Retirement may not be easy on an emotional level, but if you’re an employee at least it comes with minimal complications. You shout the office a few bottles of something fancy, collect your gold watch and ride into the sunset.
For business owners, however, retirements are seldom as straightforward and the emotional implications of handing over the reins of your long held year venture can be powerful.
Tackling succession is more important than it’s ever been as the baby boomer generation hits retirement age. While 69% of private businesses are facing generational change over the next 10 years, figures from accounting firm Grant Thornton’s 2012 International Business Report show only 30% of New Zealand businesses plan to grow through acquisition. And New Zealand’s small and medium business (SME) owners don’t seem particularly prepared for their exits. Barely half of respondents to the most recent quarterly ASB succession planning monitor indicated they were ‘succession ready’ in the event they became suddenly ill and had to quit the business — and that figure of 52% was at the top of responses to various succession scenarios.
Auckland-based Graeme Thomson stands out as one owner who’s given succession a good deal of thought. Thomson founded Premium Group Marketing in 1990. For 23 years the business has been been at the centre of his life, now he’s beginning to consider the next stage — not retirement, but a winding down to free up time to pursue other things and to eventually move from Auckland to somewhere rural.
There is plenty to take into account, he says. “You already have a big emotional attachment in terms of the history of the business and there’s also the issue of the wellbeing of your clients and employees to consider. It becomes quite a wrench when you begin considering any change.”
Thomson is looking at various ways to scale back his commitment to the business in another three to five years. A trade sale or merger are options. “And you potentially could look at offshore partners and there are an increasing number of opportunities like that where overseas companies are looking at establishing an Australasian presence. This [company] has a name associated with integrity and I want it to continue to trade with that.”
The most likely scenario is he’ll keep an active interest in the company, but reduce his commitment to working two or three days. “I’ll still be actively looking for business accounts, still playing a pivotal role, but passing the mantle over to the senior management team to do much more of the day to day.” So what’s his advice for other business owners contemplating succession? First, get your state of mind right. “It’s paramount in terms of making the right decisions because there will be a lot of emotion and a whole bunch of considerations coming into the equation. That’s where you need to get sound advice from people whose judgement you respect. And take it gradually. It’s fundamentally important that you give your team a sense of empowerment about the change, not a sense of loss.”
Succession can be difficult for any business owner, but what about when the business in question is family owned? Those discussions can often carry an additional emotional charge. In fact one owner of an intergenerational business that Unlimited approached eventually declined to be interviewed, saying the subject was just too sensitive.
In that respect, the fact New Zealand businesses are far less likely to be handed down to family members than in most other countries is something of a blessing. When asked how they intend to realise the value of their business when the moment arrives, 64% of owners responding to the Grant Thornton 2012 IBR said a competitor or trade buyer, or management buyout, was most likely. Only 12% said a family buyer was likely
Nigel Bingham, executive director and co-owner of Wellington-based Pencarrow Private Equity, says there is a “huge wall” of business owners intending to sell within the decade. But how well prepared are they for moving on? “It’s mixed,” says Bingham. “Generally speaking, people are getting better at succession; they have seen friends have heart attacks and so on and they realise that if something like that was to happen to them they can’t be in a position where they are everything to their business. But there are others who are doing that less well. For a lot of these people, they’ve spent their waking lives running their businesses and are passionate about them and it is hard to give them up. But it is something you need to prepare yourself for.”
You begin, he says, by extricating yourself from some day to day tasks — begin working on, rather than in, the business.
“You need to be thinking, ‘I have to get this business to a point where it can run without me if I was to go on an eight week holiday’. If you can meet that test then you’ve gone a long way towards achieving your succession goals.
Then the next step is to work out who can fill key management roles.” Among owners’ options for winding back their involvement, private equity can be a good way to go, he adds.
“We can get alongside them to help them grow their business to the next level, because very often they can see a lot more growth potential ahead, but they’re of an age where they don’t want to risk any more capital, so private equity can play a very useful role there.
Then three to five years down the track, once hopefully some value has been created, the individual and the private equity firm can realise that capital through a trade sale, an IPO, or some other mechanism.”
The biggest piece of advice he can give, however, is to start the process. “You can never think about this stuff too early. Even if you’re in your 40s you need to be thinking ‘what would I do with this business if something suddenly happened?’, and ‘how would this company operate if I suddenly became ill?’”
What is the biggest challenge your small business is facing in 2014?Related story: (See story)