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Doug

By Doug

I'm the Director at CS Law

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29.05.17

Business Succession Planning

With 40% of business owners looking to retire in the next five years and the average age of New Zealand business owners still rising, many business owners face the challenge of deciding what will happen to their business after they have retired. What is needed is a formal business succession plan.

An effective succession plan enables a smooth transition of business control to the next owner, whether they are a family member, employee or an independent party. Many business owners don’t get around to develop a succession plan for a number of reasons:

  • There is no time to stop and think!
  • Owners are often afraid or unsure of how to talk to their family or staff about what they intend to happen.
  • Reluctance to acknowledge they are nearing the end of their business life, and
  • Their business partners are not interested in discussing or planning for the future.  If this sounds like you, read on.

Why should you start a business succession plan?

Your key role is to lead your business. For the business to continue into the future, you need to pass on the leadership baton. Effective leaders plan for the business to succeed when they are gone – whether through retirement, death or incapacity.

Involve the right people

In any succession planning exercise a team approach will have the best results. This team should include your lawyer, accountant and banker. It’s critical that all these professional advisers are prepared to work together and listen to your wishes.

Family and staff expectations

Your children’s expectations need to be considered and managed well. Have your children expressed their views regarding the future of the business and what role (if any) they hope to play? A family meeting as part of your succession planning creates an opportunity for open discussion between all family members. You may be surprised by who would like the business to be retained as a source of income for the whole family or who would like to be trained to participate in the business. Staff who play an integral role in the success of the business should also be given the opportunity to have input into the plan. If key staff aren’t involved in the process, you risk them resigning, which could harm your ability to increase the value of the business for a potential purchaser.

Is your plan viable?

If you plan to sell to an independent third party then your main goal should be increasing the value and saleability of the business. Some of the value drivers include:

  • Enhanced branding
  • Improving processes
  • Investing in IT
  • Focussing on efficiencies, and
  • Having sustainable earnings which are not dependent on your own labour input.

If you plan to pass the business to family members or employees then the focus will be on identifying your new management leaders and preparing them. Your successor will need to observe you, be empowered to make decisions and then be given control of important strategic aspects of the business. You will need to identify the weaknesses in the business and skills that are needed to enable it to succeed beyond your involvement. People with some of the skills that are required may not be in the business yet and you may need to begin recruiting for them. Your plan needs to realistically address the capital requirements of your successors and the level of debt that’s sustainable. The goal must be to ensure success for the next generation or new management as well as ensuring you have the retirement lifestyle you deserve. You should get professional advice as to what business structures should be established and the legal and taxation implications of your succession plan.

Make it happen

A major issue in succession planning for business people is that it can become too hard and the barriers we outlined above start to appear. Appointing an independent board member will help maintain momentum in developing and implementing the plan. A regular review process involving your team of professional advisors will also ensure your objectives are not forgotten or put aside.

Every business is unique

Every business and family are unique; they have different debt loadings, skill bases and business characteristics as well as different expectations from every family member. It takes time to develop a successful plan. Don’t delay in getting your business succession plan up and running. In the long run, you will be pleased you decided to tackle this now.