Succession of Traditional Business
Since the 70’s a developing fear has emerged about the unknown effects that the “baby boomers” would create. These fears are beginning to be realized as this group reach’s the golden years. In the 70’s the growing concern developed around retirement and to whom, was going to fit the bill.
This is still a very major issue; however, another burning issue has developed which effects a large percentage of traditional businesses, the backbone of NZ’s economy, in employment and tax take. Who is going to take over the business or who is going to buy it?
There are three ways that the business can address these issues.
Succession to family
If we go back to the 70’s it was a pretty well known fact that the kids would come into the business to eventually run it, allowing Mum and Dad retire in comfort, either through a funded buy out or an ongoing payout. Various factors have arisen over the past 40 years to change this normal succession method.
The fact is that NZ’ers, are normally very independent. They strive to get their own house in order which has encouraged many second generation baby boomers to open and run there own businesses independently from the family one. A syndrome of, I did it my way. The thinking of, I must have a son to take over the family business has shrunk.
Further pressure has been put on succession system through the advent of the Internet, which has created a massive amount of new opportunity for NZ’s natural entrepreneurs, taking them away from the traditional business.
Succession to Staff
This is an option which would take over from the traditional family succession; there are several ways that this could be addressed.
Fund a buyout, by using the business assets as security.
Agree to a rate of acquisition per annum, allowing the owner of the business, to exit over a nominated period.
Sale based on Valuation.
In a lessoning poll of buyers, businesses will become harder to sell at the right price, those that look best that will come through. At present there is a demand from immigrants looking for businesses as it is immediate employment. However in this case the business needs to have very good systems and processes, be pretty much running by itself as the immigrant gains local and cultural knowledge.
In all of these options a valuation would take place which would include many underlying factors to determine an end value. One of the major issues would be ease of transition.
Ease of transition could be the difference in the value being 1x Earnings Before Income Tax or 5 x EBIT and in some cases up to 10 x EBIT.
This transition could be related to “A Choice To Sell” which would be an indicator as to whether the business was able to sustain itself without owner input or not.
The value will ultimately be assessed by a Chartered Accountant, who is qualified and legally able to do so, however, that valuation, which with no emotion included does not reflect what another person will pay. Any purchaser under advisement will then whittle away the value by assessing the value of putting in systems and replacing a key man. If the seller is the driver, then the multiple of EBIT is reduced accordingly. An insurance Co value on a key-man is normally 3 x EBIT and sometimes 5 x EBIT. That is the cost to the seller, for not having the business groomed for sale.
A Choice to Sell would be a company which is the best it can be and is a position to aim for. Sometimes, getting a company into a “Choice to Sell” will be exactly that, the owner may decide to keep it. Following are area’s which would be addressed in aiming for a choice to sell.
Strategic Planning for “A Choice to Sell”
Vision
Does the company have a vision that someone would want to buy into? Without vision a company can quite often be obfuscated and a potential buyer needs to be aligned with that vision so that potential growth can be realised. The vision will quite often fit alongside their Marketing Program.
Purpose
What is the Purpose of the Company? This may not necessarily be a monetary statement, some very successful companies have started out with totally different purposes, and ultimately it must make a profit and must give shareholders a return. It could be to make something safer or to improve something, there needs to be clarity as this can also fit alongside marketing.
Values
Whether written or not a Company will have values, are these values going to fit with a potential buyer? Quite often they do not, which in a merger or buy-out, would normally result in an upheaval whilst the purchaser instills their values. Values also come into play with HR, creating privilege to be able to work there and creating standards to work to. Quite often a company which faces continuing issues with staff would find a vast improvement by re-visiting values and culture. These also become an integral part of marketing
Point of Difference
Referred to as; Unique Selling Proposition. What is unique to the business that no-one else has. What makes it stand out from the crowd, or as prominent marketing Guru, Seth Goddin points out, what is the Purple Cow? This should be in eight words or less and is also critical in marketing.
Growth
A company should be able to show past growth patterns and should have a very clear and documented system to show these. Past growth will allow any serious, potential buyer to analysis performance and show where the growth has come from. One of the main area’s that a potential purchaser will be looking for is how much the existing owners contributed to that growth. These historical figures will also help to justify future forecasting of growth. A potential purchaser will also be looking for sustainable non-capital cost growth. The future cost of growth would normally lesson the sale price. Future growth will also be an assessment on either fact or gut feel, fact is preferable.
