RSM Australia’s latest thinkBIG report cautions owners to structure business succession planning carefully to avoid impacting the wealth of future generations
Australian business owners looking to sell their business or hand over control to another family member must do so in a structured and planned way to avoid impacting the wealth of future generations, according to the latest thinkBIG report by RSM Australia (RSM).
RSM’s thinkBIG series has been published for 16 years and explores current issues of interest to the small and medium-sized enterprise (SME) sector. The latest report in the thinkBIG series is titled The Big Succession: Ensuring the family business crosses generations.
Judy Snell, partner, RSM, said, “Successfully transitioning an organisation to the next generation is one of the most difficult challenges facing family businesses in any circumstance. There’s no one-size-fits-all approach as no family is the same. Getting it right requires time, so it’s important for business owners to begin planning for the future handover of their business as early as possible.”
The Australian Small Business and Family Ombudsman reveal that more than 60 per cent of employing small business owners are nearing retirement. With more than 40 per cent aged 45-59 years and 19 per cent aged over 60 years. (1) Business owners aged over 50 should reassess their succession plan every two years. In contrast, those owners who are three to five years from retirement should look to obtain annual updates from valuation experts so their plans can be adjusted accordingly.
Business succession planning can take place over five years in a staged approach:
1. Five years from handover: business owners should set succession objectives, considering the external market now and in five years. Then consult their spouse and stakeholders as appropriate.
2. Three years from handover: business owners should establish a management team and transition key roles and relationships to those who will drive the business forward. They should document systems and processes, consider incentive structures to retain key managers, and begin considering key factors in the timing of the sale, which can include:
a. economic and growth cycles impacting the business
b. timing of major customer contract renewals
c. key business milestones such as lease renewal dates
d. tax considerations such as capital gains tax concessions.
3. Two years from handover: at this point, it’s time to establish and deliver on a business plan focused on sustainable growth, identify and mitigate negative value drivers, secure customer relationships, ensure financial information is robust and accurate, and review stock levels that should be monetised ahead of the business sale. It’s also important to ensure related party arrangements are on arm’s length terms.
4. One year from handover: ensure goodwill no longer resides with the business owner rather than the business itself. Cement key supplier relationships.
It’s important to get an independent valuation that includes the cash flow, bricks and mortar and goodwill, intellectual property, and other intangibles. The valuation will consider financial statements, physical assets, other assets such as goodwill towards the business, and intellectual property. It should also take into account an organisational chart that illustrates the control and ownership of assets.
Nadine Marke, partner, RSM, said, “A business’s valuation is for a specific point in time so, if the owner intends to pass the business down generationally, they may want to time the succession to a specific point in the market as the value will adjust accordingly. Suppose the aim is to minimise tax implications for the family or make it easier to fund the purchase for stakeholders. In that case, owners could consider effecting the transition during a downturn or when the sector is out of favour. Alternatively, suppose the current owner wants to realise maximum value and invest the proceeds. In that case, they should pick an upturn or a time of significant merger and acquisition (M&A) activity in the sector.”
If the business owner completely exits the business, they need to establish clear sales objectives upfront. This means clarifying the expected amount of the sale, potential involvement in the business post-sale, flexibility on other terms, and whether there are different personal or family expectations. If there are multiple shareholders, it will be important to align with their objectives.
Judy Snell said, “A business owner’s business succession planning will determine the quality of their life in their sunset years, the wellbeing and security of their loved ones, and the future of the team who has helped them realise their dreams to this point. To avoid unnecessary complexity or financial loss, organisations should seek professional business advice and obtain recommendations that are specific to their business and family situation.”