The Background To SME Business Succession
Business succession for small to medium enterprise businesses (“SME’s”) has become a hot topic. Many SME business owners consider the sale of their business to be their retirement “nest egg”. With the first of the post-war “baby boomers” now approaching 60 and many SME business owners now approaching retirement, some SME business owners are turning their minds to developing a business exit strategy. However, statistics compiled by Hayes Knight, Chartered Accountants and others suggest that a significant proportion of the SME sector is yet to actively engage in the succession process.
About Succeed Magazine
Enclosed with this issue of Lawlink Magazine is the first issue of Succeed Magazine, launched as a joint initiative by Hesketh Henry, Lawyers, Hayes Knight, Chartered Accountants and ASB Bank Limited in the spring of 2005 in response to this issue.
This first issue contains a feature article on the impact of the “Baby Boomer” generation on New Zealand SME businesses. It also contains a series of profiles of well known New Zealand business people and an account of the successful succession projects undertaken by them. It is rounded out by columns from each of the partners in the Succeed project giving a legal, accounting and banking perspective on the succession process.
Feedback from initial distribution of Succeed Magazine has been very positive. It confirms that SME business owners and others involved in the SME market value the informative insights into the succession process and have found Succeed Magazine to be a very readable and practical guide. We hope you will take the time to read it and provide your feedback. We are sure that something in Succeed Magazine will strike a chord.
So, What Is Business Succession?
Business succession means different things to different people. Some view it simply as retiring business people “selling up”. We think that is too simplistic. In our view, business succession is the underlying process to develop and implement an exit strategy. This involves preparing and positioning the business in line with that strategy, thereby creating options and choices so as to maximise financial and other outcomes for the business owner. Often the desired outcome will be to sell at the highest possible sale price. However, perhaps surprisingly, an outright sale is not always the best or most desirable option. Different business owners often look for different options and outcomes including intergenerational succession, management buy-out and so on. Some of these options are highlighted in the enclosed Succeed Magazine.
How Does The Succession Process Begin?
Both Hesketh Henry and Hayes Knight stress the importance of the SME business owner involving both the lawyer and accountant at the beginning of the succession process. We encourage business owners to talk to their lawyer and accountant early on, preferably at the same time. At the very least, the business owner should ensure that their lawyer and accountant are talking to each other. Both have important and complementary contributions to make to the succession process.
Some Key Points
Set out below are some of the key points to consider in any succession project. These and many more are incorporated in the features and articles contained in Succeed Magazine.
- An ageing population – research and statistics compiled by Hayes Knight and others suggests that with an ageing population many businesses will be coming on to the market in the next 5-10 years. Those who are prepared will reap the benefits. Those who bury their heads in the sand are in grave danger.
- Turnover and profitability does not define an SME – in our view, the key criteria for an SME business is the closely held nature of its ownership (often one or two individuals) and comparatively low numbers of employees proportionate to turnover. Many SME’s have turnovers of tens of millions of dollars while employing few staff.
- Business succession is a process not an event – careful planning and preparation of an exit strategy takes time. Hayes Knight recommends a minimum of 3-5 years and has developed a unique 21 step process. Often the ultimate outcome will be a sale, but not always. Planning, time and appropriate processes will create options and choices and maximise financial and other outcomes.
- Market convergence – some industries won’t last. What does your business do – will it stand the test of time? A rapidly changing market and the influence of technological change could render your exit strategy meaningless. Good advice can change outcomes for the better.
- First impressions matter and may be the key to success – a business that has not taken the opportunity to prepare for succession may not pass “go”. Just like selling a car or a house, any perceived flaws will, at the very least, be used as a lever to reduce price and, at the worst, potentially scuttle the deal before it begins. Well managed businesses with excellent systems and processes are far more likely to pass a purchaser’s warrant of fitness test.
- Turnover, profitability and market readiness help drive price – if a sale is your preferred option “market readiness” is key. Starting the process early enables business improvement processes to increase revenues with a corresponding flow to the bottom line, enhancing value. Good processes take time to implement.
- Your lawyer and accountant are the hub of the business succession wheel – we recommend talking to your Lawlink lawyer and your accountant first. Good lawyers and accountants will be able to focus on the key issues and strategies and draw in other advisers as necessary (eg business brokers, valuers and insurance agents). A common mistake is to fragment the process by introducing too many advisers in an ad hoc way at the beginning.
We believe this subject is so critical to business owners that we have joined with Lawlink to distribute the magazine throughout its New Zealand network. We thank the management team and Board of Lawlink for recognising the importance of the business succession issue and for allowing us to include Succeed Magazine in its distribution network.