramatically improve business valuations by improving business performance through benchmarking and implementation of employee share plans and incentive schemes to attract, motivate and retain key people within the business. The ability of business owners to focus on a small slice of a much larger pie contributes dramatically to the asset that is their business wealth. By utilising family wealth planning strategies at the same time we are able to protect that wealth and as we extract wealth from the business it can be invested externally to maximise returns. For many business owners the diversification into other asset classes is totally new – much of their wealth is often tied up in their primary asset - the family business – this change alone can have a dramatic effect on wealth planning.

The addition of estate planning tools to protect wealth and importantly to provide the two outcomes we most regularly hear from clients – continuity and ongoing success of the business ( including its employees) and providing for future generations – provide business owners with a coordinated succession and estate plan and ultimately peace of mind.