Every year in Australia, instances of fraud cost businesses hundreds of thousands of dollars, and these are only the ones we know about.

Fraud doesn’t just happen on a large scale. Fraud cases can be minor in isolation, but have a surprisingly large impact on your business’ finances if left unresolved over time.

Key fraud findings

A recent report by auditors MGI indicated 47 per cent of Australian organisations experienced in excess of 10 fraud incidents in the past 24 months.

51% of all corporate frauds that occurred in 2015 were committed by internal fraudsters.

MGI Audit Manager Stephen Greene said it was concerning that economic crimes in Australia continued to increase and is higher than the global average.

“In the last 12 months we have seen clients uncover incidences of accounting fraud, fraud by trusted people within senior management and external fraud,” Stephen said.

“In some of these instances the fraud went undetected for multiple years and accumulated to a significant cost to the business,” he said.

What can businesses do to protect against fraud?

The good news is that there are certain strategies that businesses can adopt to reduce the likelihood of fraud going unnoticed within their business.

MGI has released a report that analyses specific cases of fraud in 2015 and provides key strategies that can implemented by businesses to deter and detect similar fraud situations.

To download the full MGI report click here.

If you are considering selling your business, either now or in the future, it’s important that you understand how to value a business for sale.

The challenge for many small business owners is that emotions often play a big part in their assessment. And that’s often for good reason: a passion for whatever it is that the business makes or does, a commitment to the industry sector, or a happy way of working.

But business owners can sometimes allow their emotional investment in the organisation to cloud their financial judgement.

It’s a useful exercise to weigh up your business as just another investment that needs to make a return on capital. After all, if capital wasn’t in your business it could be invested elsewhere.

So just how to value a business for sale based on rate of return on capital?

Known as the Capital Asset Pricing Model, you begin with determining a ‘risk-free rate’.

Generally you take a 10-year government bond rate (currently about 3.5 per cent) as a surrogate for a risk-free rate.

So, if you’d say your business is more risky than a risk-free rate, you’d need to achieve a rate of return higher than 3.5 per cent.

Then, if you were to invest in a broad portfolio of publicly-traded blue chip stocks, you could expect a return of between 6-8 per cent above the risk-free rate, which would be about 10-10.5 per cent (assuming a risk-free rate of 3.5 per cent and an average portfolio return of 7 per cent).

The rate of return of an owner of one business in one industry in one city, that’s not publicly traded, should be significantly higher than that so you’ll need to calculate how much more risky your business is compared with a broad portfolio of blue chip stocks.

While there are endless measurements and calculations that can be made when looking at how to value a business for sale, it’s not necessary to get “too pedantic”.

Pick a figure that’s the appropriate benchmark for your business. Let’s say it’s 20 per cent. So if you’re actually getting 2 per cent, you know you’ve got some serious work to do to improve the value of your business.

Why is this a better measurement of my business performance?

Most business owners can tell you the dollar profit they’ve made. Often they’ll say: ‘That’s a 10 per cent return’, and when you quiz them further and ask 10 per cent on what? They’ll say, ‘On my sales’.

So they might have had sales of $10 million at a profit of $1 million but that’s just one part of the equation – the profit and loss – not the balance sheet.

Every business is fundamentally the same. It’s a pot of money made up of equity funding (your own money you’ve invested) and debt funding (money you have borrowed from the bank, bank overdraft, lease equipment etc).

Then you give your customers credit terms (accounts receivable/debtors), you invariably have stock you invest that money in (you’ll get credit terms from your suppliers, so you’ve got to take off creditors); you may have some plant and equipment that you need; and you may have bought some goodwill. That’s your pot of money.

So when looking at how to value a business for sale, what you need to be measuring your profit against is that pot of money, not your sales. You don’t say I made $1 million in profit and $10 million in sales therefore it’s 10 per cent. That’s the wrong thing to look at.

Some of our clients are achieving a return on capital of as much as 90 per cent.

When a business owner understands the concept of the pot of money and they can see that if they reduce the size of their pot – in other words, the amount of capital invested in the business – and keep their profit the same, then the return on their capital goes up.

