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Positive economic sentiment to benefit SMEs business growth and succession prospects

Tue, 01 Jul 2014 21:55:54 +0000

Craig West

As stock markets and economic indicators locally and across the globe continue to improve and whispers are getting louder that things are getting better, now is the time for SMEs to plan for the year ahead and especially, for baby boomer business owners to revisit their succession prospects and exit aspirations said Succession Plus CEO Craig West.

One of the interesting things observed by West has been the dramatic increase in mergers and acquisitions, capital raising and IPOs for Australia’s major corporates (largely listed companies). “The level of activity has increased quite dramatically over the last six months and if you read any of the financial press regularly it is not unusual to find a story about a private equity firm making an acquisition, a new listing being announced, a merger between two major businesses or other corporate activity”.

“This kind of activity has not been seen in the market at anywhere near this level for several years (and probably not since the GFC)”.

This is significant as the private capital markets (corporate activity, acquisitions, et cetera with Succession Plus’s typical clients) will generally lag approximately 12 to 18 months behind the ‘big end of town’.

“Whilst in our sector of the market we have already seen an improvement in activity (partly led by the increased availability of capital), we can expect this increased activity to really peak in approximately 12 months”, continued West.

“This area, like nearly all other investment classes is cyclical and business owners should be doing everything they can to take advantage of this predicted increase in activity. Contrary to the doom and gloom associated with the oversupply of baby boomer owned businesses in the market and the downward force that will apply on prices – this is simply not our experience, but that comment needs to be qualified by saying that good, well – prepared & successful businesses will always sell (in any market)”.

The opportunity here is to ensure your business is all of those things and therefore attractive to as prospective buyer as the market upswing continues.

West concluded, “Ultimately, the best advice for any business owner at any stage of the business life cycle is to take time and carefully assess all factors in relation to either their business growth or exit objectives. For those seeking to sell, assess all pertinent data and then develop the strategy to sell the enterprise to the right buyer – at the right time – for the best price”.

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The 6 steps of succession planning (part 2)

Thu, 15 May 2014 22:00:31 +0000

Handing over the keys takes time and good planning.

Succession planning is about working out how to exit your business at your preferred time, in your preferred way, and hopefully at your preferred price.

Doing that successfully is quite a journey, and involves significant thought and planning, and detailed execution. It doesn’t usually happen through sheer good luck!

In Part 1 of this two-part article we covered the first 3 steps in some detail, and Part 1 can be viewed here.

To summarise though, the 6 steps of a full succession plan are:

1. Establish the Owners Objectives

2. Understanding Where The Value Is

3. Building & Maintaining Practice Value

4. Creating the Sale

5. Completing the Sale

6. Personal Planning & Legacy Issues

Having clearly identified what your objectives as an owner are, understanding where the value components are within your business that can be managed to build and maintain the value for optimal pricing and exit is the first half of the challenge.

To active the ultimate objective of the succession plan though a sale and exit has to actually happen.

Creating the Sale

Buyer identification cannot be left to chance and the whims of the market. Have you considered what type of purchaser is a natural fit for your business? Who would stand to gain exponentially from incorporating your business into theirs? Are you able to create a “prospective purchaser” list of candidates? Have you considered “internal” potential purchasers as well as “external” parties? Internal may be other (remaining) shareholders, or staff, or contracted advisers. External might be current competitors, or simply strategic buyers (investors) looking for additional business opportunities.
Part of the process of identifying ideal prospective purchasers is understanding the internal issues (if any) that may need to be resolved or addressed in advance, or managed through a sale process, and then planning for those. Internally, there may be issues to consider with remaining minority shareholders; contracted advisers or business partners, staff and employment contracts, and, any ongoing corporate commitments (leases, loans, funding agreements, etc). All can have an impact on the structure of a deal, the value of the business, and the ease of creating a sale.
Are there external stakeholder issues to consider? Preferred agency or platform arrangements, contractual provisions that may be triggered by substantial change in shareholding, regulatory or licensing restrictions and so on.
Funding considerations. Once you have begun to form a view of the optimal purchaser (internal v external; stakeholder issues or restrictions; etc) it is prudent to think through their options for how they might fund it. Strictly speaking this is not your problem of course, but the more you understand the mechanics of making the deal happen from both sides, then the better you are placed to be able to make the deal happen in the way you’d like.
You need to consider what type of approach to market is most suitable. Having identified ideal prospective purchasers, would an open and rather public contestable tender or negotiation process work for you, or would it create potential problems with your staff and customers? Is an exclusive and highly confidential process best? Does that require an external facilitator or broker to manage the process? Or, are you best to use industry networks and key contacts and good old fashioned word of mouth to attract the right potential purchasers? All have their advantages and disadvantages of course….