Systems
Good systems will manage the business; there is no doubt about that. People run the systems. One of the biggest factors alongside HR which inhibits business growth is systems. If they are shabby now, then they will definitely break down under growth. Any potential purchaser will look at these systems to identify whether they can cope with your potential growth expectations. Shabby systems will also inhibit effective management control, which leads to management working in the business and not on it.
Key performance indicators (KPI’s), linked with key numbers and dashboards, allowing pro-active management as apposed to reactive. All linked to efficient accounting systems and aligned to your KPI’s and dashboards, covering inventory, profit and loss, sales and delivery which could be a widget or a service.
Procedures
Totally documented procedures which allow for peace of mind management, placed to increase efficiency and decrease the risk of error, but only rigorous enough for the small to medium sized business to retain its spirit of, freedom to act swiftly.
Staff
Aligned staff are normally those that feel good about the company, they fit the values and fit their roles. Sometimes when assessing a problem member, the issues of values and role fit, will creep into play. Happy staff are often those that know where the company is going and where they fit into the plans. Ownership of vision, goals and values are critical to peak performance. Do they fit with the team, are you recruiting to your values?
Staff character analysis is a very helpful tool to ensure that each individual is in the right role. Analysis finds strengths and weaknesses which allows you to create job fit. Non-performance may simply mean wrong role. Overall team analysis is also important to identify strengths and weaknesses as a unit, allowing for solid future recruitment decisions.
Are, the staff aligned? Do they see personal development within the Company? Are they involved in the Company Vision? Do the staff work as a team? Have you done a strengths and weaknesses analysis? Is each member fitting to their role? Do they fit the Values of the Company? Are staff running the systems, the systems running the business or vice versa. Do they know their critical numbers for peak performance?
Marketing
Do you market a widget or do you market the Company. If you are selling 20 widgets, it’s a costly exercise to market 20 widgets. Marketing the Company to sell the widgets is the better option. Marketing the company or brand is normally done once and then tweaked regularly, having an identity makes it easier to sell the widgets.
Do you have a marketing plan? What is the Company? Does it have personality? The marketing should be designed around all areas of purpose, vision, values, point of difference, goals, and target market. Once these are formed it helps to form the identity. Now we can tell people who we are and can form a strategy on how we are going to do that.
Target market is a critical factor in creating identity and becomes part of what “you can be the best at”. Having assessed this, then it’s a matter of finding the best value for dollar method to approach the market.
Effective web design and use are critical in today’s market. Is the search engine working for you? What is the first impression when opening the site? Does it draw your potential client into your business and invite them to stay and learn more? Quite often this is the only shot you get. Through your identity you are able to make the potential client feel comfortable and get the feeling of “that’s the company I want to work with”. But the system must be efficient and mean business. If you want the business, “look the business”.
Media can be effective, but expensive and must be able to be quantified; media is effective in marketing identity or brand, which in turn will sell the Widgets and not visa versa. With media, it’s marketing the brand and point of difference, followed by the widget. In other words, always marketing the brand, but not necessarily in that order i.e the eye catcher may be the offer, but it’s backed by the identity. This can help in quantifying the effectiveness.
Identify what your most cost effective method of sales would be.
Sales
Is there a sales program in place, have the right people been identified to effect it? If it is one on one sales, is there a process to follow? Is it documented? Is there an efficient on-going training program in place? Are there sufficient leads, flowing through from your marketing program? Are the sales monitored through key performance indicators? What are the key numbers to a successful sale?
Through effective staff alignment, good KPI measurements and dashboard monitoring you are able to assess your effectiveness in the market place. So many companies do not know. Be sure that you do.
Service
Do you keep a data–base (also for sales) for customers and follow these up to check on satisfaction, do you have a written policy for your staff to follow for returns or complaints. Do you have a written procedure for after service? Your point of difference may relate to service. Have you made this a critical K.P.I.
Life Balance
All areas are designed around giving the owners a balanced life between work and family. An unbalance in either direction could mean a loss to the least dominant. No one will pay good money to gain a loss of balance.