How do I value my business?

The valuation multitude that someone will pay to purchase your business is dependent on risk i.e. how likely is it that your business will continue to produce the same level of revenue and profit in the years to come. The following comes into play when assessing this risk:

• the industry type associated risk
• dependency on the business owner i.e. are there the systems and processes in place for the business to operate without involvement of the owner
• dependency on a small number of major clients

Generally a prospective buyer will pay between 1.5 and 3 times the return on capital.

What can you do today to increase the value of your business?

The first step is to understand your current return on capital and then to come up with a plan to improve this. The second step is to address any risks in your business that might act as a deterrent to prospective buyers.

MGI South Queensland has a team of experts ready to help you understand how to value a business for sale. Contact our business valuation services team in Brisbane or the Gold Coast for assistance today or download our business valuation guide to get a head start.

The economic challenges of the last few years have brought with it a never-ending number of corporate collapses. I was recently asked why businesses fail. Is it the time of year? Is it that businesses are growing too fast and did this come down to the ego of the owner or chief executive? Or is it that management just doesn’t get it? My answer was, yes to all of the above. Let me deal with each of these.

Time of year?

I think it can be the case that for some businesses the run-up to Christmas is their best time for sales. This brings with it the wish or hope that “if we can just get through Christmas everything will be OK”. Unfortunately, unless the fundamentals of the business are sound, the festive season’s trading doesn’t end up being the panacea that may have been hoped for.

If a business looks like a dog, behaves like a dog and barks like a dog – then it’s probably a dog, no matter what time of the year.

Ego – is it a dirty word?

As the saying goes – turnover (sales) is vanity, profit is sanity and cash flow is reality.

Unfortunately, based on my 30 years’ experience, sales growth can often be driven by the ego of the owner or chief executive. Here’s how – “look how good I am”, “we’ve doubled sales in three years”, “business is booming” – all mindsets that feed the ego. And this is fed by the media, with a growing stream of stories about this month’s fast-growing business, only to be next month’s corporate collapse.

What many of these businesses fail to realise is that a fast-growing business is in dangerous territory. There is often a focus on growing the top line (sales). There is less focus on whether the business is profitable and even less focus on how the growth is going to be funded – the cash flow.

Fundamentally, there is only one reason businesses fail – they run out of cash. You can have all the sales you like, but if you don’t have cash you’re out of business. There seems to be this mistaken belief that sales growth will magically fund itself.

Or is it just plain ignorance?

A business owner said to me recently: “You know, we don’t know what we don’t know.” What he meant was that he was blissfully unaware of the key things he needed to know in order to run a successful business.

He had no idea whether his business was performing well. He had no key business performance metrics on which to assess performance. Clearly not all businesses are like this but it begs the question whether failed businesses are measuring and managing the key aspects of their business.

As mentioned previously, there is only one reason businesses fail – they run out of cash. There are three reasons they run out of cash – they grow too fast, they use operating working capital to buy long-term assets (e.g. plant) or they simply aren’t profitable. The key is to ensure you don’t fall into one of these three categories by undertaking good business hygiene.

The sad part is that in the vast majority of cases, business failure can be prevented if owners and chief executives focus on a few key parameters. Here are my key parameters to prevent your business becoming a statistic:

• Leave your ego at the door. Growth is important, but unless you have the cash to fund that growth you’ll go broke.
• Know your Return on Capital Employed (ROCE). You’ve got money invested in your business that needs to generate a return. Know how much you’ve got invested and what ROCE you’re achieving and what the drivers are to improve your ROCE.
• Every business has a Sustainable Growth Rate – know yours. This is the rate at which your business can grow without adversely affecting your debt/equity ratio.
• Watch your Free Cash Flow like a hawk. Free Cash Flow is simply the amount of cash you have left over out of your profit after funding growth. Many failed fast-growing businesses have negative free cash flow and that is why they fail. If you’re a fast-growing business and you’re not measuring and managing this you could be headed for disaster.
• Know your Working Capital Burn Rate. Sales growth generally doesn’t fund itself. Know how much additional working capital you need for a given increase in sales. Don’t budget for sales growth in the next year unless you also know this key metric.

