4 Leadership And Management Challenges That Cause Business Exit Problems

Four business leadership and management challenges have the potential to impact the success of your business profits at all stages of the business cycle, and may have a particularly dramatic impact at the time of exit, depriving you and/or your successors of the result you anticipated from your business succession.

Business succession problems arise from one or more of the five exit strategy weaknesses I identified previously:

1. business strategy weaknesses.
2. structural faults.
3. situational errors.
4. sustainability breakdowns.

Reason # 5, business leadership and management challenges, is the subject of this post.

The 4 business leadership and management challenges that cause business succession problems:

1. Does Your Successor Have the Skills to Keep the Business Operating Profitably? Financial Capacity and Competency – If your potential buyer does not have the financial capacity to buy you out in one lump sum, you are left financially vulnerable.
   The buyer’s personal credibility, integrity, credit history and financial responsibility becomes a further risk for the seller to consider, because the seller is effectively providing credit to the buyer. If the new owner’s capacity to operate the business is impaired in any way, the result could dramatically drive down the end sale price you receive.
   Loyalty to Your Staff and Customers -  Some business owners won’t mind how the business is operated once they’ve left, particularly if they’ve received their full financial settlement upon transfer. However, others may have built up a substantial loyal customer base and will leave behind staff with whom they’ve developed caring relationships. Other business relationships, such as those developed with suppliers, may also be impacted by a change of ownership in your business.
   These established relationships can burden the exiting owner with feelings of responsibility, so it’s important for them to ensure that the new owners have the skills and integrity to treat all the remaining parties in a fair and appropriate manner. You will want to be sure they can continue to operate a viable service so those people who have served you well during your business life are looked after.
2. Failing to Declare Income Reduces Your Business Value and Will Not Attract Your Most Profitable Buyer.
   Business owners who operate on a cash basis without declaring their true income through annual tax returns will not be able to present their business as viable and profitable, so not only are they breaking the law and placing a heavier tax burden on other members of the community, they are also doing themselves a great disservice. If a buyer can be found, it will almost certainly be at a price that is much lower than the seller would desire.
3. A Poorly Systematized And Poorly Documented Business.
   Business owners who hold all the client and supplier details, business procedures and other operational data in their head, rather than documented in an orderly format, are doomed to failure in their attempts to obtain a buyer at the business’s true value.
4. Sibling Rivalry.
   When the head of a family business fails to demonstrate strong leadership when deciding which child should succeed him or her, it can be a major source of conflict that has the potential to lead to family breakdown.
   Common sense says that the child who has the most skill and aptitude should be chosen to take the helm, but emotion and family dynamics can lead to an inability to determine this fairly.
   Conflict in a family business will usually lead to operational problems that will cause a downturn in the business, thus affecting the business value and its eventual sale price.

In my latest book, “Your Business Succession : How To Exit Your Business For Maximum Cash Flow And Profit” you can read three real life case studies (Cases 16, 17 and18), which detail the business exit consequences of poor leadership and management decisions made by business owners, and how those outcomes could have been avoided with appropriate planning for a profitable and stress free business exit.

Your business succession strategy should cover all the leadership and management issues we have just identified for you.

In a future series I’ll share some case studies that will help you to understand the influence of each of these sustainability breakdowns in detail, so you can plan how to overcome these problems before they can have any impact on your profitable business exit.

In the meantime please feel free to take advantage of these resources to make a start on your profitable business exit strategy now:

1. Take the Business Exit Quiz (5 minutes of your time) and find out where your exit strategy may be letting you down, and how to improve your chances of building a business for maximum profits and cash flow.
2. Read my book “Your Business Succession” to discover what you want to do to ensure you will be prepared to steer clear of any of the leadership and management challenges outlined in this article.
3. Contact our Business Succession Strategy office to plan your business succession strategy, so we can eliminate the stress of making the right decisions for your best chance of maximizing your business valuation for a profitable exit.

To Your Profitable Business Exit,
Leigh Riley

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Your business exit profitability is directly dependent upon the ability of your business to continue to operate at a sustainable or profitable level.

