Planning a successful succession

Closing the doors might be the last thought on your mind when starting a business, but it’s important to prepare a succession plan to ensure the future of your company.

Failing to plan for your business’ succession can often undo all of your previous hard work; the brand, reputation and history of your business can be lost immediately and leave you out of pocket.

Things to consider

According to the 2013 ANZ Privately Owned Business Barometer, 29% of respondents identified succession-related issues facing their business. This is a dangerous trend, especially with New Zealand’s ageing population. In the near future, there may be a glut of businesses for sale in the construction sector. The key questions owners have to ask themselves are: ‘How can I avoid missing out on my retirement?’ and ‘How can I stand out from the crowd?’

Firstly, you should assess and prepare a logical succession plan that applies to any reasons that may require you to leave the business.

You need to consider:

• When would be the ideal time to dispose of the business (if at all)?
• What would be the value of the business at that point?
• Who would offer the most to the business owner? (Is there a family member or a third party that could leave the remaining family members with cash?)
• The tax planning and structure issues that need to be navigated.
• What happens to the staff / client relationships / business image when the owner leaves the business?
• Can someone else do more for the business over the next ten years than you can?

As the current business owner, you know your business’ strengths and weaknesses and are generally best informed to assess its value. Having a liquidator or the executor of your estate manage the sale almost always leads to a less than optimal return. For these reasons, the best time to realise the maximum value is when you are around to sell it.

“While you may think that your business isn’t worth anything to another person, you need to consider your full body of work, and the reputation you have built along the way; it may be worth more than you think

How to sell

There is no single ‘right way’ to sell or exit your business; the question of ‘how?’ should be considered with another: who to sell it to? Your succession planning needs to include a full appraisal of the business and the people in it.

Unless you’re operating as a one-man band, there will often be the potential to sell to an employee or business partner, who will benefit from taking on the business name, reputation and financial history. In the case of employees, progressive ownership options – the offer of ownership down the track, based on certain performance objectives – or a straight sale can all be options.

But none of these alternatives can be made available overnight; they take years of planning.

What you are selling

It’s very important to understand what you’re selling. When you first started out in business, it was likely any work you won (and continued to win) was based purely on the quality of your work and the personal qualities you showed potential customers. Selling your business is exactly the same – effectively, you’re selling the reputation you’ve built over years of operating, not just the value of your balance sheet.

This leads to another key consideration for the exiting owner – do you want the person you have in mind carrying on the business in your name? Moving on from your business is a tricky proposition – there are a multitude of factors to consider. However, the sooner an exit strategy is in place, the smoother the transition at the end of your time in the business. While you may think that your business isn’t worth anything to another person, you need to consider your full body of work, and the reputation you have built along the way; it may be worth more than you think.

More Information

If you have questions about succession planning, whether you are looking to exit your business in the next few years or if you want to discuss a long-term strategy, please contact Peter van der Heijden at peter.vdh@crowehorwath.co.nz; or contact your local Crowe Horwath advisor. For the contact details of your local office, please visit: www.crowehorwath.co.nz/locations or phone 0800 494 569.