If you aren’t being provided with this information and managing it properly, you’re flying blind.

Grant Field works as a business advisor with a number of high growth companies assisting them to achieve a sustainable high growth performance. For more information on our business advisory or accounting services please contact us.

This article has been modified from the original in August 2023 and originally appeared in The Sydney Morning Herald, The Age, WA Today, Canberra times and Brisbane Times.

I’ve often been asked by clients to assist in a trade sale of their business or a sale or hand over to the next generation. These all take different forms depending on the motivation of the parties concerned. While there seems to be an increasing awareness of the need to prepare for transitioning the business, figures from the latest MGI Family Business Survey indicate that more than 75% of family businesses have no formal, written management or ownership business succession planning process.

I was recently asked what I thought were the secrets to good business succession for a family-owned business. A common scenario is where the mum and dad business founders want to retire and hand the business over to one or more siblings.

As in life generally, communication is the key. Differences can arise when the parties have a mistaken perception about the motives and actions of each other. Talking things through is therefore critical to avoid the potential for the parties to make assumptions and jump to sometimes erroneous conclusions.

I have listed below my Top 5 issues to include in your business succession planning discussions:

1. Develop a Family Business Constitution
   One of the best ways to ensure that the necessary issues are discussed is for the family to work through the process of documenting a family business constitution. As in all cases, its horses for courses. If your business is relatively small, the starting point may be to initially just cover the basics. You can build on it as time goes by. For larger businesses, it’s worth the effort to get it right and documents what the family has agreed and enables family members to clarify expectations, minimize conflict and maintain family relationships.By identifying processes for communication, decision-making and handling disagreements and creating a clear set of guidelines for resolving issues before they escalate, a family business constitution helps to formalize procedures and relationships, reducing the potential for issues to become personal and emotional.
2. Get buy-in from the whole family
   Involving all family members in the process, regardless of their current level of involvement in the business, is critical in ensuring that the plan is workable. Without everyone’s input, there may be underlying issues which can ultimately lead to resentment within the family.
   If the business is not going to be passed on to all children equally, make sure your estate planning reflects this. Having an up to date Will that reflects your intentions is often overlooked.Finally, it might sound obvious but it’s crucial to plan the involvement of the successor sibling to ensure that all knowledge and intellectual property is captured and passed on in a timely and effective manner.
3. Agree a business valuation framework
   A business valuation framework should be Included in the Family Business Constitution so that all family members are clear on how the business will be valued. The key here is to make sure that it is workable and that the terminology is well defined so that there can be no room for misinterpretation. It is important for both the vendor parents and the purchasing sibling to feel that the transaction price is fair. However, it is just as important that siblings not involved in the business perceive equity in the process.
4. Review your business structures
   There are two issues with this step. The first is to ensure that your current structure is right for you. Family (discretionary) trusts are very commonly used in family businesses. Whilst these may work well for a typical mum and dad family business they are unlikely to be appropriate where siblings are involved. With a family trust, you don’t own anything and therefore do not have an asset to bequeath in the event of your death. What happens if a sibling dies or there is a matrimonial split?The second issue is to ensure that you take full advantage of some of the capital gains tax concessions currently available on the sale of a business. If structured correctly, it is possible to have a capital gain of up to $4m and pay no tax but there are many “hoops” to jump through in order to qualify, so get advice well before you’re ready to sell.
5. Consider implementing a put and call option arrangement
   Whether a business will ultimately be transferred from mum and dad to one or more of the children, or whether a number of siblings are already owners of the business, one thing that is generally not well addressed is what happens if one of the owners dies or is seriously incapacitated. Often, the siblings of the deceased are left in business with the spouse or family of the deceased, sometimes with disastrous consequences. One way to deal with this is to put in place a Put and Call Option arrangement.In the event of death or disablement of an owner, it provides the spouse or estate of the owner the right, but not the obligation, to force the remaining owners to buy out the ownership interest. It also provides the remaining owners with the right, but not the obligation, to force the spouse or estate of the deceased, to sell. This provides certainty for both parties. The buy out is often funded (either fully or partially) by having the parties take out life insurance.

