Handing over your small business to a successor takes considerable time and effort. Here's why you need a succession plan to help you do it.
At a glance
- Small businesses make up about 70 per cent of Australian companies and account for about 50 per cent of the country’s workforce.
- More than 60 per cent of small business owners are approaching retirement, but many of them have no documented succession plan in place.
- Instituting a succession or transition plan can be a complex and emotional process that needs to be worked through carefully to ensure the needs of all concerned are met.
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Small and family businesses have been the backbone of the global economy for decades. In Australia, small and medium-sized enterprises (SMEs) make up about 70 per cent of all businesses – about half a million – and employ about 50 per cent of the workforce.
Forward thinking has not been a hallmark of SMEs when it comes to succession planning. Craig West, founder and CEO of Succession Plus, says SME owners are simply not used to having conversations around succession. “In their heads, they think: exit, retire, die – so they avoid the conversation.”
The scale of the problem is staggering – a recent report from KPMG Enterprise and Family Business Australia (FBA) has found that 54 per cent of family businesses have no documented succession plan in place. Given that more than 60 per cent of SME owners are approaching retirement age, it would seem many of them are sleepwalking into an uncertain future.
Amanda Greer’s family is currently working through succession planning with the help of FBA.
Her parents founded the Stainless Steel Wire and Mesh business in 2002 in Melbourne, where she works as business development manager. Greer and her two siblings have worked for the firm for nearly a decade, but it is only in the past two years that they have begun to take over management as their parents prepare to take a step back from the business.
From an emotional point of view, Greer acknowledges that the process is a difficult one for her parents and that any transition needs to be accommodating to their needs.
“Succession is a process, and we are still finding ways to support our parents. You can’t just flick a switch off.
“Mum and dad set up the business around the kitchen bench. They have taken all the risks and worked incredibly hard. It has been a huge part of their life – their fourth child in our case – so to move on is really hard, but it is important,” says Greer.
Difficulties can arise when the knowledge capital and expertise of a business are invested in the owner and CEO, making them indispensable. Greer is aware of this in her own family business and explains that her father is transitioning into a strategic role, working on the business rather than in it, which has allowed her and her siblings to “draw out” his knowledge.
“My parents don’t realise what they know until they have to pass it on,” says Greer.
Key to the transition has been engaging an external facilitator to kick-start the formal succession planning process.
“The facilitator acts as a circuit breaker and brings energy, experience and knowledge. We have learned simple but effective tools to work through difficult conversations and conflict, such as the ‘pause button’ if things are getting tense. We have also learned to rewind and reflect on how we could have improved on things we have done,” says Greer.
For the employees, too, it has been reassuring to see that succession planning is happening, as they know their jobs are secure, says Greer. “People value the culture of working in a family business. It’s so important to have a good plan and for the staff to be involved and part of that process.”
CPA Library resource:
Effective succession planning: ensuring leadership continuity and building talent from within. Read now.
Leadership skills development and peer-to-peer support are critical to succession planning, and FBA helps SME owners develop both.
One of the key recommendations in the KPMG and FBA survey report is to set up a family council, separate from a board of directors, and ensure good communication between the two.
A family council can guide and set rules around family values and engagement, participation and recognition as a way to reduce the likelihood of conflict. A strong communication framework acts as a forum to talk, listen and share intergenerational perspectives across areas such as future growth and transition strategies.
However, not every family business has children willing or able to take over the helm. Stephen Jones, adviser with Succession Plus, says there is no point trying to coerce a family member into the role if they don’t want to do it.
Equally, some business owners take the opposite view, insisting that their children gain some life experience outside the family business first, before being considered for succession.
“I remember a CEO saying to me he wouldn’t let his kids work in the business until they had gone and found their own pathways. If they came back to the business and were interested in taking it on, then he said they were meant to be there,” says Jones.
Almost half of small business owners surveyed by KPMG and FBA see themselves working in the business beyond 65 years of age, with over 30 per cent saying they would be relying solely on the sale of their business to fund their retirement.
The problem for many SME owners is that, when they make a decision to sell, they do not have a business that is exit or sale-ready.
A family business owner’s life, business and wealth are frequently interwoven, and they are not easily separated. To decouple the business from the owner, so that it can stand on its own, takes time.
“We find there is often no discipline or structure around financial management, because family members wear multiple hats, so it’s all blended,” says West.
"Protecting the value of the business becomes a priority, and emergency planning will at least cover such basics as having a will and power of attorney prepared, personal insurance and directors in place." Stephen Jones, Succession Plus
“Unfortunately, when it comes to a buyer, what you see from their point of view is a very confusing picture, and that equates to high risk.”
Once a business reaches a turnover of A$5 million, there should be a board of directors in place, says West. Typically, the reason a business does not have one is because it has grown significantly without adapting its governance.
“As you get bigger, it becomes more difficult and more messy,” he says. This is one reason that accountants are increasingly getting involved in small business succession planning. Brought in to get the accounts cleaned up, they can make sure the owner is paying themselves a market salary, get rid of one-off payments and separate out personal expenses from the business account.
“You can’t rush that. If you leave succession too late, you will sell, but you won’t get the same amount of money or an easy transaction,” says West.
Unfortunately, many clients that West and Jones meet need an urgent sale. Someone has passed away, suffered a disability or divorce, there may be partnership disputes – a whole range of things may have happened, and there may not even be emergency plans in place.
“Protecting the value of the business becomes a priority, and emergency planning will at least cover such basics as having a will and power of attorney prepared, personal insurance and directors in place,” says Jones. Doing things in a rush is inevitably going to cost more, and money may need to be spent on external advice and support.
“For instance, clients who don’t have marketing set up and lack a good website or internet presence will need to do that quickly, as buyers hate that,” says West, who compares the effort owners put into getting their homes ready for sale to the lack of preparation for making their business market-ready.
CPA Australia resource:
Asia-Pacific Small Business Survey. Read now.
Leaving a legacy
Business owners who care about their legacy have an opportunity to put steps in place to honour it as part of their exit strategy.
“Conflict can arise, however, when an owner wants to leave a legacy by passing on the business to their children, but they need to extract money out of the business for their super. If they sell to an external party, they get the equity, but their family won’t have the legacy asset,” says Jones.
Legacy is not always about tangible things, like money or the business. Sometimes it’s about brand and reputation, says West.
“Owners feel an intimate connection to their business and want to make sure the business stays successful after it is sold. Or, they want to ensure that employees and customers get looked after, and new owners don’t do anything they don’t like.”
This is another reason to work through succession planning gradually, says West.
Employee share plans have become popular as a legacy tool, but they take time to set up and to allow employees to secure the funds to buy into the company.
West points out that, in Australia, many baby boomers are already wealthy. “It is estimated that over the next decade the retirement of family business owners will see the transfer of approximately A$1.6 trillion in wealth. That surely must make succession planning one of the most significant issues facing SME owners today.”