Business Succession Planning: The Returns are Worth It

Article by: Michael Noon

 

Many Small and Medium Enterprise (SME) owners are either currently, or will soon, confront the issue of succession in their business. For this to be successful, business succession planning needs to be at the forefront of their mind.

The process of succession is one that can cause stress for the SME owner as they attempt to transition to the next stage of their life; often involving part or full retirement.

Types of Business Succession

Succession in an SME can take many forms, including;

  • Intergenerational family succession
  • Management buyout
  • Complete or part sale of the business to third parties
  • Appointment of a management team, with retention of ownership by the SME owner

All the above forms, present different challenges, opportunities and outcomes for the SME owner.

Why Business Succession Planning is So Important

Often when the issue of succession is raised with an SME owner, a common response is they want a complete sale for a generous value that may have little resemblance to true market value. This response can be induced by the many years of “blood, sweat and tears” involved in building the business to what it is today.

It can also come as a surprise to many SME owners, that the returns obtained in other asset classes (e.g. property, listed equities, fixed interest) are often well below the returns obtained in profitable SME businesses. The risk/return relationship explained in significant detail by Financial Planners in respect of asset classes deriving passive income, is in some cases not understood by the SME owner in respect of their own business.

Once an SME owner understands the potential future returns lost post-sale, there can be increased motivation to more carefully plan for succession and retain ownership of some, or all, of their business equity.

Key Considerations For Retaining Business Ownership

If an SME owner wants to retain some ownership in their business post-retirement, the following initial questions will need to be considered by them;

  1. How would I assess the future of the industry my business operates in?
  2. Is my business able to operate at desired profit levels whether I am present or not?
  3. Does my business have well-developed systems and processes to enable another person or team to manage it?
  4. Do we have the right team in place to operate and grow the business?
  5. Do key team members need to be motivated with the offer of equity positions in the business?
  6. Is my business suitably structured to allow for new equity participants?
  7. In a family-owned business, do the next generation working in the business have the aptitude, work ethic and skills to take the business forward? If not, how do you manage the introduction of new unrelated team members?
  8. Is there a plan for the withdrawal of your equity in the later years of retirement?

 

SRJ Walker Wayland Can Assist With Your Business Succession Planning

At SRJ Walker Wayland, we assist SME owners with business succession planning using our unique package of processes and tools that facilitate the continued derivation of returns from their business, post-retirement. For more information, or to get started, get in touch with one of our three Brisbane and Sunshine Coast offices.