Of course, having a framework to work through the process is vital but one thing you cannot predict is how people will react – their thoughts, feelings and concerns. Taking account of the human side of the planning process and having a process to deal with it is critical to the effectiveness of the final plans.

Creating an effective business succession plan may seem quite a daunting task, especially when it involves getting the buy-in of all family stakeholders but if you break it down into bite sized chunks and set realistic deadlines for yourself, it can prove to be one of the most valuable exercises you will undertake for your business.

it is important for you to start planning your succession now. A business coach and advisor from MGI South Qld can help you start the process including helping you benchmark your business against others in the market, strategic planning planning, wealth management and business valuations.

Our succession planning services will help you make calm and considered decisions about the long term future of your business.

You might also be interested in our previous blogs about business exit strategy and why it’s important to start the business succession planning process now

In over thirty years advising family businesses, the most successful succession plans I’ve seen have been the ones where there was solid stakeholder engagement – in other words – good communication within the family. Even if you think everyone is aware of what is going on and generally on the same page, don’t leave things to chance for people to fill in the blank spaces. Fill them in for them.

Often there will be an “heir apparent” to the family business – someone that has worked in the business already. But do you really know the personal (and business) vision of all family members? Have you taken the time to talk to ALL family members to ensure they’re on the same page? The risk of not doing so is a potentially unhappy sibling which could lead to a lifetime of bitterness and resentment.

A good place to start is to actually ask all family members about their personal vision.

• Do they actually want to work in the family business?
• Do they want to own part of the business or are they happy just working in the business?
• Do they want to be the business leader?
• Are they happy for their siblings to be part of the business?
• Do they want to own all of the business, not just part of it with their siblings?
• What are their future plans for the business? Do they plan to grow it? The implications of this can be significant.
• Do they want it to stay within the family?
• What do they think the purpose of the business is? Is it to accumulate wealth for the family or is it to fund lifestyle? Alternatively, is it to provide careers for multiple generations of family members and to pass onto the next generation?

When talking with business owners I like to obtain the above information by way of a succession planning questionnaire and have each family member complete this. If you intend to have multiple family members owning the business, make sure there is cohesion around investment decisions and dividend policy. In my experience, this is where things can go awry. Let me give you an example.

Sibling one sees the future potential of the business. They want to grow it and invest all of the profits back into the business for the strategic growth of the business. Sibling two is also happy to grow the business, but wants (or needs) the monthly dividend cheque in order to fund their lifestyle. You can see that the disconnect between the personal (and business) visions of each sibling will end up as a recipe for disaster.

Another of the potential areas for disagreement and resentment can be if one sibling feels another sibling has got something unfairly. In other words, if one sibling feels another sibling has been “given” the business or at a significant discount.

So, make sure there is total transparency in relation to price. Get the business valued by an independent party so that everyone knows that a market price has been paid, even if most or all of this is vendor financed by the parents transferring the business.

As in any relationship – communication is always the key. Our succession planning services will help you make calm and considered decisions about the long term future of your business.

Just like in our own household, waste costs the average family business tens if not hundreds of thousands of dollars every year. However, the business owner doesn’t just incur the yearly cost, but the multiple of that cost when a business is sold. So how do you identify and reduce business waste to grow your bottom line?

Let’s assume that through a waste audit we can identify $100,000 in yearly cost savings in your business. Let’s also assume that you’re getting close to selling your business. As businesses are generally sold for a multiple of earnings (i.e. profit), it follows that if you can cut $100,000 in costs, then you’ll increase profits by the same amount. If the business is sold for say five times profit, then that’s a cool half a million dollars in your back pocket – certainly nothing to be sneezed at!

Reducing waste may not sound overly exciting, but it can pay real dividends. And a point to remember: this is money that is coming straight out of your pocket!!!

