[ source : Robert Powell. The Australian. http://bit.ly/1lkOGvE ]

SUCCESSFUL businesses take lifetimes to build but many business owners throw away their life’s work by failing to plan for succession and their retirement.

Figures produced by the Exit Planning Institute, the peak body worldwide for succession planning professionals, suggest that while two-thirds of all businesses are owned by the baby-boomer generation, only one-third have done anything about planning for their retirement, yet more than half intend to use the proceeds from sale of their businesses as their primary source of retirement funding.

These findings are backed up by Family Business Australia studies, which conclude that less than 30 per cent of businesses have formal succession plans for management, control and ownership.

Where succession plans exist, they are rarely well articulated.

Statistics from RMIT confirm that 66 per cent of privately owned businesses do not see themselves as succession-ready. More than half don’t intend to do anything about it in the next 12 months.

FBA statistics also suggest that of those business owners surveyed, 81 per cent plan to retire within the next 10 years, resulting in an asset transfer of up to $2 trillion.

But EPI studies suggest that up to 80 per cent of businesses are not saleable in their present state. A recent index of private business values maintained by Australian group BizExchange reports a dramatic slackening of demand for small and medium enterprise, combined with a fall in achievable prices for those businesses, reflected by a lowering of earnings before interest and tax multiples.

What’s wrong with this picture? Under-prepared business owners could be in for a rude shock if they plan to finance their retirement via a sale of their businesses. It is a far smaller, much tougher and more discerning group of potential buyers awaiting them than many expect. It is only the best prepared businesses that will raise an acceptable sale value – and that’s if a buyer can be found.

An owner’s reluctance to properly consider succession can be caused by many different factors.

Many owners are very good at running their businesses but are poor planners. Often they need help to think more long term.

Succession can also be an emotional issue for business owners. Naturally, they can be reluctant to let go of control over their creation. This can be because the owner has so closely identified their sense of self-worth to the business that they fear for their future without it; or they may fear retirement itself, particularly if they have no meaningful plans.

When succession planning does occur, there are two deficiencies which commonly arise.

First, planning doesn’t start soon enough. Usually a five-year timeframe would be regarded as the minimum to employ a succession plan properly.

This is to provide sufficient time for remedial action to be taken to correct deficiencies that can affect the value achieved in a sale.

Second, planning is not structured or formally documented. A properly structured process should include: a business valuation exercise and an assessment of the owner’s financial position to ascertain whether the likely proceeds from a sale are sufficient to sustain the owner in retirement; examination and comparison of succession options – trade sale, management buyout, initial public offering or generational family transfer; detail of the steps to be taken to enhance the business value before the succession; management of the succession transaction, including shortlisting of offers and due diligence; and wealth management/estate planning, which should also include advice on taxation implications from a qualified expert.

Family members often disagree about succession options, which can make the succession a particularly difficult time for the family.

There can be a strong desire for long-established family businesses to keep control within the family. Many such families regard themselves as custodians of the business for future generations.

However, successors from within the family may not be best for the business. Those who are willing to take over may not be qualified, or those who are qualified may prefer to follow a career outside the business.

Management of family succession carries many pitfalls. The assistance of independent advisers can greatly benefit business owners during this transition.

Robert Powell is a family business specialist and partner at Grant Thornton Australia

[ source : Robert Powell. The Australian. http://bit.ly/1lkOGvE ]