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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Every business owner’s dream is to eventually exit their business with maximum cash flow and profit, assuring a comfortable retirement income as a reward for their years of dedicated hard work  To achieve this you will need to maximize the price you receive when exiting if you want to enjoy the comfortable retirement you’ve been hoping for.

Alarming facts about small business owners and retirement savings

Australian statistics reveal that only 5% or retiring business owners will have sufficient retirement savings to be completely financially independent.  In the US the average retiring business person has enough savings to fund approximately 8 years of their retirement, but will on average live 17 to 18 years beyond retirement age.  Facts such as these really bring home the need to focus on succession strategies that will boost your business valuation so you can exit with maximize profits and retirement income.

5 reasons business owners miss out on maximum retirement income

While some business owners will be sufficiently prepared to reap the rewards of years of effort, the reality is that many will fail to maximize their business value in a way that could ease their financial burden during the next phase of their life.  Here are the 5 main reasons why:

1. Strategy Weaknesses involve 8 key areas of failure to have the end in mind when operating their business.  The strategic decisions made in the business do not adequately take into account market demand for the products and services they provide, nor the market conditions in which they operate. They lack a long term customer service focus, and fail to recognize the competitors they’re up against. Two types of competition exist -  competition for customers who use their services, and competition for potential purchasers of their business when they exit.
2. Structural Faults encompass 4 main areas of fault when a business lacks a management culture, and fails to understand the associated tax implications of the ownership structure of a business, particularly when exiting.  To protect yourself against structural faults I can’t emphasize strongly enough that you need to use a team of specialist advisers to collaborate and mitigate the 6 D’s of Succession.
3. Situational Errors takes into account the 6 identifiable situations that, without adequate contingency planning, can impact your business value and move your financial success beyond your control.
4. Sustainability Breakdown comprises the 3 factors that impede effective business continuity and your ability to handover your business whilst receiving full financial benefit for a lifetime of effort.
5. Steering Off Course involves leadership and management challenges and embodies the 4 business succession leadership challenges that you must overcome to ensure your business remains on track for maximum profits and income from enhanced business valuation and sale price when you exit your business.

How ready are you to take on the challenge of overcoming the 5 reasons too many business owners fail to achieve the profitable exit they had hoped for?

Business exit strategies to achieve maximum income for your retirement

1. Take the Business Exit Quiz (2 mins 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 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 Succession,

Leigh Riley

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Business Exit Is Not Always A Planned Strategy

As a business owner you have already discovered that events beyond your control are likely to bring unexpected surprises / shocks that can have a profound impact on your business cash flow and profit.

Multiple factors contribute to your business success in both the long and the short term, and while some of these factors may be beyond your control, just as many success factors are within your control, but are often overlooked.

Unplanned events that have the potential to annihilate the future profitability of your business are often related to your unexpected exit from your business, triggering a business succession scenario. While these events may not be planned, expert business exit preparation can  allow you to minimize unfavorable consequences of unexpected life and business events.

6 Business Succession Triggers

Even with a business succession plan, the impact of an unexpected owner departure can be just as disruptive as having no business exit strategy. So you want to make sure that your exit plan covers these 6 succession triggers, most of which are due to unplanned events:

1. Death
2. Disability
3. Dispute
4. Divorce
5. Departure due to retirement
6. Desire for difference

This is the first post in a series in which I will cover each of the succession triggers in more detail. While you are waiting for the next post you can click the link to take the FREE business succession quiz to assess how well prepared you are right now to exit your business with maximum cash flow and profit.

Have you or a family member or friend ever experienced one or more of these succession triggers? I invite you to share your wisdom and experience in the comments box below.

To Your Profitable Business Succession,
Leigh Riley

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How Is The Credit Crunch Affecting The Sale Of Your Business?

Who would have thought that a credit crunch originating in the USA would affect your ability to exit your business profitably in another country? Yet that is exactly what can happen if you are planning to sell your business without proper preparation in the form of a holistic business plan.

Despite the best efforts of governments around the world to free up credit markets, access to credit is still tight, with financial institutions carefully scrutinizing small business access to funding and therefore limiting the pool of potential buyers for your business.

If you’re a business owner who is planning to sell your business in the near future, the chances are that your ability to sell at the price you want and deserve will be directly affected by the your buyer’s capacity to obtain finance to fund the purchase.

Financial institutions are reported to be lending on business acquisitions right now, however only those businesses with proven financial viability and profitability, together with strong asset backing, will be in the running for loan approvals.  This presents a succession problem for you as a business seller who desires to exit your business in the near future.