This step of the process is often focussed on the “consideration” aspects alone, and while the structure of the settlement of the sale is very important, the elements outlined above are just as important. The consideration, or how people will actually pay you for your business, will typically come down to one of the following (ranked from most favorable to least desirable in my view):

cash upfront (a lump sum payment if given to you)
deferred compensation. (a proportion typically paid up front, with further tranches or payments triggered by ongoing business metrics being achieved)
leveraged buyouts (either from minority shareholders or staff)
earnouts (you continue to work or consult to business and be paid for it, and the new owners use the business earnings to pay you out)
vendor financed. (Similar to earn outs except there is no expectation of you continuing to work inside the business, you have swapped your equity position to one of being a financier relying upon the ability of the business to repay you).
buyer-of-last-resort, or guaranteed buyback arrangements with suppliers
equity swaps. (Typically used in a merger situation, may involve some cash or debt obligations being attached as well.)

Completing the Sale

When it is time to begin the actual sale process you will need to be prepared with:

Valuations. Preferably 2 or 3 using different methodologies
Confidentiality Agreement. The Due Diligence process can be rigorous and revealing – but is no guarantee of an eventual sale. It is vital to ensure that any information revealed during this stage is kept confidential.
Restraints of Trade. Consider what protective mechanisms need to be in place to enhance the probability of completing the sale to a buyers satisfaction, from yourself as an exiting principle and also when it comes to any staff.
Stakeholder communications. Key suppliers, bankers, strategic alliances, staff and customers all need to be told the right thing at the right time, and it is best to be prepared in advance with a communications plan and timetable.
Transition timetable. Transferring ownership and management seamlessly is never an overnight task, but a smooth transition can be managed if all the steps have been anticipated and planned for in advance.
Finalizing the financials. Upon handover ensure that the financial statements are finalized, and all legal agreements required to ensure transfer of liabilities, deeds of guarantee and future asset ownership are in place and completed.
finally, consider including a buy-back provision in the Sale & Purchase Agreement. In the event that for whatever reason the new owner fumbles the ball, or defaults on payment schedules, or breaches their obligations…consider what might trigger a buy-back provision, and on what terms.
…then, settle the deal.

Personal Planning and Legacy Issues

At this point it is finally all about you! Of course you will have prepared for this if you have been diligently creating the perfect succession plan, although it is surprising how many professionals get to this point and only then begin thinking about how to structure their own affairs.

Minimum considerations should include:

A personal retirement plan (if not a full personal financial plan, which would be much better). Have a clear plan as to how much of the business sale proceeds need to be parked away for your own future – for most of us there will only be so many times we can build a business and sell it for a decent sum. Don’t blow it.
Check that all commercial personal guarantees and obligations are removed or exhausted. Despite being covered in the Sale & Purchase Agreement, it pays to follow through and make sure any parties holding interests or guarantees have released you personally. Don’t leave it to chance or think the sale agreement provides absolute protection.
Review & Update key estate planning documents. Wills, powers of attorney (especially any limited POA’s that might have been made in favor of a business partner), trust deeds….all should be reviewed. This is the area where professional advice and attention can provide the best chance that you get to keep and use the sale proceeds the way you want. It is worth the money getting good advice in this area.
Taxation planning. Deliberately placed after the personal retirement planning and the estate planning review as it is more important to get the strategic decisions right first, before moving to what is essentially a tactical area. At this point if all has gone well you will have an estate that can create some additional taxation considerations, and an investment portfolio that will have tax implications as well, so it is prudent to manage the taxation position holistically.