I use activity based costing (ABC) as a means to explain what I mean by waste. ABC is a simple concept. In any business, people do things, whether this is loading a truck, operating a machine, using a computer. This is called ‘Activity’. In the course of “doing things” scarce resources are consumed e.g. the person’s time, the cost of the machine etc. Each of these has a cost, whether it be the wages of the employee or the operating costs of the equipment. ABC is about allocating the cost of those resources to cost objects. This could be a particular product or service.

So, whether we like it or not, these costs are embedded in the products or services businesses sell. If the cost of your product or service is not competitive in the marketplace, think about undertaking a waste audit. It may enable you to reduce your costs and become more competitive.

So what are the main areas of waste and how can we reduce or eliminate them? Many years ago, Toyota identified seven prominent waste areas.

1. Overproduction – don’t produce ‘stuff’ for the ‘just in case’ scenario. Produce it ‘just in time’. Producing without the guarantee of sales is waste.
2. Waiting – this occurs whenever time is not being used efficiently. This might include lead time waiting for the next stage in the production cycle. Some estimates suggest that it is not unusual for a product or service to spend 99% of its time waiting. Any time you have a product “waiting” at any stage of the production cycle, and after it (e.g. holding stock) you have waste.
3. Transporting – customers don’t want to pay for the cost of transportation between internal business processes and hence a clear source of non-valued cost. Look at your stock layout. Is your workplace set up efficiently for each stage of the production process or is there unnecessary transporting of raw materials and finished goods.
4. Inappropriate processing – this occurs whenever a business is processing ‘stuff’ using the wrong equipment or people. Do you have highly qualified people handling tasks that others could handle? Are you using a “Rolls Royce” machine to do a job that can be done by a much cheaper machine?
5. Unnecessary inventory – I’m continually amazed when I go into a business and the owner proudly shows me all the stock they are holding, as if this is somehow a sign of how strong the business is. When I see large amounts of stock, I think of one thing — dollars!! If we imagine piles of cash where we see stock, maybe it would be easier to understand it as waste — piles of cash sitting on the shelf making absolutely no return. This is the case whether it is raw materials waiting to be converted to finished product or the finished product itself.
6. Motion – this might be as simple as having an inefficient office or factory layout, with products or services being passed through multiple sets of hands, certainly more than is required.
7. Defects – this is a “no brainer”. Everyone knows that re-work or replacing a product or service costs money. Find out the cause, is it a system, process or human error and put in place actions to prevent it happening again.

Over the years I’ve worked with many businesses to identify waste. I work through a process to identify and quantify waste in each of the above areas. We then assess this against the ease of fixing the problem. We start with the bigger the potential cost savings that are the easiest to fix.

In my experience, it is only once you get on the “waste train” and embrace it, that it stands out and becomes easier to identify. It’s as if a light bulb goes on in the mind of the business owner. The “penny drops” and a whole new mindset takes hold.

If you’d like an external review of your business to identify how you can reduce business waste and start to grow your profits even further, let me shout you a coffee and have a chat.

For many small business owners, superannuation can be a confusing and complicated place.

This needn’t be the case. It is best to break things down into various “buckets” and tackle them one at a time.

If you would like to learn more about how to get the maximum benefit from your superannuation, or how to make managing your superannuation easier, register for our free upcoming breakfast Smart Super Strategies: How to get more from your biggest long-term investment.

Super Contributions

There are yearly dollar limits on the amount that members or member’s employers can contribute into super. Contributions in excess of these limits attract the top marginal tax rate of 45%, so beware.

These limits are broken into two components – concessional contributions and non-concessional contributions. The former are simply contributions for which the member or employer (whoever makes the contribution) obtains a tax deduction. For those under 49 years of age, the limit is $30,000 and it’s $35,000 for those over 49 years of age. Non-concessional contributions are those contributions for which the member doesn’t obtain a tax deduction. These are unaffected by a member’s age and the yearly limit is $180,000 or the member can elect to “bring forward” up to three year’s contributions, meaning they can contribute up to $540,000 provided they have not exceeded the $180,000 cap in any of the previous three years. The member will also not be able to make any further contributions (above the $540,000) for the next three years.

