Succession planning: how to take the first step

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15 August, 2016 by Pete Hetherington Pete Hetherington // Business

This article is published by Modoras Accounting (Gold Coast) Pty Ltd ABN 62 601 145 199

succession planning

Control the destiny of your business with a sound plan for succession

It’s an uncomfortable subject, and one business owners are reluctant to face, but succession planning is a critical part of running a business. Many people avoid it, because it does tend to bring up awkward feelings. It’s never nice to confront the reality that you might, some day, need to hand over the running of your beloved business to another person or people. You might think no-one will ever run it the same way you do, and you’re probably right. But that’s not always a bad thing. They might bring a new perspective or fresh energy. The reality is, one day, you and your business will reach a point where you have to break up. Being prepared mentally and practically for this day is wise, and the more you plan for it, the smoother the transition will be for you.

A succession plan protects the future interests of your family, staff and business partners. It makes sure your personal and business goals align.”
– David Gonano, Macquarie Business Banking1[1] 

Allow the thought of succession to enter your head

The first thing you need to do is to break out of denial. Stop believing the current status quo will endure forever. Succession planning is the reality and you may as well do it properly. The first step is easy. All you have to do is start thinking about it.

Macquarie Bank’s 2013-14 Insurance Broking Benchmarking Report[2] highlighted a range of approaches to succession planning by businesses. Of those surveyed, 30% planned to sell to another firm, 29% intended to give staff the chance to acquire equity. A further 25% planned on family succession. Of the firms without a succession plan, 16% had no successors who they could pass the business to. And 7% described it as too hard.

So, start by thinking of what your business might look like without you in it. Here are a few alternatives to consider:

  • Is it sold to another business?
  • Is it sold to your business partner?
  • Is it passed on or sold to a family member?
  • Is it taken over or sold to an employee?
  • Will day to day operations change?
  • Will staff change?
  • Do you still have a financial stake?
  • Do you still have any control at all?
  • Will there be a transition period?

Once you’ve decided how you’d like your business to look, you need to begin making this a reality. And no matter what your decision, you need to establish its value.

So, what’s your business worth?

The Department of Industry, Innovation and Science have developed a nifty Succession Planning template[3], which will help to kick start your thinking. There are templates and plans to follow and checklists to make sure you leave nothing to chance. You’ll also find several alternative methods of valuation. These include marketplace valuation (where you compare your business to similar ones in the industry), return on investment (ROI) or calculation of the value of assets, both tangible (real physical items), and intangible (goodwill, intellectual property).

Another valuation method is to estimate what it would cost to start up a business exactly like yours from scratch, incorporating stock, equipment, staff training, licences, permits, product development and marketing. Each method has its own pros and cons and it’s not ideal to do these kind of calculations without professional assistance. We recommend speaking to a Modoras Accountant to assist with valuing your business.

Give your business its best chance for a strong future

Give your business its best chance for a strong future

When you sell your home, you want the best outcome. You speak to your real estate agent, check recent sales in the area for similar houses and give yourself a fair idea of a likely price. Then, to help you achieve this, you spruce up your house, clean it up, declutter, throw out and generally make sure it’s looking its best for open inspections. Then, no matter what the foibles of the property market, you know you’ve done the best you can.

When preparing to sell or pass on your business, you should be following a very similar plan. Firstly, develop a realistic idea of a price, by comparison or calculation, and then begin assembling records, accounts, reports, marketing docs and other collateral to back up your asking price. Invest time in sprucing up procedures, catch up on any reporting backlog, make sure your compliance and government submissions are up to date and any permits and licences are renewed. You can begin this process years before your intended sale or retirement date. The better organised your business is, the easier you’ll find the entire succession process.

And finally, start throwing your ideas around with an expert. A business planner or accountant. Someone who knows about business valuations, who’ll be honest with you about your prospects. If you have a specific plan or price in mind, they can help you build your business up so your dream price is entirely realistic and achievable. You don’t have to do this on your own.

You owe it to yourself and your hard work to take business succession seriously

Succession planning is not a task you knock off quickly on a Monday afternoon. Done right, it’s the product of time. Months, perhaps years of planning and preparation. But while we don’t recommend rushing into it, we do suggest you turn your mind to the idea. How do you see your business without you? What form does succession take in your mind? Once you’ve done that, whether you’re planning to sell or pass it on to family, a realistic valuation is the next logical step. At this point, the help of a qualified expert for impartial guidance is highly recommended. A business planner, accountant or advisor can help you prepare and make the subject of succession less daunting.

If you’d like to know more about where to start with your business succession planning, you can give us a call at Modoras on 1300 888 803. 

We’d love to hear your thoughts on succession planning. Have you done it? Are you thinking about it? Let us know in the comments.

Sources:
[1] http://www.macquarie.com/au/business-banking/business-strategy/expertise/develop-a-succession-plan
[2] http://static.macquarie.com/dafiles/Internet/mgl/au/business/documents/reports/benchmarking-insurance-broking-preview.pdf?v=4
[3] https://www.business.gov.au/Info/Plan-and-Start/Develop-your-business-plans/Succession-planning/Develop-a-succession-plan

This article is published by Modoras Accounting (Gold Coast) Pty Ltd ABN 62 601 145 199. This article contains general information only and is not intended to represent specific personal advice (Accounting, taxation, financial or credit). No individual personal circumstances have been taken into consideration for the preparation of this material. It is recommended that you obtain your own personal professional advice before making any financial or business decision.

 


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