As you can see, putting together the optimal exit from your business can take as much thought and preparation as the building of the business itself. Of course a business owner doesn’t have to go to all this trouble – and most don’t. Most go for a simple rule of thumb valuation that is typically accepted within their particular sector of the profession and go for little more than an asset sale.

The difference between doing that and working to a full succession plan where you sell a well structured business that is attractive to new investors can be, and usually is, many extra zero’s. In your pocket.

Who said hard work doesn’t pay?

www.financialadvisercoach.com

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The 6 steps of succession planning (Part 1)

Tue, 06 May 2014 22:00:37 +0000

Handing over the keys takes good timing and good planning.

Unless you plan to work to the grave all practice owners need to be thinking “succession” at some point – preferably as early as possible.

Succession planning is simply about working out how to exit the business at your preferred time, in your preferred way, and hopefully at your preferred price. Doing that successfully is quite a journey, and will involve significant thought and planning, and detailed execution. There are 6 distinct phases to an ideal business succession plan, and this article covers the first three in some detail. The 6 steps of a full succession plan are: 1. Establish the Owners Objectives 2. Understanding Where The Value Is 3. Building & Maintaining Practice Value 4. Creating the Sale 5. Completing the Sale 6. Personal Planning & Legacy Issues

Establishing the Owners Objectives

At the very beginning of any succession planning you have to answer the essential questions of “what, when, who and how” as they establish the framework of what is trying to be achieved.

What is it you are going to be selling? Is it just assets (such as a client base), or a “going concern” that includes potential liabilities, is it partial ownership of an entity or structure that caries limitations for incoming owners?
When do you want to sell it (ideally)? Is the timing driven by your needs and personal plans, or others? Have you considered how much impact timing can have upon price? If timing can have a large impact upon valuation (e.g. if selling a multiple of trail commission on a funds under management book where value can move with market performance and confidence) are you able to prepare the business for rapid sale at a time of premium values?
Who are you most likely to sell it to? Who would it be most attractive to….an internal successor or an external party? Do you have, or are you building, the type of business which is more attractive to somebody looking to build upon their own sweat equity and create their own income stream for the future, or are you building something which carries potential synergies and leverage for external investors? Are those systems and key IP you might be building of interest only to investors from within the same industry, or are you thinking of a turnkey operation that opens up the possibility of being appealing to external investors that are not looking to work in the business itself?
How…at this stage is really “how much makes it worthwhile?” What is the price range that makes a future sale worth doing – for you. How much are you wanting, needing, or hoping to get from it that can become a key driver of the investment you will make in positioning the business for optimal succession value, and also trigger the succession process?

Understanding Where The Value Is

One of the key questions at the outset was understanding what it is you are selling – a business, an interest in a business, just an asset sale? It follows that once you have worked out what it is you are selling you need to understand what components add or create value within that. Considerations will include:

balance sheet, P&L’s and other standard financial measures and reporting. In particular, what areas contribute the greatest value from an investors perspective? What areas might be open to serious negotiation given widely different interpretation (e.g. goodwill, intellectual property values, brand value)?
current value, and valuation methodology. Apart from what the business is worth now, is this value tested in a range of methodologies such as discounted cash-flow analysis, EBIT, future maintainable earnings x industry multiples, any comparable sales data?
business structure, and any limitations this may introduce (such as minority shareholders, shareholder agreements, preferred agency arrangements, etc) or additional opportunities it may create (strategic alliances, preferential access arrangements, absolute control or incoming owner, etc). The governing documents of the business (constitutions, resolutions, licensing restrictions or authorizations) can add to, or detract from, the value of the business depending on whether they create certainty and control for investors, or whether they introduce restrictions and limitations.
governance of the business. Is there a robust decision making framework with a strategic focus and a level of external thinking and/or skills that are adding value to the business?

Building and Maintaining Practice Value

Having established a clear picture of what it is you are hoping to achieve, and how others would consider where value might lie within the business, it becomes somewhat easier to then focus upon the areas that can add the most to practice value, and therefore enhance the return from your succession planning. These might include: For pure “asset sales”:

persistency levels
commission, trail, contracted fee agreement growth rates
client demographics and regional breakdowns
policy or investment types, and mix of types. if there are multiple lines of business, does each carry the same valuation multiple?
quality measures (e.g. client satisfaction surveys; book attrition rate, client complaints history)
taxation impact (e.g selling with or without GST or sales taxes – can that make a difference?)

