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Succession - Change is Inevitable

The Team - Wednesday, February 16, 2011

CHANGE IS INEVITABLE – BUT MAKE SURE IT’S ON YOUR TERMS


It is a fact that every small business (including yours) will either change ownership or cease trading at some future time. Business "succession" is eventually an issue for all business owners. Every business owner will either want to sell, be forced to sell, or control of their business will pass to a partner or family member. In some cases death or bankruptcy dictate the succession process. 



YOU SHOULD CONTROL THE PROCESS



So it makes sense for business owners to face the inevitable and take positive steps at an early stage to optimise the value of their business and also the ease with which a sale or other transfer of the business can take place with a minimum of heartache for you, your partners or your family.


It is important that you control this process.  Your ownership will cease at some point and it is better for you and your family if this occurs in a planned and controlled way so that you can maximise your return for all your past efforts in building an asset.



THERE IS NO SUBSTITUTE FOR PLANNING



What we are talking about here is succession planning and it ranks as one of the most important elements of your planning process. 

A lack of proper succession planning could mean that:
   

  1. you have to stay working in your business long past your optimum retirement age;

  2. you don't maximise the price at which you sell the business; or

  3. your wife or the executors of your estate have to sort things out as best they can.


MAXIMISE YOUR VALUE



Failure to properly plan for succession can mean that the business isn't valued optimally on sale or transfer and, in some circumstances your family may be placed in the position of having to effect a quick sale of the business where if you are no longer around to handle the transaction. This is particularly dangerous where the family home may have been used as security for the business's bank borrowings.



MINIMISE YOUR RISKS



There are things you can do to reduce the risk of unplanned succession and also increase the value of your business as an asset so that when the business is sold, it can be transferred at a good price which still represents a reasonable buying proposition for the purchaser.

Here are some factors to consider and some ongoing strategies which should be put in place:



  1. If you are in business with others - family members, partners or shareholders - there should be a partnership or shareholder agreement in place which sets out how individual interests will be dealt with in the event of a forced or unplanned change in ownership.
        

  2. Discuss the issue with your family and partners. You might be surprised that the family members you were counting on to carry on the business actually want to do something completely different (all the more likely if they have seen you spend too many hours working whilst they were growing up)

  3. Get some good practical advice on succession planning.

  4. Set up great systems and procedures that help make the business less dependent on "you" and will not only make it easier for a family member to run the business but will also make it a much more attractive sale proposition.


  5. Keep good records of everything! A prospective buyer will probably want to see detailed sets of accounts for the previous 3 years. Ensure that they are consistent, that any material variances are explained and that debtors and creditors lists are "clean." Ensure also that records are kept of any "arrangements" with customers or suppliers which are outside the normal course of operations.


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