Business Succession Strategy Weaknesses

In a previous series on why too many business owners fail to exit their business with maximum cash flow and profits, I identified 8 business exit strategy weaknesses that may contribute to a disappointing business succession outcome for you.

My last post pointed out the pitfalls of failing to value your business properly, and this post explains why you want to move your business from the Unilateral Zone of Value™ to the Three Dimensional Zone of Value™ so that your business will have the highest possible valuation at the time of succession.

Why You Want To Move From The Unilateral Zone To The ‘Three Dimensional Zone Of Value’™ In Your Business – Case Study

Fritz was the successful owner of a car dealership that he had operated for more than 20 years. He proudly conveyed that the primary value in his business was his own personality and ability to develop relationships. He was resolved that he was the sole reason for the business success and he knew when the time arrived for him to leave, he would have nothing to sell other than stock, the premises, office equipment, and other goods and chattels.

Fritz admitted to having no formal arrangements with customers and suppliers, who continued their association simply because they liked to deal with him. He considered his staff to be mere instruments for backing him up in the operation, because they added no value to his business turnover or efficiencies without his specific instructions.

Fritz’s biggest complaint about having a business was that he could not get enough time away from it to relax and enjoy some of his success. This is a classic example of a business operating in the ‘Unilateral Zone of Value™’.

This example demonstrates a business strategy problem, but it also is representative of a case with leadership, management, contingency and continuity problems.

Obviously Fritz needs to develop his car dealership from the ‘Unilateral Zone of Value™’ into the ‘Three Dimensional Zone of Value™’ if he wants to increase the business value, and therefore the selling price at the time of exit, which could occur either at a time of his choice, or by circumstances beyond his control.

How to build your business value to the Three Dimensional Zone of Value™ is discussed in more detail throughout my book, Your Business Succession: How To Exit Your Business For Maximum Cash Flow And Profit with specific solutions to Fritz’s predicament in Part 5.

How well prepared are you to exit your business with maximum cash flow and profits?

Take the FREE Business Exit Quiz (5 minutes of your time) and find out where your business succession strategy may be letting you down, and how to improve your chances of building a business for maximum profits and cash flow

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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Strategy weaknesses impact your business succession profitability

Business succession problems are the result of one or more of the  five weaknesses I identified in my previous post 5 Reasons Business Owners Fail To Exit Their Business With Maximum Cash Flow And Profit

The first reason is strategy weaknesses.

8 key strategy weaknesses have the potential to impact the success of your business succession, and therefore your business exit cash flow and profit.

8 Strategy Weaknesses

1. When you fail to understand and respond to the laws of supply and demand in your market place, you put your business exit strategy at risk
2. If you are not thinking like a buyer when planning to sell your business, you probably haven’t prepared your business well enough to be attractive to a purchaser and therefore will fail to achieve the best selling price
3. Failing to understand that you must have evidence of  maximized business profits in order to boost your business valuation and influence the potential selling price
4. Failing to inoculate your business against Leaky Bucket Syndrome™. This is a key element to building a valuable business that will generate the business succession result that you want – maximum cash flow and profits
5. Failing to value your business properly. A proper valuation is the only way to validate the price on which you base your business exit strategy.
6. Failure to adjust your business tactics to the current economic climate. You want to take an active interest in economic matters that could impact the performance of your business, and which would enhance or detract from your business valuation.
7. Failing to be transparent about your business to a potential purchaser can undo the sale in a way that could harm your business value and your reputation. Understanding the importance of communicating the value of your business to the market place is just as vital as operating the business to capacity
8. Failing to understand that Shareholder Agreements are usually an unsuitable mechanism for handling all the issues involved with your business succession planning.

Business succession planning case studies

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

The right business exit strategy can put the caviar on your crackers

If you want to make sure that you have the right business strategies in place so that you can have a little (or a lot) of caviar on your crackers, 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 for maximum profits and cash flow
2. Read my book “Your Business Succession” to discover what you want to do to ensure you will not become one of the poor statistics outlined earlier in this article
3. Contact our Business Succession Strategy office to plan your business succession strategy, so you can ensure that your business does not have any strategy weaknesses that will reduce your business succession profitability.

To Your Profitable Business Exit,
Leigh Riley

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Planning Your Business Exit Strategy

When your business exit strategy is not in place and you don’t know what you don’t know about how to arrange this, how do you know what to ask and who do you ask?

Asking the right questions requires some knowledge of the topic.  Asking anything at all can be a problem in itself when you don’t want to seem like you don’t know something that you feel you should know.

And yet, not knowing requires questions to find answers and build your knowledge in a way that can solve problems.

I know you’re a thinking person because you’re reading this now.  You could research  a suitable business exit strategy yourself, but the volume of information available is overwhelming.

But, if you don’t have time to learn, understand, weed out and apply the bits that are relevant to you, it is likely your business exit strategy will stay unresolved.

You have only one shot at getting your business exit strategy right, and there is no time to recover from mistakes.

How to organise your business exit strategy

Your business exit strategy can be dealt with effectively.  Just like you’d go to a doctor when you have pain expecting the problem to be pinpointed quickly and resolved, a similar approach is required to your business exit strategy pains.

