When To Hand Over The Reins?

By Dave McPhedran B.Com, CA.

(Posted December 2006)

It’s now approaching that time again when we can stretch out with a good book and reflect upon the events of the past year. I call it the ‘Good Intentions’ period as without doubt most of us re-charge our batteries and look forward to the New Year with clarity and the ‘time honoured’ resolve to make 2007 a winner.

I have also lost count of the times that the enthusiasm has been beaten out of us within a month of returning to work and being snowed under by the day to day tasks of running a business.

Forward strategic planning tends to take a back seat and the attitude ‘I’ll sort it out next year’ prevails. As a professional business advisor, however, I can’t afford to take this attitude with my clients. Strategic planning is crucial and critical timeframes do not recognise post Christmas lethargy.

There are few strategic planning issues more critical than deciding how to maximise the business value prior to ‘handing over the reins’. As I have said many times in the past: - you can either decide to go on your terms, or someone else’s. If it’s the former then you need to get professional advice now – whether you are considering moving in one year or in ten.

I have been discussing these issues through various forums in the past year, and now summarise some of the key points for you to consider as part of your ‘Christmas reflections’

Planning to Hand over the Reins

Whether you’re new to business or you’ve been operating for some time, odds are you put a lot of time into setting up your business. Probably the last thing on your mind was thinking how you were going to sell your business, or pass it on to the next generation, in the future.

You need to plan for selling or succession with the same attention and thought that you put into your business, marketing and financial planning. It’s critical to the ongoing success of your business.

Yet it is estimated the vast majority of family-owned businesses do not have a formal succession plan in place. Losing a key person in the business with no obvious successor can do serious damage to the value of the business. As well, there will be financial arrangements and rearrangements to be made in the event of the death, disablement or retirement of a family member which, unless planned for, can have drastic consequences.

In the worse case scenario the business itself could collapse and the family would be left with immense problems.

Sadly, the vast majority of New Zealand businesses do not reach the second or third generation, in most cases because of improper planning. Evidence indicates that only businesses that have nurtured and developed the obvious successors within their business, both family and non-family, are likely to defy the statistics and continue to succeed.

It’s the same rationale for non-family businesses. One day you will need to sell your business, and, however distant that may be, you still need a succession plan in place right from the beginning. Your business needs to stand alone, without being too reliant on you. You need to create that culture at the start and continue to make it a part of your business.

Succession planning is a long term process so it’s important to start while you’re still running the business. You need to think about whether:

• You will pass the business on to a family member, and if so, whether or not there is a family member both able and willing to take on this role.
• You will groom the business for sale internally, either through shareholder or employee buyout.
• Is a sale to ‘outside’ interests a better option?

Succession planning in a family business in particular is not always easy. Quite apart from the breadth of issues to take into account, succession planning can and does result in family disagreements. Most families find it helpful to seek advice from a professional skilled in the area of business sales and succession planning.

Regardless of whether you are in a family business or not, the outcome is the same – YOUR comfort, enjoyment and dignity in retirement is at the top of the list.

Having worked in this area for over ten years I have witnessed the pitfalls that can occur if the business is not prepared properly for sale and worked with clients to solve the issues and ensure desirable outcomes for all stakeholders.