RSM New Zealand

Protecting & future proofing your business and your retirement - when & how to start succession planning

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Retirement has become a grey issue (excuse the pun) for business owners.   There's no longer a straight line to, or finish line, in the sand.

A growing proportion of the New Zealanders are living and working longer than ever before. Statistics New Zealand numbers suggest that over a quarter of New Zealand business owners are over 55, defying previous generations by illustrating a longer ability and willingness, or need, to stay in business.

What does this mean for business owners?

It’s pretty certain that most will be looking for an exit strategy over the next 10 to 15 years resulting in a scary amount of businesses changing ownership in some shape or form. The problem with this is that many organisations and their owners aren’t properly planning for this critically important transition.   Worse still,  many haven't started conversations on this topic.

It's estimated the vast majority of New Zealand family-owned businesses don't have a formal succession plan documented and in place. This lack of planning has the potential to jeopardise the best outcomes for retirement, family wealth, business sale price and team transitions.

Sadly we have seen too many business owners scramble to transition their business in a hurry due to unexpected life events.  We've all heard of businesses where the owner has left and handed control over to a family member or internal manager only for the business to collapse shortly after, leaving immense problems.  While we've assisted many business owners in this position, the transition could often have been more seamless and successful if a succession plan had been actively determined.

Not sure when and how to start?

Earlier the better…

The best time to start succession planning is at the very beginning when setting up the business.   However this seldom happens as most startups take a short to medium strategic approach.  While in many respect this is understandable and completely normal, owners may be missing out on significant value creation by not planning early.

If you haven’t yet done so, we urge you to start.  Invest in succession outcomes by seeking advice and starting conversations with key personnel involved in the business. Starting these conversations at least 5-10 years ahead of a planned retirement point should be a minimum if you want to maximise buyer options and value of the sale of the business.

Quick tip: Succession planning has many layers so give it the time it requires to be suitably implemented.

Some quick questions to help start conversations and discussions around forming a succession plan exit strategy:

  • How much do I need for my retirement?
  • What is the current value of my business and what does it need to be worth to achieve my retirement goals?
  • Who's likely to buy or take over the business? A family member? An employee? A third party?
  • How will the change of ownership occur? – a single transaction or process over time?
  • Who knows the secrets of the business?
  • How would key relationships within and external to the business, react to a change in ownership and structure?

Remember that the definition of a true business is something that should be able to run by itself without the owner.   Many “businesses” are more akin to a job as they cannot run independent of the owner.

Quick tip: Once a succession plan is agreed, documented and set in place, it becomes part of the ongoing strategy for the business and should be revisited every year as part of your strategic planning review.   The plan needs to be agile enough with appropriate strategies, to stay relevant to your business aspirations and operating environment.

Start letting go gradually, to create opportunities to grow your senior leaders

As a business owner, holding the most important cards as part of your portfolio makes you extremely difficult to replace.  It also represents a significant business risk if key knowledge is not transferred by you as owner and you suddenly cant be there.  This makes your business difficult to transfer/sell  and leave, as you are the business! This is not what you want.

Begin to let go of key tasks and relationships, and delegate decision-making to your senior leaders. This will take them out of your shadow and give them opportunity to grow under your guidance and mentoring. At the same time investing in their learning and development will also provide them with the confidence to take over if and when you are no longer part of the business.

Quick tip:  Being able to identify, develop and retain key talent to succeed you, is particularly important for the ongoing success of any business.

Be extra diligent if family is involved in taking the reins 

If children are going to buy the business, they need to be ready. Having honest conversations and fair and objective processes in place to ascertain their ambitions and business aptitudes is essential.  Other factors such as blended families, children from prior relationships, treating siblings fairly, can create additional challenges. An independent advisors provides an unbiased sounding board to the business owner.

Quick tip: Implementing training in key areas such as management, business operations, leadership and corporate governance, is highly recommended, especially if the business is large.

Seeking and surrounding yourself with professional business advisors

Independent, trusted and experienced advisors will ensure you've considered all options and your succession plan is worked through strategically and correctly. Their objectivity will provide assistance in deciding on strategies to mitigate issues and assist in driving a smoother transition and better sale value of the business.

Quick tip: Transitioning owners out of a business involves expertise in a number of areas: accounting, valuation, systems and processes, negotiation and contract law are some of these areas. Don't compromise financial outcomes and personal goals because you didn't take the time to plan.

Our next article will be a more in-depth look at the exit strategy options available to a private business owner.

Would you like to discuss this topic further?

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Authors

Craig Fisher
Consultant
Carl Cachopa
Principal - Auckland North