Retirement has become a grey issue (excuse the pun) for business owners. No longer a straight line or finish line in the sand.
A growing proportion of the New Zealand population 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 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 have not even started the conversation on the topic.
It is estimated that the vast majority of New Zealand family owned businesses do not have a formal succession plan in place, documented, and being acted upon. This lack of planning can be putting their retirement, family wealth, business and team in jeopardy for when that time comes. Sadly we have seen far too many business owners scramble to transition their business in a hurry due to some unexpected event like a serious cancer diagnosis of an owner. While we have assisted many, the value extracted could often have been much greater if they had started succession planning and acting on their plan earlier.
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 goal and strategy approach. While in many respects this is understandable and completely normal, they may also be missing out on some significant value creation by not planning early.
If you haven’t yet done so, we urge you to start. Invest by seeking advice from your advisors and starting conversations with your key personnel involved in the business. Starting these conversations at least 5-10 years ahead of planned retirement point should be a minimum if you don’t want to risk not having a buyer and/or devaluing the price. We have all heard of businesses where the owner has left and handed the control over to a family member or internal manager only for it to collapse shortly after leaving immense problems. Not good.
Quick tip: Succession planning has many layers so give it the time it requires to be implemented suitably.
Some quick questions to help start conversations and discussions around forming an Exit Strategy:
- How much do you need for your retirement?
- What is the current business worth and what does it need to be worth to achieve my retirement goals?
- Whom is 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 upon, documented and set in place it should not be filed, nor set in stone! It should be revisited each and every year. It needs to be agile enough to stay relevant to an organisation’s aspirations and operating environment with appropriate strategies.
Start letting go gradually, to create opportunities to grow your senior leaders
Holding all the most important cards as part of your portfolio as business owner makes you extremely difficult to replace. It also represents a significant business risk if key knowledge is held by the owner and they 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, relationships & delegate decision making to your senior leaders. This will take them out of your shadow and give them the 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 a leader retires.
Quick tip: Being able to identify, develop and retain key talent to succeed you is particularly important for the ongoing success of any business.
If family is involved and taking the reins, be extra diligent
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 aptitude are essential. Other factors such as blended families with children from prior relationships can create additional challenges, as can fairness between children.
Quick tip: Implementing training in some key areas such as management, business operations, leadership and corporate governance is highly recommended especially if the organisation is large.
Seeking and surrounding yourself with professional business advisors
It is important to ensure all options are considered and a plan is worked through correctly. To make sure you haven’t missed anything, sit down with your trusted business advisor so they can help you objectively identify and work through the issues.
With independent professional advice you can help ensure that when the time comes for selling your business you are getting maximum value and a smooth transition.
Quick tip: Transitioning owners out of a business involves various expertise. Accounting, valuation, systems and processes, negotiation and contract law are key areas which require specialists to be part of and relied upon.
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