Speak to anyone with experience in succession planning and they will tell you the same thing; to maximise the value of your business you need to plan your exit well ahead of time.
Rather than beginning once you reach a benchmark age, a succession plan needs to be developed when you’re at your peak and have the energy to make necessary changes to the business.
Succession Plus CEO Craig West says: “The most successful succession plans are those that have been carefully considered over a period of time, are implemented gradually, constantly monitored and reviewed, have realistic strategic outcomes and begin with the end in mind.”
According to the Australian Family and Private Business Survey of 2013, the average age of business owners is 58 years, with a third of this group reliant on the sale of their business to fund retirement. Despite this, only one in four owners have a succession plan.
Because exit planning is often driven by personal considerations, Austbrokers Chief Distribution Officer Fabian Pasquini says that for many it can be a very difficult process and one that they consciously put off. However, he adds that not planning for succession is quite simply planning to fail.
While the details of a succession plan will differ from business to business, Craig West says a comprehensive
plan will cover five key stages, all linked to value: identifying, protecting, maximising, extracting and managing it.
From West’s perspective, the most difficult stage and one where owners most commonly come unstuck is in terms of maximising the value of the business. Having put off addressing their succession plan, countless owners get to a point where it needs to be done urgently and gets rushed as a result.
West says there are three triggers for selling a business, the business cycle, personal circumstances and legislative changes, any of which could change unexpectedly and force or delay a sale. Maximising the value of your business means having structures in place that will allow for a smooth transition, even if the sale happens at short notice.
A considerable barrier to this transition is a business structure that is dependent on the owner. “It isn’t a case that a personal practice won’t sell, but it definitely isn’t as attractive as a properly structured business that an individual can easily succeed into,” Austbrokers’ Fabian Pasquini says.
As well as spreading responsibilities across the business, brokerages should spread their portfolio across multiple industries. To ensure a succession plan meets the needs of the current owner and future stakeholders, additional parties should be involved in the succession planning process. This means identifying one or more people early on who are capable of taking on your role and inviting them to weigh in on the direction of the business.
“A key part of the plan is to identify your successor and implement training processes to help improve any skill gaps that may prevent them from being a capable leader,” Pasquini says.
This has two benefits; it gives the individual confidence in their capabilities and provides comfort to stakeholders that there is a plan for the continuity of the business. To further minimise disruption and preserve the value of the business, Pasquini recommend owners stay on as a consultant or mentor for 12 to 18 months after the sale.
Going to market
Once your brokerage is well positioned for sale, the next challenge lies in finding the right buyer. There are three main channels for selling a business: selling to a family member, selling to staff or selling to another broker or cluster group, each with its own pros and cons.
When selling to a family member, the biggest consideration is capital. A common issue is that owners and their children are likely to be in a completely different financial position, with the son or daughter unable to write a cheque for the full value of the business. The bank is unlikely to lend that amount of money and as a result the owner is forced to enter some form of long-term payment plan, meaning the cash isn’t available upfront for retirement.
Selling to staff is a good way of ensuring continuity and consistency of culture provided you have clarity around how it’s going to work, what the key value drivers are and what the employees need to do. Succession Plus CEO Craig West favours this approach as a good mechanism to solve funding issues.
However, the downside is that establishing an employee share plan takes considerable time, which many owners don’t have if they have left it too late. Finally, selling to another broker has the advantage that they understand the industry and already have the required compliance structures in place. West says: “There is also considerable benefit to the buyer as they are probably able to plug that business into their own without duplicating costs.”
With more than 30 years’ experience assisting owners to sell their broking businesses, Austbrokers has seen the success of each of these models of sale. Pasquini says: “What remains consistent across each is
the need for a clear plan that involves other interested parties in the planning process
from as early a point as you can.”