Research shows that owners of most Australian small to medium enterprises (SMEs) and family businesses perceive the ‘fair value’ of their businesses to be much greater than the true market value. There are two main reasons for this:
1. Few owners make their business sale-ready by taking the time or trouble to invest in resources, or undertake ‘necessary housekeeping’. As a result, significant gaps exist in the planning (strategy), financial, human resources and operational areas of the business. These gaps serve to discourage purchasers from paying full value, especially if they are looking to buy the business as a going concern.
2. 33% of SME owners are currently aged over 50. As the baby boomers retire over the next 5 to 10 years there will be an imbalance in demand and supply for SMEs. Only 15% of the population are currently in the 35-45 age category.
The factors suggest that only profitable and well run businesses will attract premium pricing.
Why succession planning is important
It has been suggested that fewer than 30% of family businesses have an achievable succession plan in place. This creates the potential for many Australian businesses to fail or not realise their full potential value.
The process involved in ownership and management succession requires time for implementation. It is also quite complex as many different business, financial and personal issues come into play.
Many clients are seeking advice too late to maximise the effectiveness of this transition.
What to do – Embark on a strategic approach
True succession planning begins with an evaluation of business performance. This allows for a range of sensible options to be developed, including an assessment of the financial benefits of a carefully thought through succession plan, as opposed to an exit through a hasty alternative.
A good succession plan will look at a range of issues such as people, talent, corporate structure, family dynamics, estate planning, insurance and share transfer to name a few.
Vital to the plan is the identification and grooming of future leaders and key skills. Responsibility for grooming the next generation belongs to the experienced business owners. Entirely new sets of skills and responsibilities need to be defined and mastered by new leaders. This is a process which is aided by careful planning and time dedicated to development experience, such as shadowing, training, mentoring and feedback.
There is a huge difference between the efficient day to day operation of a business and the preparation of the same business for transition. It is easy to be lulled into a sense of false security that “when we are ready to sell/transition, the principles that have contributed to our success will stand us in good stead for sale”.
Saward Dawson can provide a current assessment of the effectiveness of the planning, financial and human resources practices of your business. We can provide you with key actions that need to be taken to get your business ready for a smooth succession and maximise its value.
We work with business owners to map out a succession plan for their business which meets the unique needs of each business, individual business owner and successor. We act as a sounding board and advisor for incumbents and successors. We can play a mentoring role to business owners who often experience difficulty in embracing change. We also work productively with successors who have different expectations.
Together with Tania Hannath of People Axis, we can assist with leadership development, and employee review and appraisal systems. This will help to retain valuable employees in your business.
We believe that only those who act early, seek good advice and commit to implementing the necessary change will ensure a smooth transition and the full value for the sale of their business.
Don’t leave it too late. Even if you are not considering an imminent change, this process often takes up to 5 years to ensure the best outcomes.
For further information please contact your Business Advisory Manager or advisor at Saward Dawson.