Where would your business be without you?

The New Zealand building sector has a uniquely large number of small to medium-sized firms, with only a relatively small number of large firms. A massive 91% of firms in the construction sector have five or fewer employees and 21% of those are sole traders.

One problem common to many of these small to medium-sized businesses is that they simply close when the owner retires. This causes disruption to employment, training, suppliers, systems, specialist trades and the client base. By planning ahead for ownership change, business owners can ensure continuity.

1) What is succession planning?

Succession planning is making your business ready for the transfer of control and ownership to others. Whether you decide to hand your business over to a family member or senior level management, to sell all or part of your business, or to bring in new investors and managers, you need to have a plan in place to ensure the business continues to operate as successfully as it was under your full control. Like any good plan, succession is a step-by-step process, which can take several years to complete – so the best time to think about it is now.

Here are some questions to consider:

• What would happen if your personal circumstances changed and you wanted to exit your business?

• What would happen to your business if you passed away suddenly?

• Do you have a family member capable of taking over your business and would they actually want to run it? Have you prepared them for it?

• Who in your management team could buy you out?

• Would you consider outside investment to enable you to take a step back from the business to free up some of your time and capital?

• If you were buying your business, would you pay the price you expect to achieve if you sold the business now?

2) How do I start my succession plan?

Research shows that for many people, planning for succession is seen as a technically daunting and often emotionally difficult process. It needn’t be.

Our experience shows that all good succession plans share three essential actions:

• Start now! The longer you have to plan and make changes, the better shape your business will be in when you come to make the transition.

• Think of it as a journey. Thinking of succession as simply a sale misses the point. The sale (if, indeed, sale is the right option) is just one step in the journey.

• Involve your advisors. You don’t need to do this alone. Get help from professionals, such as accountants and lawyers and your bank. But also talk to your trusted friends and colleagues. It’s amazing how many people have gone through a similar process.

3) Seeking professional help

Professional service providers can greatly assist you in developing your succession plan. You may seek guidance in the following areas:

• Your accountant can help you establish an initial plan, by giving you an idea of how much your business is currently worth, forecasting future returns and identifying any potential changes you could make to increase its value.

• Your lawyer can ensure that you have the right contracts signed up with trading partners, address any lease or employment issues, which may put off buyers, and ensure your succession is structured to help avoid unpleasant surprises. Both professionals can also help you ensure your business is meeting current compliance requirements.

• It is also important to ensure you have a good relationship with your banker. Your bank can help you to protect your current business assets should something go wrong, fund further growth to make your business more attractive to buyers or investors, and streamline your banking systems. It can also give advice on where to invest the proceeds of your business’ sale to help you on the next step – whether you are considering investment in another business or planning for and managing your retirement.

• Your business coach will enable you to enhance your own capabilities in clarifying and balancing your priorities and resources, maintaining traction and positive momentum towards achieving your key objectives – all in an effective and efficient manner that works best for you and your team.

The best succession plans begin with input and communication with all your service providers. Ensure that everyone is ‘on the same page’, with a clear consensus about what matters most and how to achieve it most effectively! This will mean you have experienced professionals supporting you through every step of the process, to ensure your succession plan meets your needs and helps you get the most out of passing
the business on to someone else.

4) Your plan to succeed – a 4-step guide

The following succession process is based around a business sale – the most common form of business succession. Generational succession planning or management buyouts will require some modifications being made to the process. This approach also assumes that there is a reasonable timeframe to build and implement a succession plan – preferably three to five years.

So we’ve seen why it’s a good idea to create a succession plan and we have touched on where to start and from whom you may seek guidance. The next step is to actually begin the process!

Plant to succeed:

Part One  
Determining the state of your business

•Review succession options
•Undertake a business diagnostic
•Complete a valuation

Part Two
Developing a succession plan

•Determine a timeframe for the plan to be implemented
•Balance sheet review
•Taxation review
•Review financial reporting structure

Part Three
Readying your business for succession

•Pre-sale internal due diligence
•Establish sale/transition terms
•Valuation test – review valuation against price expectations
•Establish marketing plan for the business sale/transition
•Prepare information memorandum

Part Four
Moving on from the business

•Putting the business on the market
•Enquiry management assessment
•Contract and due diligence
•Settlement
•Post-settlement issues and opportunities

About the Venn Group

The Venn Group provides the opportunity for you and your business to benefit from the insights of a team of independent specialists in enhancing the effectiveness and efficiency of small and medium enterprises (SME). If you have any questions about the above issues, or would like to discuss this article in further detail, please contact Tony Hocking via tony@venngroup.co.nz, Tim Wilde via tim@venngroup.co.nz or Peter de Valda via peter@venngroup.co.nz.