You need to draw on a Succession Strategists experience, skill and knowledge to help you through.

But before you do, you could download a FREE chapter and the table of contents from my book “Your Business Succession” which will contain some helpful hints about how to arrange your business exit strategy.

You could also invest 3 minutes of your time to complete the Business Succession Readiness Quiz to automatically receive your free customised report and your personal succession planning ‘To Do Checklist’.  This will get you started on what you need to do to implement your business succession plan.

I’m committed to making Your Business exit strategy problems easier to solve!

Here’s to Your Profitable Business Exit Strategy!

Leigh Riley

Sole traders deserve a profitable exit strategy too

If  your business has no employees, and your family members are not interested in taking over your business when you leave, what is your best exit strategy to make sure you actually receive the cash flow and profits you’ve worked so hard to earn?

If you are a sole trader you may believe that you are at a disadvantage when leaving your business, but there are many options to help you  maximize the value of your business and therefore maximize the return on your investment.

7 tips for a profitable sole trader exit strategy:

• Make sure your business has a proven track record with financial accounts  and tax statements to verify the income and profits of your business.

• Keep your place of business organized and attractive.

• Document all client records, including contact details

• Establish and document systems for all procedures and processes to make it easy for someone else to fulfill your role when you exit your business.

• Communicate your success to your business associations, competitors and trading partners to make it a well known that your business is an attractive purchase proposition.

• When considering potential buyers don’t overlook the newer graduates and trainees that you meet at business associations. They may currently be working with your competitors, but aspiring to own their own business one day.  You can portray your business as an easier path to owing their own business with instant income, rather than building a business from scratch.

• When you’re comfortable, approach someone in your network to enter into an agreement with you to buy your business one day upon specified events occurring.  The events can be agreed with terms to include retirement or another matter causing you to leave the business,and the term should also include events such as sudden illness, accident or death.

This strategy will allow you to agree on a price for the time when you exit the business. Your agreement should include the terms of sale, and can even make provision for funding the purchase price.  This is known as the ‘friendly rival’ strategy.

Benefits of the ‘friendly rival’ exit strategy for sole traders

Any agreement you set up should be arranged by a team of experienced business exit strategy specialists and should make provision for the changing value of your business.

Due diligence must be given to the tax implications upon changeover.  The agreement should also provide for terms to protect your business asset from the contingencies, with insurance to cover sudden illness, accidents and death.

Putting a ‘friendly rival’ exit strategy in place will allow you the comfort of knowing you have a certain buyer when the time comes for you to leave your business, no matter what the circumstances. This will also provide you with assured financial security in the form of both cash flow and profit int the future and remove the pressure of finding a buyer if you ever have to leave suddenly.

FREE online tool to evaluate your exit strategy:

Start with the end in mind and sharpen your business strategy in a way that will enhance your proitable exit . Invest just 3 minutes to complete the FREE Business Succession Readiness Quiz and receive your FREE customized evaluation, plus a ‘To Do’ list of specific actions you want to take to ensure your profitable exit from your business.

Take the quiz now

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The headlines read ‘Earth and Venus may collide’!  If that is your latest reason not to take action on growing your business value and arranging your business exit plan, think again!

There is a one-in-2500 chance of Earth and Venus colliding.  But there is a 100% chance of you leaving your business one day… whether you choose to or not, it’s inevitable, so isn’t it time to face facts, stop making excuses and start on your business succession plan?

Leaving your business is lot less scary than the thought of planet Earth crashing into Venus.  You and I both know that if you’re the type to look for reasons not to get things done, there’ll be another reason waiting in the wings to justify your inaction.  If this possible threat is just a distraction from reality for you, then wake up and start on your business exit plan now.

Taking simple action will add value to your business, because you’ll present it in its best light, making it more appealing to potential to buyers.  When you are preparing to sell your car – you clean, polish and service it, and you obtain a mechanic’s report to verify its reliability.  These simple actions certainly add value to the car because buyers will pay more for the beautifully presented vehicle in great mechanical condition.

Practical business exit plan steps you can take right now

Similarly with your business, you need it to be in top condition to maximize its value.  Preparing to exit your business is similar, but it takes a bit more time and effort. Here are five practical steps you can take right away to start the process of maximizing your business value:

1. Keep your premises clean and tidy
2. Maintain your equipment, stock and tools in good order
3. Document all your systems
4. Ensure your staff are well trained in the day to day processes of your business
5. Verify the profitability of your business with an accountant’s financial reports for at least 2 years

FREE help to start on your business exit plan now

Take the FREE business succession readiness assessment that I designed to support you and readers of my acclaimed book ‘Your Business Succession’ How To Enter, Execute And Exit Your Business For Maximum Cash Flow And Profit.

You need to invest only 3 minutes of your time to complete the free assessment…. And you’ll receive a customized ‘to do list’ of the main actions you want to take to get started on your business succession plan. You have nothing to lose and much to gain … so take the quiz now

Take the quiz

How well prepared are you for planned or unplanned business succession? Share your story or your experience with the quiz on the comments box below.

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