Level 2, 234 George Street, Sydney NSW 2000
+61 2 8599 3442

Succession Planning – a practical approach

Michael-McGrath_256x256

Michael McGrath
Published 6 May 2019

‘Life is what happens to you while you’re busy making other plans’ said John Lennon in the lyrics of Beautiful Boy released in 1980. Not his own line, it is apparently attributed to an American writer and journalist called Allen Saunders. In any event the sentiment rings true for many of us as we survey the scene and wonder how we got to our current point in life.

Woman sketching a business plan on a placard at a creative office

Things rarely work out in accordance with our planning. So is planning a waste of time? If you heard many of the discussions we have with business owners when we discuss the subject of a forecast or business plan you might think so. We often hear, “you can’t possibly forecast our business” or “I’ve never done a forecast in 40 years and don’t intend to start now.”

Within twelve months 25% of Australians will be between the ages of 56-74 and according to some reports they own half of the nation’s wealth and many of them own and run businesses with reportedly less than 25% of owners planning to pass the business on to their children to run. Estimate suggest that between 15 and 30% have no succession plan in place and some estimates suggest that only 3 out of 10 businesses that come to the market are in adequate condition to be attractive to a buyer.

Being “succession ready” is to be ready for change, transition or sale.

The reality is that old father time marches with relentless persistence and that developing some plans which flexibly take into account the reality that we will need to retire or at least move to a different sort of role as we move into the twilight years we think makes a lot of sense and the earlier the better. Thinking of succussion only in terms of selling the business or retirement we think is also a mistake. Our businesses and our life move in cycles, so looking at succession through the broader principle of change and employing creativity can be very helpful, involving your spouse and family’s perspective is also important. Half of the business we sell are NOT on behalf of baby boomer clients but younger owners and sometimes much younger, we sold two business quite recently and of the four individuals involved the eldest was 34 but they had tackled succession and had a plan and a clear vision of what they would like to happen next.

Business owners have three broad options when considering succession.

  1. Sell the business to a trade player or third party,
  2. Place the business under management and remain the owner or part owner (and possibly transition out of ownership to management or others over time often called a management buy-out, MBO or management buy-in MBI) or a combination of the two, or
  3. Close the business down once the owner no longer wishes to or is able to operate the business.

You will exit your business one day. This is just an irrefutable fact. Our experience suggest that starting to consider succession early is never a mistake.

Since 1984 Oasis have been helping business owner clients, of all ages, tackle succession and have a solid track record of right sized, practical input when change of any sort is being contemplated. If you would like some fresh perspective and input contact us today for a confidential discussion.

Here is a quick 10 point checklist to help you cover off some of the most important elements of succession planning.

1. Develop a strategy and plan for your business and your life

A business with a clear purpose and direction is fundamental to its future and forms a key part of any valuation. It doesn’t have to be war and peace but it does have to makes sense and be grounded in reality and logic. Part of that planning will include assessing your current role and what your future role could look like and how things might need to change as your roles changes.

When all is said and done an acquirer is simply buying the future. So making sure you understand yours is essential.

2. Know your numbers

It’s a fundamental requirement to know and understand your numbers: past, current and by way of a forecast at least the next 12 months and ideally 3 years. Management accounts should be completed monthly and wherever possible should be accurate and produced in a timely manner. These should include adjustments for pre-payments and accruals – the profit for the period under review should reflect what’s actually happened. The balance sheet should balance and be up to date (monthly).

Separately or sometimes not, you need to know your own personal position outside the business and what things might look like after a trade sale or some other reorganisation. Knowing the facts early can help drive strategy both personally and within the business.

Do you have a simple finance snapshot available to you by the 15th of the month following outlining your previous month’s performance with key insights? Do you know your super position and whether you are structured correctly for any sort of liquidity event?

3. Develop good Leadership

Having a competent and right sized management team in place can be a great way of providing comfort to an acquirer that the business is not a one-man show! Introducing clear expectations and good accountability within the leadership team is essential to operating sustainably. Having a carefully selected and balanced team with the requisite skills adds significant value to an enterprise. Individuals with previous experience within a large corporate environment are not always appropriate in a fast moving small-to-medium sized enterprise. Ensuring candidates have a significant body of experience in a similar sized organisation helps to mitigate the risk of introducing the wrong person. At the very least the organisational design must makes sense with clear roles and responsibilities.