Business succession problems are the result of one or more of the five weaknesses that I have previously identified:

Reason #1 was strategy weaknesses.
Reason # 2 was structural faults.
Reason # 3 was situational errors.
Reason # 4, sustainability breakdown, is the subject of this post.

Three sustainability breakdowns have the potential to impact the success of your business exit, and therefore your business exit cash flow and profit.

The 3 sustainability breakdowns that cause business succession problems:

1. Family Business Continuity Problems.  In Chapter 10 of Your Business Succession the Cabernet family represents an example of the difficulties associated with business continuity when one or more co-owners want to exit, but the remaining owners wish to continue. If the owners who wish to continue do not have the financial capacity to buy the exiting parties’ shares, they can be forced to give up their life’s work.
2. Buyer Market Limitations – Barriers To Entry. The barriers to entry into your business may limit the number of potential available buyers in the marketplace. This, in turn, may delay your business exit if adequate time and planning is not applied to find a suitable successor. Main barriers to business entry include:

• licensing and registration restrictions
• financial limitations
• funding limitations
• emotional barriers
• the burden of debt

3. Failure To Recognize When It Is Time To Leave. Staying beyond a reasonable time can drive a business into ruin if you’re no longer capable of running it at peak performance. You must be truthful with yourself about when the right time is to leave if you want to exit your business with maximum cash flow and profit.

In my latest book, “Your Business Succession | How To Exit Your Business For Maximum Cash Flow And Profit” you can read three real life case studies which detail the sustainability breakdowns suffered by business owners in three very different industries, and how those issues could have been avoided with the right business exit strategy.

Your business exit strategy should cover all the relevant sustainability issues we have just identified.

In a future series I’ll share some case studies that will help you to understand the influence of each of these sustainability breakdowns in detail, so you can plan how to overcome these problems before they can have any impact on your profitable business exit.

In the meantime please feel free to take advantage of these resources to make a start on your profitable business exit strategy now:

1. Take the Business Exit Quiz (5 minutes of your time) and find out where your business exit strategy may be letting you down, and how to improve your chances of building a business for maximum profits and cash flow
2. Read my book “Your Business Succession” to discover what you want to do to ensure you will be prepared to sidestep any of the  sustainability issues outlined in this article.
3. Contact our Business Succession Strategy office to plan your business exit strategy, so we can eliminate the stress of making the right decisions for your best chance of maximizing your business valuation for a profitable exit.

To Your Profitable Business Exit,
Leigh Riley

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Your business exit profitability can be negatively impacted by several unplanned situations that cause serious succession problems.

Business succession problems are the result of one or more of the five weaknesses I identified previously. Reason #1 was exit strategy weaknesses, Reason # 2 was structural faults. Reason # 3, situational errors, is the focus of this post.

Six situational errors have the potential to impact the success of your business succession, and therefore your business exit cash flow and profit.

The 6 situational errors that cause business succession problems:

