Securing your future
The bulk of Australian accounting firms don’t have an adequate or even a succession plan at all for their business. This has a direct impact on the value of a practice and the livelihood of its owner, so what’s the best approach for SMEs?
SMEs put plans in place to grow their customer bases; they plan agendas for meetings; they plan for the
nasty effects of natural disasters, theft or other loss by way of insurance; they even plan out daily schedules to ensure they can prioritise and juggle tasks effectively.
So it is quite surprising that so many Australian business owners have no formal succession plan
Mid-tier accounting firm RSM recently surveyed 2,000 NSW-based business owners, consultants and
directors, and found 66 per cent of them didn’t have a formal succession plan in place.
These numbers are likely to be replicated across the country, in many different types of businesses,
according to RSM.
“Most business owners don’t start or buy a business with the end in mind. But they should. Exiting the
business is inevitable, regardless of whether business owners intend to run it until they retire, bequeath it to a family member when they die, sell it once it starts turning a profit, or any number of other options,” says Patrick Flanagan, director of business services at RSM Australia.
The reason for this lack of planning is something of a mystery. Perhaps it is because no one is broaching the subject with business owners, and they themselves are more focused on the here and now of running their businesses than the nitty-gritty details of planning their eventual exit.
With this in mind, we thought it would be useful for SME owners and operators for us to get some
insight into the question of succession planning – what it involves, the options that are available, why it is best done in advance, the mistakes of other business owners, and how to ensure you walk away with the best deal for yourself and those left behind within the company.
The big picture
A recent study conducted by the University of New England (UNE) found that having an effective exit
plan in place is not only important to a business and its owners, but also to the overall economy.
Associate Professor Bernice Kotey of the UNE Business School says this is partly to do with the financial return on investment that such planning can deliver to owners exiting a business, as well as to the community that relies on the services of that business.
“The continuation of small businesses in regional Australia is especially important, as they contribute to sustaining regional and rural economics during downturns in the resources sector,” she says.
“Regional location is a major barrier to successful business exit. Other barriers include competition from large retailers, online shopping, inadequate support from local council – such as unreliable forecast
of economic conditions – crime rates and lack of access to medical and financial resources.”
Having an adequate succession plan in place goes a long way towards ensuring the financial security of business owners, particularly if they are selling to retire, which in turn reduces the pressure on government to provide welfare support.
Succession planning also places the business as well as possible for continued operation, ensuring
continuing employment for staff and suppliers.
And, as Ms Kotey points out, it has flow-on economic benefits through the employment of external partners, such as accountants, brokers and vendor finance providers.
Why should you plan?
The IPA has long been an advocate of SMEs getting their succession plans in order, regardless of the size
of the business or the life stage of the business owners.
The consequences, including legal disputes and the associated costs, of failing to plan for business succession events can be significant, says the IPA. In some instances, these can cripple business activity and significantly reduce the wealth accumulated by the business owner through years of hard work.
“Smart clients come to us early and say, ‘I’m five years away but I’m thinking about exiting – what
do I need to do? What do I need to worry about? How do I get ready?’” says Craig West, chief executive of succession planning experts Succession Plus.
“Others leave it too late, and it just becomes a problem,” he adds.
“We say to people, ‘You really need three to five years to get it right, to do it properly, to maximise
the value, to make sure you get paid out, to make sure the funding works, to make sure the business
survives’ … and to do that properly you need time, you need to make sure the staff transition over, the
clients transition over, and those things all take time. They are just never going to happen quickly.”
Indeed, what becomes most apparent when business owners begin to examine their exit is
the sheer scale of the task at hand – including the number of relevant stakeholders (everyone from co-directors and employees through to the ATO) and the level of documentation and preparation required at each step of the way. And then, of course, there is the process of maximising your business’ value to ensure the best possible payout.
Exploring these issues too late can have potentially devastating effects.
“The first thing is, they generally have to delay their retirement or their timing has to change. We just
have to say, ‘You can’t do it that quickly if you want to maximise value’,” Mr West says.
“It’s a little bit like going to a real estate agent today and saying you want to sell your house
tomorrow – they will be able to sell it, but they won’t get the price, they won’t have all the right buyers there. It just hasn’t been prepared properly.”
What are my options?
The good news is that you don’t necessarily need to know which path you want to take before
starting work on your plan. Regardless of the ideas you may be toying with, the first step is almost always the same.
“Most small business owners have no idea what their business is worth. So they come to us saying,
‘I’ve got a business, I don’t know if I can sell it, I don’t even know what it’s worth, I don’t know how to value it’ – and that is the starting point,” says Mr West.
A sale is one of the most common ways in which to exit a company. However, according to Mr West, it can take many months or even years to attract a buyer, go through due diligence and negotiate the sale price and conditions.
Another traditional option is to pass the business on to your children. But this too often entails
problems, such as the children being unwilling to take on the business or unable to afford to do so.
An increasing number of smaller firms are looking at alternative exit strategies – and often these are more about ensuring the business and its employees are protected than securing every possible dollar of
value for the person selling out.
“We are doing … things like employee share plans and management buy-outs, where you can get some key staff [involved], and it solves two problems. One, the funding problem, because now you’ve got the ability to fund it through an employee share plan; but two, it also reduces the risk, and that big risk … about [the future of] key employees,” says Mr West.
In some instances, he advises, it is not the business itself that is worth selling, but rather the assets it
“Maybe they are better off to not worry about the business but sell the building, because that would
make a lot of money, or sell some equipment off or sell some assets to a competitor,” he says.
Getting it right
Of course, the option you choose will be highly personal – no one but you can make this decision.
There are several considerations that may influence your choice, including:
- The actual value of the business and any assets it owns;
- If you have children, whether they have the interest and ability to take over the business;
- Whether you will require the equity in your business to retire;
- The age at which you plan to retire;
- Whether you want an immediate or a gradual exit from the business;
- How central you are to the business;
- The requirements of fellow directors/ owners;
- The overall trajectory of your business (i.e. whether it is growing, shrinking or plateauing);
- Whether your superannuation has a direct interest in the business and/ or its premises;
- What you plan to do once you exit the business; and
- Whether you want the business to continue trading after you exit.
Of course, there is nothing more certain in life than death and taxes, and the tax man will want their
share of the proceeds of any change of ownership of a business.
“I’ve had people that forget or ignore the fact they owe the bank a couple of million bucks. They forget
to take into account the tax, so the business may be worth $5 million, but what you’re actually going to
keep is probably $3 million because you’ve got to pay tax and there’s transaction costs and there’s stamp
duty and there’s all sorts of other things,” says Mr West.
“That’s where … that valuation is quite important, because you’ve got to understand exactly what we’re talking about – how much [is the business worth]? What are you going to pay in tax? What’s going to
be left over?”
Therefore, it’s important to keep your valuation in mind as what you have to work with, rather than the
amount you will receive at the end of the process.
At its most basic, succession is about success. Plan ahead to ensure the blood, sweat and tears you have
invested in your business – over years or even decades – deliver the success you deserve.