For entire “entity sales”:

marketing and prospecting systems that are replicable and repeatable
quality staff & management, and supporting policies and procedures
financial controls and management information systems
business plans and budgets
positive and growing cash flows
client data management systems
shareholder and stakeholder communications and relationships

The first three steps of succession planning are arguably the most difficult, in that they are focussed on understanding the objectives, the levers that drive value, and then building a strategy (or plan) around how to achieve the optimal value. And that is only half of the battle! In the next post I will work through the other 3 steps that are needed to create a complete succession plan for professional practices.

Click here to read part 2.

www.financialadvisercoach.com

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Succession planning a key part of good governance

Mon, 10 Mar 2014 20:45:09 +0000

Shareholders stand to benefit from an increased focus on succession planning for senior management and boards of directors, according to AMP Capital’s Corporate Governance Report for 2013.

The report states shareholders are increasingly interested in how succession planning drives the quality of leadership and equips companies to capitalise on emerging opportunities and tackle short and long term challenges.

Quality of leadership is one of the many intangible factors AMP Capital considers when assessing investment opportunities.

AMP Capital Corporate Governance Manager Karin Halliday said shareholders who take an active interest in the more intangible drivers of value, such as leadership and succession planning, can make better informed investment decisions.

“A board needs to know where a company is heading and whether they have the right management in place to take them there. Shareholders play a valuable role in engaging with boards and shining a light on such issues.

“Simply asking directors about governance issues such as succession planning elevates the importance of these topics and encourages directors to address them,” said Ms Halliday.

“The same thing happened with CEO pay when the ‘Two-Strike’ rule was introduced. While companies know how they will remunerate and what management skills they need, the increased scrutiny has led to constructive dialogue with shareholders.”

The report also provides an update on the benefits of board gender diversity. AMP Capital has found the number of companies it invests in that have no women directors has fallen from 60 per cent to 34 per cent in the last four years.

Ms Halliday welcomed the improved diversity. “In my assessment, boards that have no women are more likely to have other governance issues such as board composition concerns, related party issues and remuneration concerns,” she said

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FTA benefits go far beyond exports for Australian SMEs seeking succession or exit opportunities

Mon, 24 Feb 2014 20:45:21 +0000

Craig West

The benefits of Australia’s Free Trade Agreements (FTAs) with Malaysia, New Zealand, USA, Singapore, Thailand, Chile and Korea (announced in December 2013 but not concluded) go far beyond the removal of tariffs on goods and services traded between Australia and its bilateral partners said Craig West, CEO & Founder of Succession Plus Pty Ltd, author of Enjoy It-Business Succession & Exit Planning and President of the Australian Chapter of Exit Planning Institute (EPI).

With over 50,000 businesses coming onto the market for sale each year, Australian SME owners should consider these countries as not only export destinations but also as a source of prospective buyers or investors.

Sighting as an example the Malaysia Australia Free Trade Agreement (MAFTA) that celebrated its first anniversary in January, Craig West said the Malaysian Government is transforming the nation’s economy under its Economic Transformation Program (ETP). In doing so, Malaysia is propelling itself into a dynamic, modern, innovative and globally competitive nation through increased domestic wealth and consumption, as well as commercial success in international markets.

Malaysia also has a thriving SME Sector and together with a rising middle class, high net worth individuals and capital rich companies looking to international markets for new investment opportunities.

Australia is well positioned to capitalise on Malaysia’s economic strategy and the extent to which Australian companies will be seen as a destination for Malaysian investors depends largely on our ability to engage with, and tailor opportunities for the Malaysian market.

“It is not unusual for an Australian business operating in an overseas market to be the focus of investment, merger or takeover interest by local businesses and competitors,” said Craig West.

“Australian businesses have a well deserved reputation for excellence, innovation, consistency and reliability, together with our high quality of life and multi-cultural population, underpins the attractiveness of Australian enterprises as a target for outbound investment or acquisition”.