To overcome this dilemma you want to prepare your business exit thoroughly and cover all options to ensure your sale can proceed in your timing and on your terms.  In my book ‘Your Business Succession’ due for release on 31st January 2010, I detail literally dozens of strategies to help you avoid or overcome business succession problems, and below I offer 7 strategies to help you prepare to sell your business profitably regardless of a credit crunch.

7 Strategies To Prepare Your Business For Sale In A Credit Crunch

1.  Assemble a reliable set of financial statements, prepared by your Certified Practicing Accountant, to  substantiate at least 3 years of your business performance.

2.  Increase your business cash flow with a reliable income stream.  This may mean formalizing service agreements with your customers or introducing product or service lines to increase business income.  It may also mean reviewing the pricing of the products and services you already provide.

3. Examine your business expenses and cut costs wherever possible.  Financial institutions will be looking for proven lean operations before providing funding to a potential buyer of your business.

4. Consider Vendor Finance options that enable you to facilitate the sale with potential buyers. Remember this effectively means you will become the banker on the sale, so you need to protect your interests with assets, insurance and a legal agreement.

5. Don’t forget to consider staff within your business as potential buyers. They’re in the best position to appreciate and understand the value of your business and are usually more prepared to pay the price you’re asking.  Think about arranging an Employee Share Ownership Plan (ESOP) to facilitate a buyout by your best staff.

6. Prepare a feasibility study of the future prospects and potential of your business and target market to impress financiers and save your buyers the trouble.  As the business owner, you’re in the best position to describe your competitive advantage and can best present the value that your business offers to future owners.

7. If you haven’t had time to implement the above recommendations, consider delaying selling until you can prepare adequately. If you want the best price for your business sale, forward planning in the form of a holistic succession plan is essential to ensure your business is operating at optimal profitability.

How prepared are you to sell your business for maximum cash flow and profit?

Invest just 3 minutes of your time to complete the online assessment and receive your FREE customized report with an instant explanation and “To Do List” to complete your Business Exit and Succession Plan at http://ybsProfits.com/quiz.php

To Your Profitable Business Succession,
Leigh Riley

Succession planning is really about developing your business for something better …

Why did you take the risk of going into business ? Was it simply to  provide yourself with a job?  I’m betting that your reason behind starting a business was to build yourself an asset that would one day provide you with a great lifestyle – a lifestyle that offers Something Better!  Am I right?

So in troubled times, when sales are dropping off, think not of lowering your prices.  This may attract more sales in the short term but the reduced profit margins also have the potential to reduce the value of your business.

If you want something better from your business in the future, you want to focus on staying steady and true to your business mission – to build something better!  Take notice of some valuable wisdom, that I quote from the great John Ruskin 1819 -1900:

“It is unwise to pay too much.  But it’s worse to pay too little. When you pay too much, you lose a little money, that’s all.  When you pay too little, you sometimes lose everything, because the thing you bought was incapable of doing the thing you bought it to do.

The common law of business balance prohibits paying a little and getting a lot.  It can’t be done.  If you deal with the lowest bidder, it is well to add something for the risk you run.  And if you do that, you will have enough to pay for something better.”

Something better – worth working for, worth planning for. How prepared is your business to generate something better for your future? Find out with a FREE online assessment with customized report emailed directly to you.

To Your Profitable Business Succession!
Leigh Riley

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How Prepared Are You To Exit Your Business With Maximum Profit And Cash Flow?

My inspiration for writing my book ‘Your Business Succession – How to Enter, Execute and Exit Your Business For Maximum Cash Flow & Profit’ came from a true tale about business succession.

Business Succession Case Study: When Harry Met Sally And Greg

When I met Sally she had just transitioned into owning a business in which she had been employed for a number of years.

Sally’s employer, Harry, built a very successful business and was now ready to sell and retire. None of his children were equipped to take on the role of leading the business, but Harry recognized that Sally was the primary income generator on his sales team. In addition, she was trustworthy, dedicated, hardworking and results oriented.

The Succession Plan

Given the size of the private company, Harry knew he wouldn’t find a buyer very easily. His best option was to offer Sally and another employee, Greg, a substantial interest free loan with special terms  to take 60% ownership in two equal shares of 30% each. The remaining 40% of the company would be allocated in equal shares amongst Harry’s four children.

For Sally and Greg this was a fantastic opportunity to own a piece of the business they had worked so hard to build. Harry was prepared to take the risk of providing an interest free loan each to Sally and Greg, because he trusted them both.