Super Rules

There are a range of provisions regarding what a super fund can and can’t do, particularly in relation to self-managed super funds (SMSF’s). Here are some examples of rules impacting SMSF’s. The overriding “rule” is what is referred to as the sole purpose test. This simply means that the fund must be established and maintained for the sole purpose of providing superannuation benefits to members. There are then some very specific rules.

In-house assets

As the name suggests, these provisions mean that a super can’t make loans to, or investments in, a related party or entity unless that loan or investment is less than 5% of the value of all of the assets of the super fund. This also includes an asset of the fund which is leased to a related party unless this is business premises.

There are then a whole series of tests to determine whether someone is a related party.

Similarly, a SMSF can’t lend to a member or relative of a member.

Acquiring assets from members

As a general rule, a SMSF cannot acquire an asset from a related party of the fund unless the asset is business premises or listed shares. Any such transaction would need to be at market value.

Borrowing

Again, broadly speaking a super fund cannot borrow money except in certain specific defined situations. These include short term funding (i.e. less than 90 days) to fund superannuation payouts and limited recourse borrowing arrangements (LRBA’s).

The use of LRBA’s can be used to great effect by small business owners and this is discussed in more detail below.

Super Penalties

It is important to realise that breaches of the above rules (and other rules) by a fund trustee could render the trustee liable to a range of potential fines by the ATO. These fines range from $850 up to $10,200 and importantly, they can be levied on each trustee. So a typical “mum and dad” fund where both are trustees could mean total fines of double the above numbers. For this and other reasons, many SMSF’s are replacing “mum and dad” trustees with a corporate trustee.

In extreme cases, where the fund trustee has blatantly disregarded the regulations, the ATO can disqualify a person from acting as trustee of a fund and/or remove the fund’s complying status which can have disastrous consequences. Basically, loss of complying status means that all assets of the fund are taxed at the top marginal rate of 45%. For example, a fund with assets of say $500,000, would have to pay tax of $225,000, leaving only $275,000 left in the fund. In addition, for every year that the fund remains non-complying, its income is also taxed at the top marginal rate.

There are also potential criminal penalties for the breach of certain superannuation rules.

Super Opportunities

Notwithstanding the above, SMSF’s provide significant opportunities, particularly for small business owners.

As mentioned above, a SMSF can acquire business premises from which the business owner operates their business, provided a market rental is paid. The super fund can also borrow (using a LRBA) to fund the purchase of the property if needed. It is important to note that there are strict requirements for LRBA’s and readers should seek professional advice prior to undertaking this.

It is also not too late if the business premises are already owned by “mum and dad” through another entity. The property can be sold to the super fund and there may be significant tax benefits in doing so, notwithstanding that stamp duty may be payable on the transfer. For example, the business may be operated through a company or trust, with a tax rate of 30% or more. By paying rent to your super fund, you get a tax deduction for the rent expense at 30% (or more) but the fund only pays tax on the rental income it receives at the rate of 15%, so there is a net tax benefit to the business owner equal to 15% of the rental income each and every year. If the fund is in pension phase (i.e. paying pensions to its members) then the fund pays no tax on the rental income it receives and the business owner pockets the whole 30% (or more) on the rental income paid each and every year.

In addition, even if the fund is not in pension phase, when the property or any other asset is sold, the capital gains tax rate inside a super fund is only 10% compared to up to 22.5% outside of super. Once again, if the fund is in pension phase, the CGT rate inside the fund is zero. So there are significant advantages in accumulating as much wealth as possible inside super.

Another potential advantage relates to the super fund investing in public company shares. Most dividends received will be franked dividends (i.e. tax paid at 30%). These are only taxed at 15% in super, so the balance of the franking credits are available as a tax refund to the fund or can be used to offset other tax payable. Where the fund is in pension phase, and the fund pays no tax, all of the franking credits would potentially be available as a tax refund.

Why talk to us?