The Australian economy is entering unchartered waters with an estimated 50,000 SME businesses coming onto the market for sale each year as Baby Boomers seek to give up work and sell their enterprises to fund retirement lifestyles. Studies have confirmed over 30% of business owners are relying on the sale of their business as the primary source of retirement funding.

According to the MGI Australian Family & Private Business Survey (June 2013), the average age of family business owners is 58 years (with 37% in their 60s), and are delaying retirement hoping their enterprises will regain lost value following the GFC.

Craig West continued, “With supply exceeding demand in Australia for SME businesses, it makes sense for business owners to consider the dual benefits of exporting their goods and services overseas under FTA arrangements and promoting their businesses for sale or investment internationally”.

The Australian Federal Government currently has FTAs and related bilateral arrangements under negotiation with China, Japan, Indonesia, India, the Gulf Cooperation Council (consisting Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates) and many others.

All national governments encourage companies to broaden their horizons and make strategic investments overseas, and to invest in industries that enhance and develop their nation’s own capabilities. Most share a number of common sectors that include: Education, Healthcare, Technology, Building & Construction, Clean Energy, Tourism and Financial Services. Australia has proven expertise and capabilities in all of these areas and this represents significant opportunities for companies who position themselves for this wave of new investment potential.

Many wealthy overseas entrepreneurs and high net worth individuals are becoming increasingly interested in migrating to Australia to satisfy a number of long-term retirement, succession and quality of life objectives for themselves and their families. At the same time, the Australian Government is encouraging high net worth individuals to apply for permanent residence under the new Significant Investor Visa (SIV) program which is designed to attract investment into Government Bonds, Complying Managed Funds and Australian Private Companies.

With tens of thousands of overseas students being educated in Australian Universities annually, and wealthy overseas entrepreneurs looking to diversify their business interests and developing a succession plan for their children and future generations, Australia is well placed to attract private investment from those looking to adopt a “one foot in, one foot out” policy between their country of residence and Australia.

Many ASEAN based companies have achieved extraordinary growth in their domestic markets over the past decade but are reaching the point where future double-digit growth can only come from expanding overseas. By investing in or acquiring international businesses, they are able to gain access to a global customer base, tap into new sources of product development, innovation and knowledge, and generate new revenue and profits from overseas.

The Australia in The Asia Century story is only just beginning and is a potential game-changer for Australian entrepreneurs and business leaders that can capitalize on these opportunities – especially those seeking a prospective buyer or investor for their SME business.

“However, irrespective of the source for a potential buyer, SMEs need to plan their business exit well in advance if they hope to extract the highest value. The result of not having an exit plan or seeking a last minute buyer when an owner turns age 64, will only result in a potentially poor price being offered for the business – or more disastrously, none at all”, concluded Craig West.

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Launch of succession planning book welcomed but lack of exit & retirement preparedness by SMEs Concerns Author

Sun, 01 Dec 2013 20:40:27 +0000

SMEs need to improve their exit strategies.

The recently launched book Enjoy It-Business Succession & Exit Planning by author Craig West, Succession Plus Pty Ltd Founder and CEO, President of the Australian Chapter of Exit Planning Institute (EPI) has been very well received and acknowledged as an invaluable resource for SMEs seeking to maximise their exit or retirement potential.

Although extremely grateful for the very positive response the book has received as Craig West travels across Australia at book launch events in the main capital cities, the lack of exit and retirement preparedness by SMEs continues to be a major concern for the strategic business adviser and his team of consultants.

“The average age of Australian business owners is 58 (with 37% in their 60s), and are delaying retirement hoping their enterprises will regain lost value following the GFC. To compound the dilemma of these business owners, due to their age and other factors, they are in the high risk group for heart disease, cancers and other age related conditions”, said Craig West.

According to the MGI Australian Family & Private Business Survey (June 2013), the average age of family business owners is 58 years. Almost half of business owners surveyed see themselves working in the business beyond 65 years of age, with over 33% saying they will be relying solely on the sale of their business to fund their retirement.

Currently, 34% do not have any adequately funded retirement plan (up from 17% in 2006).