1. Failing to recognize that illness can force a business to close. Most of us accept that one day we will die; however, few of us contemplate the possibility that we could become injured or ill enough to prevent us from working.
   As a business owner you are making a serious error of judgment if you overlook this possibility, because serious or prolonged illness could affect the success of your business, which in turn would negatively impact your business valuation and your longer term financial security.
2. Verbal agreements can lead to business failure When people make verbal agreements among the parties involved in a business, it’s usually because they share a relationship of trust. Verbal agreements seem quite normal within an extended family, with friends, or with partners, because most of us believe that the strength of the relationship will ensure the agreement will be honoured in the manner intended.
   The biggest problem with verbal agreements is that circumstances can change, people’s recollections become clouded over time, and misunderstandings can result, causing both relationship and business breakdown, with dire emotional and financial consequences.
3. Poorly communicated succession plans cause dispute and business breakdown. A common error of judgment by business owners is that they attempt to shoulder the decision-making process of succession all alone. Dividing a business in a family situation can be one of the hardest decisions of all, particularly if the main asset you hold is your business and you have one or more competing children hoping to eventually take control.
   As the business owner, it is more than likely your right to ultimately distribute and hand over the business in a way that you feel is most appropriate.
   However, if an amicable outcome in terms of both business continuity and retained relationships is important to you, you would be wise to communicate your intentions, to gain feedback and acceptance, from the stakeholders at the planning stage. Failing to communicate with all the people involved could be a recipe for disaster, resulting in financial disappointment and relationship breakdown for all the interested parties.
4. Infighting and disputes devalue a thriving business. When you first make the decision to join forces with others in a business, your attention is focused on all the positive attributes of the union.
   The last thing on your mind would be the possibility of an acrimonious separation that could result in you losing part or all of the capital you contributed initially, as well as being denied the value that you brought to the business from your efforts and contributions.
   Sadly, some business relationships do turn sour, and the worst time to attempt to negotiate fair exit terms is during a dispute, when emotions are running high and logic has left the building.
   In my latest book, “Your Business Succession: How To Exit Your Business For Maximum Cash Flow And Profit” you will discover the situational errors made by business partners Andy, Phyllis and Johanna, in a professional services firm that lost value due to their infighting and disputes, resulting in one partner being forced out without her rightful financial entitlements.
5. Situations that can force you to exit your business prematurely. You’ve already seen how disputes can impose upon your business value and continuity, and there are other circumstances that can be beyond your control, negatively impacting your ability to exit your business with the cash flow and profit you deserve. These situations include:
   •     debilitating illness
   •    sudden death
   •    bankruptcy or financial stress
   •    family breakdown and divorce
   Any of these situations may impact your ability to obtain a fair price for your business share, and will of course adversely affect your financial security. These situations can also leave business co-owners in a difficult financial position, as revealed in Case Study #12 in “Your Business Succession” book.
6. Temporary loss of capacity to function can lead to your business downfall. In small to medium sized businesses, often the owner or owners will make most of the major decisions, and sign off all the business related cheques and payments. If a situation suddenly occurs to prevent the owner’s capacity to authorize payments or to make vital decisions, the results can be ruinous to a business and its valuation, and therefore to the financial well being of the business owner.

Your business exit strategy should cover all the situations we have just identified.

In a future series I’ll share some case studies that will help you to understand the influence of each of these situational errors in detail, so you can plan how to overcome these problems before they can have any impact on your profitable business succession.

In the meantime please feel free to take advantage of these resources to make a start on your profitable business exit strategy now:

1. Take the Business Exit Quiz (5 minutes of your time) and find out where your exit strategy may be letting you down, and how to improve your chances of building a business for maximum profits and cash flow.
2. Read my latest book “Your Business Succession” to discover what you want to do to ensure you will not become a victim of one of the situations outlined earlier in this article.
3. Contact our Business Succession Strategy office to plan your business succession strategy, so we can eliminate the stress of making the right decisions for your best chance of maximizing your business valuation for a profitable exit.

To Your Profitable Business Exit,
Leigh Riley

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Structural faults impact your business succession profitability

Business succession problems are the result of one or more of the five weaknesses I identified previously. Reason #1 was strategy weaknesses and this post explains the second reason that too many business owners experience business succession problems – structural faults.

Four structural faults have the potential to impact the success of your business succession, and therefore your business exit cash flow and profit.

The 4 structural faults that cause business succession problems:

1. Failing to build an appropriate management culture. Businesses that are reliant on the current owner to operate them are less attractive to buyers because there is a higher risk of losing business customers, staff and possibly suppliers when a change of ownership occurs.
   Potential buyers will usually be prepared to pay less for an owner-centric business, so it’s a problem that needs to be addressed and overcome as soon as possible—certainly well before you reach a succession event.When a business is operated without a management culture that doesn’t develop staff to the point where they’re capable of running the operation without the owner’s daily intervention, the opportunity to fully capitalize on the sale of the business is reduced.