Managing your super fund, and navigating the minefield of rules and regulations, can be a stressful and time consuming activity. MGI can help you maximise the opportunities that superannuation benefits present. Register for our upcoming Smart Super Strategies breakfast held on 3 September or talk to us today and begin the journey to achieving the lifestyle you want in retirement. Call our Brisbane office on 07 3002 4800 or our Gold Coast office on 07 5591 1661.

Barriers to succession I’m often intrigued when I read in the press about rather large family-owned businesses which are impacted by family and succession issues. Someone commented to me recently about the issues surrounding Bob Jane’s family and his business and how these have been in the media in recent years. I was asked: “Why do these types of issues arise in quite large businesses? Are they common and do they occur in all family businesses?” Firstly, family disputes are nothing new. They have been going on for thousands of years. However, when you overlay family relationships with business you have a unique dynamic.

As with any relationship breakdown, the breakdown of a family business relationship usually occurs due to a lack of communication between the parties. I’ve previously published my top 5 tips for successful family business succession. The first two of those tips related to communication.

By way of background, we know from the recent MGI Family & Private Business Survey that the average age of a family business owner is 58 and this has increased on surveys over the past decade. Over a third (37%) are aged between 60 and 70, with 25% aged over 65. Interestingly, the survey also found that nearly 60% of family business owners felt that the younger generation family members are not as interested in actively managing the family business.

In a sector that employs over 60% of employees and is estimated to be worth some $4.1 trillion nationally, family business succession is a crucial issue facing the Australian economy.

What do we mean by succession?

Firstly, I think it is important to identify what we mean by succession. In relation to a business, there are a number of areas of succession, but the two most common are management succession and ownership succession.

Whilst some issues spread across both means of succession, I believe that greater clarity can be achieved by looking at these issues separately. For example, there is no reason why parents cannot retain ownership of the family business but handover operational management to the next generation. In this scenario, difficulties arise if, for example, the parents won’t “let go” of operational matters. In family and private business, business owners often wear three “hats”:

• an employee hat – what they do in their employee role
• a directorial hat – what they do because they are a director of the business and
• an ownership hat – the role they play as an owner of the business.

Sometimes these roles get blurred and when they do it is not always apparent which “hat” the person is wearing. So a useful first step is to understand and agree whether a business is dealing with management succession, with ownership succession or with both.

What are the key challenges?

According to the MGI Family & Private Business Survey, around 60% of family businesses are first generation businesses.

It makes sense to assume then, that most family-owned businesses won’t have dealt with this area before and in my experience, the biggest reason these issues are not addressed is that most business owners just don’t know where to start. Many also say that they don’t want the business side of things to impact on a close family relationship. This is perfectly understandable but also quite manageable.

However, sometimes these issues are swept under the carpet in the interests of family harmony. In my view, this is just putting off a problem to another day – a day when the problem may be much bigger, and harder, to deal with.

Suffice to say, in my experience, the likelihood of successful succession planning can be enhanced by both using an external party to facilitate the discussions and following a process. If this is done effectively, the likelihood of conflict between family members can be significantly reduced and managed.

In any family business, the motivations and aspirations of the various family members will be different. I find that one useful exercise is to have the family members complete a simple survey designed to identify what it is each of them are looking for out of the business.

Consider this scenario:

• One sibling may simply be interested in just having a job.
• Another sibling may be interested in taking over management of the business, growing and reinvesting all the profits into the business to fund that growth. Receiving a dividend cheque is not the motivator for them.
• Conversely, another sibling may say they want no active part in the business but they actually do. Not only that, they want their dividend cheque to fund their lifestyle and build prestige. They are not interested in reinvesting profits to grow the business.
  I often find that by working through a process with the key family stakeholders that the “end game” becomes much clearer. It helps identify issues that the various family members never realised or articulated and invariably leads to an “a-ha!” moment.

