Your Business – What Next?
Small businesses (being those with fewer than 20 employees) form a vital part of all businesses in New Zealand. There are approximately 530,000 small businesses in New Zealand, representing 97% of all business1. Small businesses account for 28% of employment and contribute over a quarter of New Zealand’s gross domestic product2.
According to a survey carried out by Auckland University in late 2010-early 2011, 70% of the businesses surveyed were run by family members. Many of these businesses are still run by the person who started it, with the number of family-owned businesses decreasing as you move through the generations.
Are you one of those family businesses – whether operating solely on your own or with other members of your family or with siblings?
Have you planned for the future?
Although you have successfully founded and developed your business, you know the ins and outs of your business, your clients, your suppliers, the industry, the strategy – have you considered who will be running your business in 5-10 years time?
If you have not then this is a critical point that many family businesses need to consider before it is too late.
If you have then great – you have at least worked out your goals, but have you put in place the necessary arrangements to make the transition as smooth as possible?
Why is Succession Planning important?
Succession Planning is important for the succession of the business. Do you wish to maximise your wealth at retirement or leave the business to continue operating in the hands of other family members or even your children?
If you are the main power engine within your business then it is important that the business is able to continue operating and a smooth transition obtained. This will also be important if a sale is required and you wish to realise your business’s true financial position.
“Sometimes the business will have been sold or wound up as part of the family’s planned and commercially sensible exit from the business. Most often it will have collapsed or declined because of a failure to manage the complex and emotion-laden issues of succession from one generation to the next.” (Leach & Bogood, 199:161).
Reasons for Planning?
Many businesses are particularly vulnerable to succession planning as the following factors suddenly arise:-
- Lifestyle and personal changes, rather than strategic goals
- Poor business performance
- Managerial dependence
- No natural family or internal successor
Your goals and visions for the future may differ if you are a single owner-manager or if the business is operated by you and other family members or siblings?
Once you or your family members have identified your goals then depending on what you decide, whether it be a trade sale or passing it to the next generation, you will need to:-
- Identify a new management team. Consider setting up effective employee option schemes to incentivise key members of your existing team
- Ensure contracts are in place with customers, members and staff
- Are there other investors and arrangements to be considered? – such as shareholders agreements, option agreements, life policies etc.
- Ensure systems and procedures are in place to continue the successful operation of the business
Careful planning is paramount if you want to put your business into the best possible situation for your family’s next generation.
How can we help?
We can put you in touch with an appropriate team of people who will be able to advise and guide you towards putting the arrangements which you would like to see in the future in place. This can include:-
- Getting the business ready for a sale
- Determining the family’s involvement and each of their roles
- Putting in place a suitable Board of Directors
- Shareholders Agreements
- Employee Share Incentive Schemes
- Life Policies
- Wills
Importance of Agreements
Many family businesses are run by different members of the family who each have their own family. Arrangements should therefore be in place at the beginning which set out how the business should be run and what happens if a member of the family wishes to leave the business, sell his/her share in the business or unfortunately dies.
If no arrangements are in place then the risk is that the individual concerned may be tied to the current arrangements (if any), the member’s family may want to have a greater level of input in the business, the remaining members of the family may not want the departing member’s family to be part of the decision making, the family of the deceased member may wish to sell the business but the existing members do not. These examples highlight just a few possibilities, and there could be many more.
What are your Options?
There is a wide range of options available to owner-managed businesses and the solution is unique case by case. Depending on whether you have a family member who is willing or able to continue the business is a key factor, but also what does the key person currently involved in the business want?
Two brothers running a business in equal share may want to make sure that if anything happened to them, their family would be provided for but at the same time, that the other brother can continue running the business independently. In this case, life policies may be in place as well as cross option agreements that allow one brother to buy the shares of the other at a pre-determined price.
It may be that the business is owned by various members and arrangements are to be in place so that they are able to sell the business in its entirety. On the other hand, provisions may simply want additional family members to remain silent shareholders.
Whatever decision an owner of a business wishes to put in place, steps need to be taken early on before it is too late.
- Ministry of Business Innovation and Enterprise
- Stats NZ