Fortunately Harry was in the financial position to afford to wait for payment, and  did not require immediate cash inflow from the funds he had loaned. His secure asset base aside from the business, allowed him the luxury of funding his retirement without the need for immediate capital injection. Harry’s ability to do this is extremely rare amongst even the most successful of business owners.

Problems For Harry With The Succession Plan

Harry’s willingness to leave his future success vulnerable to the management styles and decisions of Sally and Greg really makes him stand out in the crowd.  Harry’s succession plan was not his best option, but he didn’t leave himself with a lot of choice. Due to lack of planning, and incomplete advice, it was the best solution he could think of for his business exit.

I became involved after Sally and Greg had taken over Harry’s business, when they were referred by Sally’s personal accountant, Josh. No formal agreement had been arranged at that stage – everything rested on a verbal agreement. Josh was diligent enough to appreciate that a verbal agreement was unacceptable as it left all parties vulnerable.

As a chartered accountant, Josh was handling the tax issues and was relying on my expertise to sort out all the contingencies relating to the business succession, including the debt owed back to Harry.

Josh engaged a lawyer colleague, Michael, to draw up the legal agreement. We all needed to arrange our various parts of the succession plan between Sally,  Greg and Harry.

I did not have the opportunity to work directly with Michael, but I certainly took care of my part in the process to the best of my ability. I feel certain that Michael also exercised his legal expertise within his range of knowledge as well.

However, it turned out that Michael’s main legal expertise was in the area of industrial relations, not succession planning.  This was as unhelpful as consulting a dermatologist about a bone fracture!

Tax Implications Overlooked

Josh, acting as the accountant on the matter, did not understand all the tax implications specifically related to succession planning, because his experience was limited to general business accounting, so he did not have the knowledge and skills to recognize the potential problems.

The outcome for Sally, Greg and Harry was totally unsatisfactory, in that it clearly did not solve all of their succession problems. Their succession plan was not structured in the most effective manner as the legal agreement amounted to little more than a shareholders’ agreement (Chapter 9 of  ‘Your Business Succession’ explains why a shareholders agreement is insufficient and is a weak strategy for effective succession planning).

The strategy had not addressed all the tax issues they would face in the future, nor did it provide an adequate agreement with clearly defined terms to cover all the identifiable succession triggers. Chapter 2 of  ‘Your Business Succession’ covers the 6 specific categories of Business Events, some of which are unexpected, that will lead to your business exit.

Succession Problems For Sally And Greg

This was a major problem especially when Greg had health issues that meant he could not arrange enough insurance to cover his commitment, and had insufficient assets to provide collateral as back-up for the debt outstanding.  This meant Sally would remain in a vulnerable financial position for a very long time because she was now solely responsible for repaying the debt to Harry.

From my observation, the resulting inadequate succession plan was largely due to failing to engage a team of cooperating professionals with succession planning knowledge, skills and expertise.  Adding to the problems was the fact that each professional had a blinkered approach, which left gaping holes in the strategy.

Each had expected the other to know their role. If only each had questioned the other with more understanding and communicated as a team to uncover the full extent of the problems. The worst part of this situation was that Sally and Greg’s understanding was so limited that they were unable to understand the gravity of their vulnerabilities.  Despite my repeated warnings with full explanations, I could not convince them of the need to revise their incomplete succession plan, particularly when Josh acting as their accountant, had assured them everything was in order.

I vowed never to let this happen again.  It really brought home to me the need to work in a team of experienced succession planning specialists. I decided then and there, that in future I would  work only with experts who were prepared to work as a cooperating team, for the greater good of the client! For me, that would be the only way to provide a complete business succession planning strategy that could stand the test of time.

Fortunately, I have now found that team, and choose to work directly with these noted succession planning specialists. This has added significantly to my ability to increase the value that I personally bring to my clients.

Education In Succession Planning

I was shocked to discover how little  information of sufficient quality was available about succession planning that was specific to the Australian context. I found plenty written by overseas authors, but these books were based on rules and tax laws that did not apply to Australian business owners.

Anything Australian that was available had focused only on specific aspects of succession planning and did not provide a complete picture. Such a limited focus had the potential to actually create many of the problems businesses being faced.  I resolved to try and change that situation once and for all, with my latest succession planning book, the Business Succession Profits Quiz and this educational blog.

Share Your Business Succession Story

The focus of this site and blog is an educational one, so feel free to comment on this post or to share your business exit story and perhaps prevent other business owners from failing to get the profitable exit their efforts deserve.

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