There are numerous options that can result including:

• Ownership and management being assumed by one child. In this case, great care needs to be taken to ensure that other family members perceive this to be an equitable arrangement. Often this will involve a sale of the business (usually at market value) to the child by the parents. This may also involve some form of vendor finance.
• Ownership and management being assumed by a number of children. Clearly, the more family members involved in ownership and management, the greater the potential for conflict and therefore the greater the need for clearly defined rules and objectives for the business and the family members (e.g. a family business constitution). Understanding and discussing the motivations and aspirations of the various stakeholders up front is a key issue.
• Management being assumed by (usually) one child, with ownership remaining with the parents. Once again, care needs to be taken to ensure that roles and responsibilities of all parties are clearly defined and agreed.
  Handing over leadership and control of the family business is arguably one of the most difficult decisions facing the owners of these businesses. It has potential to impact not only the performance of the business, but also the life-long relationships within the family. It is therefore critical that it is openly addressed and tactfully handled and a family business advisor can be an invaluable asset to facilitate this process.

Our succession planning services will help you make calm and considered decisions about the long term future of your business.

In business management guru, Stephen Covey’s, best-selling book, The Seven Habits of Highly Effective People, beginning with the end in mind was a top habit of his. This got me thinking. Why is it that so many business owners don’t have a clear picture of what they want their business to look like when it’s ‘done’? And what would be the best way to achieve an exit plan for small business owners?

Covey’s habit is based on the ability to envision what you can’t presently see with your eyes. He believes in the principle that all things are created twice – once in the mind (the first creation) and once physically (the second creation).

So with this theory in mind, if you can’t visualise how your business will look at the end then you can’t make it happen.

I often ask my client’s one question: When do you intend to exit your business and how much cash do you want to walk away with?

A typical answer might be: “I want to sell my business for $10m in ten years.”

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Below I have outlined what steps you can take to help power you though and build an exit plan for small business.

1. Conduct a simple analysis and look at what the business is currently worth and how much work needs to be done to achieve the $10m payout in ten years’ time.
2. If the business is currently worth only $1m then there is significant work to be done. However, at least we have identified the end point.  Mathematically, there are only two variables in working out your business value – your profit figure and the valuation multiple. The valuation multiple is simply a measure of risk; the less risky you make your business, the higher the multiple
3. Map out ten columns on a page. In the first column set out the profit and loss statement for the current year, the current valuation multiple and the current business value. In the last column is the goal e.g. $10m in ten years.
4. Back fill a potentially achievable valuation multiple and work out what the profit needs to be in year ten. Ideally, the valuation multiple should be greater than the one used in year one because you should be trying to reduce the risk for a potential buyer over the ten years. For example, if the valuation multiple is four then the profit needs to be $2.5m to get the $10m business value.
5. Then fill in some ballpark numbers into the profit and loss statement –what sales will be needed to arrive at a $2.5m profit? What gross profit margin am I likely to be achieving and what are my expenses likely to look like?
6. Do the same in columns three, five, and eight. These create “sign posts” on the ten year journey and there’s now an indicative profit and loss statement that you know you must achieve in order to reach the ten year goal (walking away with $10m).
7. Once you’ve got your “sign posts” flagged on your journey, you can then drill this down to strategy i.e. what needs to be done in order to bring about the required change?
8. Use an appropriate revenue model to focus on building the top line sales for example, Revenue = Number of Customers x Transaction Frequency x Average Dollar Sale. In order to grow the top line you’ll need to work on each of these three variables.

• What are your strategies to increase the number of customers?
• What are your strategies to increase transaction frequency?
• What are your strategies to increase the average dollar sale?

9. Even small, incremental changes in each of these can have a compounding impact on revenue growth. Set lead indicators to measure and manage the activities that you’ve implemented to achieve the required increases in the above three variables. Unless you’re measuring and managing these activities on a regular basis (e.g. monthly) you’re unlikely to achieve them.

The challenge for many business owners is that they are too busy doing it, doing it, doing it – working in the business, not on it.

In my experience, the businesses that have had the most success at reaching their “end in mind” are those that have engaged someone outside of the business to meet with them on a regular basis to ensure they remain on track – to turn up the heat when things aren’t happening.

The choice is yours. More of the same or begin with your end in mind and achieve your dream.

Our succession planning services will help you make calm and considered decisions about the long term future of your business.