How Prepared Are You To Exit Your Business With Maximum Profit And Cash Flow?
My inspiration for writing my book ‘Your Business Succession – How to Enter, Execute and Exit Your Business For Maximum Cash Flow & Profit’ came from a true tale about business succession.
Business Succession Case Study: When Harry Met Sally And Greg
When I met Sally she had just transitioned into owning a business in which she had been employed for a number of years.
Sally’s employer, Harry, built a very successful business and was now ready to sell and retire. None of his children were equipped to take on the role of leading the business, but Harry recognized that Sally was the primary income generator on his sales team. In addition, she was trustworthy, dedicated, hardworking and results oriented.
The Succession Plan
Given the size of the private company, Harry knew he wouldn’t find a buyer very easily. His best option was to offer Sally and another employee, Greg, a substantial interest free loan with special terms to take 60% ownership in two equal shares of 30% each. The remaining 40% of the company would be allocated in equal shares amongst Harry’s four children.
For Sally and Greg this was a fantastic opportunity to own a piece of the business they had worked so hard to build. Harry was prepared to take the risk of providing an interest free loan each to Sally and Greg, because he trusted them both.
Fortunately Harry was in the financial position to afford to wait for payment, and did not require immediate cash inflow from the funds he had loaned. His secure asset base aside from the business, allowed him the luxury of funding his retirement without the need for immediate capital injection. Harry’s ability to do this is extremely rare amongst even the most successful of business owners.
Problems For Harry With The Succession Plan
Harry’s willingness to leave his future success vulnerable to the management styles and decisions of Sally and Greg really makes him stand out in the crowd. Harry’s succession plan was not his best option, but he didn’t leave himself with a lot of choice. Due to lack of planning, and incomplete advice, it was the best solution he could think of for his business exit.
I became involved after Sally and Greg had taken over Harry’s business, when they were referred by Sally’s personal accountant, Josh. No formal agreement had been arranged at that stage – everything rested on a verbal agreement. Josh was diligent enough to appreciate that a verbal agreement was unacceptable as it left all parties vulnerable.
As a chartered accountant, Josh was handling the tax issues and was relying on my expertise to sort out all the contingencies relating to the business succession, including the debt owed back to Harry.
Josh engaged a lawyer colleague, Michael, to draw up the legal agreement. We all needed to arrange our various parts of the succession plan between Sally, Greg and Harry.
I did not have the opportunity to work directly with Michael, but I certainly took care of my part in the process to the best of my ability. I feel certain that Michael also exercised his legal expertise within his range of knowledge as well.
However, it turned out that Michael’s main legal expertise was in the area of industrial relations, not succession planning. This was as unhelpful as consulting a dermatologist about a bone fracture!
Tax Implications Overlooked
Josh, acting as the accountant on the matter, did not understand all the tax implications specifically related to succession planning, because his experience was limited to general business accounting, so he did not have the knowledge and skills to recognize the potential problems.
The outcome for Sally, Greg and Harry was totally unsatisfactory, in that it clearly did not solve all of their succession problems. Their succession plan was not structured in the most effective manner as the legal agreement amounted to little more than a shareholders’ agreement (Chapter 9 of ‘Your Business Succession’ explains why a shareholders agreement is insufficient and is a weak strategy for effective succession planning).
The strategy had not addressed all the tax issues they would face in the future, nor did it provide an adequate agreement with clearly defined terms to cover all the identifiable succession triggers. Chapter 2 of ‘Your Business Succession’ covers the 6 specific categories of Business Events, some of which are unexpected, that will lead to your business exit.
Succession Problems For Sally And Greg
This was a major problem especially when Greg had health issues that meant he could not arrange enough insurance to cover his commitment, and had insufficient assets to provide collateral as back-up for the debt outstanding. This meant Sally would remain in a vulnerable financial position for a very long time because she was now solely responsible for repaying the debt to Harry.
From my observation, the resulting inadequate succession plan was largely due to failing to engage a team of cooperating professionals with succession planning knowledge, skills and expertise. Adding to the problems was the fact that each professional had a blinkered approach, which left gaping holes in the strategy.
Each had expected the other to know their role. If only each had questioned the other with more understanding and communicated as a team to uncover the full extent of the problems. The worst part of this situation was that Sally and Greg’s understanding was so limited that they were unable to understand the gravity of their vulnerabilities. Despite my repeated warnings with full explanations, I could not convince them of the need to revise their incomplete succession plan, particularly when Josh acting as their accountant, had assured them everything was in order.
I vowed never to let this happen again. It really brought home to me the need to work in a team of experienced succession planning specialists. I decided then and there, that in future I would work only with experts who were prepared to work as a cooperating team, for the greater good of the client! For me, that would be the only way to provide a complete business succession planning strategy that could stand the test of time.
Fortunately, I have now found that team, and choose to work directly with these noted succession planning specialists. This has added significantly to my ability to increase the value that I personally bring to my clients.
Education In Succession Planning
I was shocked to discover how little information of sufficient quality was available about succession planning that was specific to the Australian context. I found plenty written by overseas authors, but these books were based on rules and tax laws that did not apply to Australian business owners.
Anything Australian that was available had focused only on specific aspects of succession planning and did not provide a complete picture. Such a limited focus had the potential to actually create many of the problems businesses being faced. I resolved to try and change that situation once and for all, with my latest succession planning book, the Business Succession Profits Quiz and this educational blog.
Share Your Business Succession Story
The focus of this site and blog is an educational one, so feel free to comment on this post or to share your business exit story and perhaps prevent other business owners from failing to get the profitable exit their efforts deserve.