Succession Strategies a Must for Small Business

By Christine Kaine

How many accountants say to their clients, 'Who said your daughter or your son was the best person to take over your business!" How many clients have the time to agree?

Look at the statistics of third generation family-business failures. Between seven and 15 per cent of first generation firms make it to the third generation. Should we be so surprised?

Apart from the electronic/technology age there are two glaring succession considerations from the Australian Bureau of Statistics.

  • Over Thirty percent of people will never marry and those that do are reluctant to remarry.
  • At least twenty percent of couples are childless.

In the face of the shrinking family, what will we call the "Family Business"?

Just the Facts

In Victoria, of third and fourth generation firms:

  • 33.7% Have a succession plan for the future ownership of the business
  • 15.6% Have an ownership succession plan in writing
  • 9.4% Have an ownership succession plan implemented
  • 18.1% Have a succession plan for the future management of the business
  • 14.2% Have a management succession plan in writing
  • 12.1% Have a management succession plan implemented
  • 91.3% Do NOT have a documented family constitution
  • 26.2% Do NOT have a management structure in writing
  • 31.3% Have a performance appraisal system for family member.

Source: AXA Australia Family Business Research Unit at Monash University

There is an enormous opportunity for accountants to become a more prominent and integral part of their clients' business succession strategy. This may require specialist advice and who better to interface between business advisers and their client than accountants. How many firms do not get the right advice because they don't have the time or the contacts to find a business adviser they can trust?

But there are also highly skilled corporate executives who yearn for self-employment. Many of these people set themselves up as consultants but increasingly they are seeking to marry themselves to a small business which lacks a succession solution. There is an increasing trend for business consultants to want more than just the fee for service. If they are inside the firm they can enjoy the benefits of their successful advice. Such advice may also be more beneficial to the business.

Case Study
At 48, Mick was a CEO of a division of a large corporation in the food sector. He and a colleague have now established a business advice consultancy without any affiliation to accounting associations. They hope that many accountants will call on them for specialist advice. "This is the kind of team work which will ensure the client finds reasonable skills at a reasonable price without fear of being exposed to the unscrupulous. Many small firms do nothing rather than risk letting someone in the door who is untrustworthy. The realistic assessment of the company's needs must happen earlier rather than later. Succession is the same as any other business problem - it will cost you money when you sell or hand over the business if you don t plan for it properly."

Clearly we are unprepared for the inevitable. How many businesses do not have suitable successors? How many businesses operate on the labour of love? Are we planning the entry and exit strategies for the healthy small businesses that contribute greatly to the Australian economy? If these businesses are no longer viable under their present structure are we offering solutions?

A succession plan is not just hoping a son or daughter will be suitable to take over the business, but it is ensuring they have the personal drive and commitment to steer the business as well as the skills to develop it in accordance with the economic environment. Often this takes many years of structured training and development, not just listening to the chit-chat around the dining table.

Case Study
John has operated his travel agency for 30 years. His heart and soul are invested in the business. He has developed the formula that keeps the clients coming back in the face of increased competition and slim margins. He doesn't want to sell to just anyone. He is in his fifties, he has no children, he can retire comfortably but he is intent on passing the product of his labours onto a worthy successor. His plan is to find an understudy. He is looking forward to teaching someone the tricks he has learned over the past thirty years.

Of course, in my view, placing a business angel in the succession strategy can have multiple benefits.

The right angel can help make the business more valuable for founders who can receive substantially more when they retire.

Where it is deemed that a successor does not have all the required skills a business angel can bolster the capabilities of the successor.

They can also bridge the gap if the successor is not ready to take control of the company.

They can be more objective and help ease the successor in and the founder out. The presence of a business angel changes the dynamics of the family-business relationship and buffer the intensity that often exists with a driven founder at the helm.

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