OPINION: Although most businesses plan and budget for sales, expenses, cashflow and growth, the vast majority of family-owned businesses do not have a formal succession plan in place, writes Jay Changlani in Taxing Times.

The value of a business can be dramatically affected by the death, disablement, retirement, or other form of exit of the key person in the business. The worst-case scenario is that the business itself could just disappear with the key relationship holder, and the family would be left without its “nest egg”.

Just as night follows day, some form of exit - planned or otherwise - will happen for all business operators. After all the sweat and toil that has gone into establishing a business, some consideration should be given to what will happen to that business when the current principals are no longer available. The best time to start succession planning is now. Bear in mind that the average age of New Zealand business owners is about 57, so there is no time to waste.

"What would happen if ...?” is a good starting question. For example, what would happen if a key individual was unable to perform his or her normal duties? What would happen if that individual was run over by the “proverbial bus”? Who would take over the business? Who knows the secrets of the business? Who holds the key relationships?

A well thought out and defined succession plan is one of the key attributes to prosperity, both within a business and a family. A succession plan can also lead to a greater exit value upon sale, as the purchase risk is reduced by good contingency plans and systems.

Another key planning issue is how to select the correct people. The role of any one person in a small enterprise is often more important to that enterprise than the role of any single person in a larger organisation.

One bad egg in a small enterprise can do a lot of damage.

Yet so many small businesses devote few resources to selecting the right people.

This can often be a difficult matter to resolve, especially when there is a strong case of “Founder's Syndrome” (that is, it is my business and no-one could do it better than me).

Often, there is significant emotion and attachment involved in the succession planning process.

Therefore, it is recommended to involve a third party in the process to provide some guidance and traverse some of the more difficult issues.

 

 

» Jay Changlani is a tax manager at accounting firm WHK. Phone 03 211 3355.

- © Fairfax NZ News

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