4. Analyse and mitigate your risks

You want to present your business as a stable enterprise to potential acquirers. Being across and mitigating risks such as revenue concentration, obsolete stock, litigation, doubtful debt etc. is essential to the defence of your earnings. Buyers will not expect a completely trouble free business but they will expect management to be fully across the risks, and where necessary have them reflected in the numbers by way of provisions and have a sensible and cogent plan for each identified issue going forward. There is no such thing as the perfect business, but ignorance of the issues is not a defence!

This should also be essential even if you are not planning to sell, it just makes sense to mitigate your own risks as an owner at all times.

5. Optimise your corporate structure

Your business is more valuable to an acquirer if it is already running successfully and profitably without heavy involvement from you it should also be more valuable to you, in those circumstances you’ve potentially now got ‘the penny and the bun!’

If you are the owner operator and wish to retain ownership and evolve to having the business run by management then identifying that individual early from within or allowing sufficient time to hire the right person as MD or GM is essential. Whilst this may lead to you eventually giving up day to day control we think you can retain a very effective level of control through having board meetings and perhaps engaging non- executive input. Effectively you can plan to become the non-executive Chairperson and eventually limit your input to the monthly board meeting where you provide advice, guidance and support.

We like all businesses to have a board in place. All of the most successful listed companies in the world have board meetings as do many successful private companies. Why not you? We have found over many years and in many different circumstances, irrespective of size, that creating a board and adding a non-executive member, who does not work day to day, can be a very cost effective way of adding significant management horsepower. Additionally the independence can add a degree of objectivity not always possible within the management team itself. Operating a board is a statement of intent and signals strategic and professional commitment.

The board provides strategic leadership, accountability and governance to help achieve the objectives of the business and has the important task of creating value for the shareholders. It can also help to facilitate an owner stepping back from daily management to fully or partially exit the business without selling.

Finally, is your corporate structure efficient and will it optimise your position in the event of a significant liquidity event like a sale? We see too many businesses poorly structured in this regard.

6. Formalise agreements with staff, suppliers, and customers

Where possible make sure that agreements are current and valid. It’s not necessarily a deal breaker if agreements are not current and sometimes important agreements are verbal, nevertheless being across that status of all agreements and their importance to the business is just good management and ‘money tends to follows management’.

7. Be proactive.

If you have decided to sell then be proactive. Most businesses won’t be so fortunate as to get a knock on the door, but even if you do, you want to know that you’re getting the best deal. The only way to be certain of this is to proactively explore your options in the marketplace. This needs to be done intelligently and discreetly. Conducting an exploratory exercise while, maintaining anonymity puts owners in the powerful position of having real and current intelligence from the market which then allows them to objectively assess the appetite of current acquirers for a business such as theirs. The exercise will also alert an owner to the likely real-world valuation which can inform future strategy.

If you do get the knock on the door remember that just the beginning – getting professional input from a professional should prove extremely valuable at that point irrespective of how nice and friendly the potential buyer may appear!

8. Be discrete about your intentions.

You are not for sale; you are simply exploring your options. At Oasis M&A we believe strongly in protecting your identity and maintaining anonymity while seeking acquirers to avoid destabilising and thus potentially devaluing your business. For this reason, we recommend against producing an Information Memorandum as part of the marketing process. Nothing is finalised until a contract has been signed and payment has been made. Until that point it is all, “ifs, buts and maybes” so work on a ‘need to know basis!’ For more on why protecting your anonymity is so critically important, read our blog post ‘Anonymity: the key to a successful sale’.

9. Separate personal assets from the business

Good financial management is essential and presenting accounts that are timely, accurate and easy to follow speak volumes. Even if non-business assets are not in a separate legal entity at least split them out for the purpose of presenting your management accounts. Confusing accounts that don’t make sense, with non -core items buried make buyer nervous.

10. Seek independent, expert advisors for support.

Complement your deep understanding of the business with independent, objective experts skilled in negotiation and deal doing. You want to have the time to focus on running the business as professionally as possible during the critical time when buyers are being objectively identified qualified buyers start to evaluate the business. A good advisor will add a lot of value and their fees should be returned several times over. Check the track record of advisors and make sure you feel they understand you, your business and the market.

Think ‘when was the last time you did something for the first time?’

Related Posts