Why is succession planning so important?

Tuesday 24th September 2019

Why is succession planning so important?

Tuesday 24th September 2019
Written by Steve Roxby

Put simply, a succession plan is having a plan for your eventual exit of the business.

We don’t always get the chance to decide exactly when we leave our business. It may come as a result of sickness, illness, a relationship break-down, or many other reasons. If we don’t have a plan we may need to make one on the fly, or worse still, be dictated by someone else making one for us.

As problematic as it is not to have a Will, it is just as problematic not to have a succession plan or exit strategy. We need to be realistic about the processes and the outcomes.

A business that has been built over a lifetime can fall apart in a matter of weeks if there is no succession plan for the key people involved. When considering an unplanned exit of the business, strategies involving personal risk insurance coverage, buy/sell agreements, and agreements with key people, are all options worth consideration.

An alarming statistic is that some 55% of business exits across Australia are not due to the sale of the business, but rather through liquidation, death or disability, gifting or business owners simply walking away. On top of that, the average age of a business owner in Australia is currently 58 and rising.

Considering that over 50% of business owners expect the sale of their business to fund their retirement, planning for their exit is essential.

At Maxim, we consider the planning of the business succession to commence from the start of the business. It’s a case of beginning with the end in mind.

We encourage owners to determine what result they want from the sale of the business, and then working backwards to the present day, asking what do we need to do in our business now to achieve that outcome. This may include undertaking a due-diligence now to see what a prospective purchaser may think about your business.

If you were to sell your business today what would be the answers to the following questions?

  • How much tax would I pay?
  • Is my business structured so that I get the best result?
  • Do I have appropriate documentation in place so that the purchaser would be able to retain the benefits of the business, including:
  1. Premises?
  2. Key employees?
  3. Intellectual property?
  • Client and supplier relationships?
  • Am I able to exit the business without having to be retained for an extended period of time?
  • Is my accounting system and financial management reporting adequate?

Whilst there are many other matters to consider, the real benefit of undertaking a review of your business today doesn’t only generate benefit for the eventual sale of the business, it also identifies areas that may be changed to improve the current trading performance or structure of the business.

The key to success for business exit is around strategy and timing. Devise what needs to be to done to exit the business and allow that timing over the relevant period – being at least three years. Over this time, the areas identified as requiring attention can be planned, actioned and monitored to provide the opportunity for realising the maximum value of the business.

Here at Maxim we pride ourselves on our expertise in this area, give us a call - 4925 1000!

Written by Director, Steve Roxby