   Lee Iacocca, manager of Ford and Chrysler until his retirement in 2001, said, ‘I hire people brighter than me and then I get out of their way.’  That’s the type of management culture you need to build in your business if it is to benefit your exit strategy.

2. Failing to consider tax implications on the sale or transfer of your business. The sale price of your business is NOT what counts. Your focus should be on what you keep after tax, because that’s what you will care about most when the time comes. You can make significant taxation savings with thoroughly considered tax planning strategies.

The tax rules and alleviation strategies vary from country to country of course. Each nation has its own complexities. I can’t emphasize strongly enough the importance of your seeking professional tax advice from an exit-planning specialist to identify the options specific to your circumstances. You will want to do this well before you think you are ready to sell or transfer your business, to maximize any available advantages.

Careful planning of your business structure, the sale, and well-considered treatment of the proceeds is essential to ensure you legally maximize your cash flow and profit from your business exit.

In Australia, it’s possible to significantly reduce the capital gains tax paid on the sale of a business using the available laws. The rules are complicated, which is a definite incentive to seek specialist tax advice. It is important that you understand the full implications of the ownership structure of your business and to seek out tax-planning options to ensure you are in the best position to take advantage of the rules.

A word of caution - restructuring your business during its operation can inadvertently exempt you from leveraging some of the available concessional rules. That’s why you want to obtain specialist tax advice from the commencement of the business, to ensure your business will be in the best position to utilize the rules and exemptions that may be available when you sell.

A specialist tax adviser can save you significant amounts of tax—sometimes ten to twenty times more than the specialist’s fees, so beware of the false economy of NOT seeking specialist advice to maximize the financial and lifestyle outcomes of your business succession.

3. Failing to consult a business succession planning specialist. This can result in poorly structured business assets, negatively impacting your business succession outcomes in terms of both cash flow and profit for both you and new owners of your business.

In one of my books “Your Business Succession” I detail a case study that demonstrates how poorly structured business assets can hinder business succession. I show you what can happen when succession planning advice is given by business advisers who lack sufficient specialist expertise in succession planning.

In Case Study # 5 of the book, I reveal multiple strategies that could have saved Myra and Eddie a lot of money and heartache if they had sought  advice from a team of succession planning specialists before the transfer of their family business.

4. Using estate planning as your succession strategy. Some business owners believe that identifying a business successor in their will is the same as having a succession plan, because they think that business succession is just a matter of appointing someone of their choice to take up ownership when they die.

There can be a lot of confusion about which assets can actually be passed on via an estate. Asset ownership is not always straightforward because of the structure of ownership. For example, assets held via a family trust, superannuation fund or company, or assets that are held jointly, rather than as tenants in common, will be dealt with differently from other assets, and may not form part of the estate for division among beneficiaries.

In the case of Joint Tenants, the joint owner automatically assumes ownership when the other joint owner dies; therefore, each party cannot will their part of the business to another person or party.

In the case of Tenants in Common, each party owns their share in the asset and can chose to make provision for that share to pass to anyone of their choosing upon their death.

Estate planning lawyers can help you understand what’s eligible to form part of your estate and able to be willed. However, they may have a limited understanding of the associated issues from a business succession planning perspective.

The bottom line is that a will can’t change the ownership structure of assets, with the result that many business owners inadvertently fail to provide for loved ones in their estate through poor advice or failing to seek advice from a team of business exit strategies specialists.

In a future blog series I’ll share some case studies that will help you to understand the influence of each of these business structure faults in detail, so you can plan how to overcome these problems before they can have any impact on your profitable business succession.

Business Exit Strategy Resources

If you want to make sure that you have the right business structure in place so that you can avoid the mistakes identified in this article, then you want to take advantage of these resources to make a start on your profitable business exit strategy now:

1. Take the Business Exit Quiz (5 minutes of your time) and find out where your exit strategy may be letting you down, and how to improve your chances of building a business with maximum cash flow and profit.
2. Read my book “Your Business Succession” to discover what you want to do to ensure you will not become the victim of the business succession structural faults outlined in this article.

To Your Profitable Business Exit,
Leigh Riley

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