It is estimated that over the next decade the retirement of family business owners will see the transfer of approximately $1.6 trillion in wealth, which surely must make succession planning one of the most significant issues facing SME owners.

Yet incredibly, despite 75% of business owners surveyed admitting their businesses are not sale or succession ready; 52% do not intend doing anything about it over the next 12 months.

With estimates of 50,000 businesses for sale each year for the foreseeable future, the small business market may become flooded, which will put further pressure on business values.

Many SMEs will have no option but to simply close the door and walk away from their businesses.

In the current market the best chance of success is to be prepared and plan ahead. If SMEs ’Begin with the end in mind’, they are much better prepared for making the right decisions along the way, following the steps towards their long term vision.

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Succession planning experts say looking inward first leads to 50% uplift in key financials

Thu, 03 Oct 2013 21:50:24 +0000

Wealth valuation specialists launch Peloton Partners; aim to help wealth advisers optimise businesses value

Peloton Partners launched to add value in succession planning.

Three experienced financial industry advisers have launched a new specialist consultancy group aimed at helping wealth management advisers extract full value from their businesses.

Peloton Partners has been established by its three key principals, Rob Jones, Michael Harrison, and David Murray, who between them have more than five decades of direct experience working with institutions at various levels as well as financial planning and accounting businesses both large and small.

“Currently, many wealth management firms are not extracting the maximum value from their businesses mainly due to the inefficiencies of the existing model,” said Mr Jones. “Additionally, many feel disappointed when selling or merging their businesses because they do not feel the true value of their business has been reflected in the sale price.”

“We work with our clients to ensure they have the right game plan and effective tools for change to maximise their value and performance as part of either a long-term growth plan or in readiness for the potential merger or sale of their business.”

Peloton Partners uses a proprietary tool,ifocus^TM, to review the current state of each individual wealth management business and identify what needs to be done to unlock specific opportunities for expansion or create competitive buyer tension.

“We have been through the succession and sales process many times ourselves and appreciate the effort, risk, emotion and cost involved,” said Mr Harrison. “Using our extensive experience, we help clients achieve outstanding results by ensuring they fully understand their business and therefore, its true value.

“This process gives our clients the choice of selling their businesses on their terms and conditions or continuing on with a revamped, more efficient and valuable business model.”

Since Peloton Partners was launched, it has reviewed and advised wealth management businesses with a combined total of $1.42 billion of Funds Under Management, an average tenure of 13 years, total revenues of $16.87 million, and close to 6,000 clients.

Some of the key issues identified by Peloton Partners include;

Normalised profits needing to be 20% higher in order for the business to be sustainable;
Annualised revenue growth needing to be at least three times greater;
Inefficient use of IT platforms to give clients secure, reliable access to markets;
Majority of the debt relating to over-priced book acquisitions which have not been properly integrated;
Revenue being reasonably well diversified but was not strategically targeted; and
Average advice fees being 0.6% which is materially lower than the target benchmark of around 1% of funds managed or equivalent fixed fee
Segmentation of clients based on total fees charged rather than profit derived.

According to Peloton Partners, the total ‘un-extracted’ or ‘latent’ bottom line value assessed within these businesses was $2.7 million in EBIT uplift, which equates to nearly 50% of the total aggregated EBIT these firms are currently producing.

“Our estimate was that the changes we recommended would take between six and 36 months to implement,” said Mr Murray. “Given the average business tenure of these clients is 13 years, ranging from a start-up through to 25 years in business, this is a relatively short period of time to substantially improve the bottom line and overall business.”

“The impact of ongoing increased cash earnings and capital value is significant and dwarfs the cost of implementing our recommended measures,” said Mr Jones. “We are confident the individual firms can achieve on average at least 80% plus of the value uplift ascribed to them after specific risk factors have been applied to the firm.”

The key message from Peloton Partners is that wealth management firms need to look inward before looking outward.

“Resetting of their existing business model and fully extracting value from it should be their only priority before embarking on new business opportunities,” said Mr Harrison. “The end result will be wealth management businesses that are ideally positioned to deliver tomorrow’s services at the right price to the right clients while also adapting to changing industry and market conditions where necessary.”

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