To reward myself for my hard earnt new qualification at Chicago, I took a quick trip to New York City where I made some amazing new business contacts and book sales too, but I found myself attracting people that were hungry for guidance about succession planning.

On the roof top of the apartment I rented at Hell’s Kitchen, I struck up a conversation an American executive (I’ll call him Ritchie) who seemed a bit troubled and open to discussion about his business problems.  To protect his privacy I can’t reveal too much detail about the compnay details, but I can tell you we ended up having a 2 hour discussion (virtually a consultation) as he poured out his anguish around the succession of his father.

View from my roof top in NYC

Family Succession Suffering

Ritchie had been his father’s succession plan and since his dad’s departure, the company had entered troubled waters.  Ritchie had a Harvard Education so he felt he was well qualified to make business decisions.  As a teenager, Ritchie had worked in the company performing menial tasks and his father had wisely insisted that Ritchie must gain some experience with a competitor before allowing him to work in a management position with his own firm.

The trouble for Ritchie was that his father did not adequately prepare him to fill his shoes of as the CEO. The succession handover was rapid and this did not provide Ritchie with adequate time to win the respect of the staff. Despite his education and work experience in another company, the staff treated Ritchie as if he was a spoiled boy of priviledge and undermined every decision he ever made.

Ritchie was feeling quite down about the situation which was amplified by the fact that he was going to have to downsize and cut staff to maintain a competitive company position. He felt this decision would further decrease his popularity in the company and that he may never gain the respect of his co-workers. When he sought his father’s advice as a mentor, his dad categorically refused to provide any guidance whatsoever.

Lessons for Family Business Succession

The lesson is significant for all of us with Ritchie’s situation:

• Statistics show that only one third of family businesses handed to the next generation will survive.
• The statistics worsen to one in seven survival for 3rd generational family companies.
• Preparation for family successors needs to start early.
• Education alone is not enough to support the next generation, and experience with another similar company may be of help, but nothing substitutes the gradual responsibility and succession handover so necessary to assist the next generation.
• If your family business is important to you, preparation should commence as early as possible.

Family business can be the most difficult succession plans to arrange because of the family dynamics, which are sometimes too soft on successors and other times to hard on successors. It can make or break and be the difference between successful continuity of a business built over a lifetime. Don’t delay,  take action on your business succession plan as early as possible! Family Business needs just as much time to prepare it’s successors as any business.

Here’s to your Profitable Exit Strategy!

Leigh Riley M Bus, Certified Exit Planning Advisor® (CEPA®), DFP, Cert IV A & WT
Consultant Business Succession Strategist, Author, Speaker, Trainer

Currently, I’m in Chicago USA attending the MBA style intensive exit planning study program for Small to Medium Enterprises.

I’ve had 3 days to adjust for jetlag and tonight I treated myself to the Broadway hit show – The Million Dollar Quartet.  This was not only a brilliant display of talent and showmanship, but also raised some interesting points relevant for business owners.  The story is told through the eyes of the Sam Phillips, owner and manager of the recording label “Sun Records”, that gave new talents their chance to make it in show business.  It’s been said that it takes talent to know talent, and that is what comes across loud and clear to me about Sam as I enjoyed the show.  Sam discovered the big names such as Elvis Presley, Johnnie Cash, Carl Perkins and Jerry Lee Lewis. Sam had the knack of understanding the wants of the teenage music market at the time, and hand picked the talent that would provide it.  The rest is history.  Despite Sam’s great ear for the up and coming sounds that would pay dividends for his company, he didn’t understand the need to protect his business what he had worked so hard in business to achieve.  He’d taken the risk with these young unknowns, and was so successful at promoting them, it attracted the intense interest of bigger players that enticed these young ambitious artists with lucrative contracts involving greater exposure and success for them.

Sam made some key business mistakes.

1. He had not conceptualised a continuity strategy that would protect his revenue streams.  When he lost his best artists, his business was virtually worthless.   

2. When the offer presented for him to merge with a larger competitor, his ego would not allow it, and hence he suffered financially… Sam didn’t know when to relinquish control for the greater good of him and his company.

3.  Sam did not know how necessary it was to grow his company along with his clients.  They outgrew his service offering and had no choice but to move on, despite them being very appreciative for all he’d done for them.  Not one of them made the decision to move very easily.

Sam was a great guy and a very talented one, but it takes more than this to succeed in business.

I have to ask you now, are you making some of Sam’s mistakes? Or have you implemented strategies to protect your business income?  Is your business developing in a manner that will retain your clients?

 Have you thought about your business exit strategy and is it prepared for all possibilities?

Without a plan to address these fundamental business attributes, it’s likely your business has no real value that can be sold, which is likely to impact your financial future.

 If you want to know what you can do to protect and grow your business value, start by reading the book, “Your Business Succession…proven strategies to boost business profits from start up to step down”  It’s all about how to enter, execute and exit from your business for maximum cash flow and profit.

You can also sign up for the Free Webinar on 21 June 2011 by emailing your interest to my office at support@ybsprofits.com    or   call 1300 499 225 to book your place.

The session will be run in two timeslots, 2pm and 7pm of 45 minutes duration.

Places are limited so don’t delay.

Here’s to your successful business exit strategy!

Leigh Riley

Poorly Communicated Succession Plans Can Lead To Business Failure

One of the biggest mistakes made by business owners when it comes to succession planning is making all the decisions alone. Often the most difficult decision is how to a divide a business in a family situation, particularly if the main asset you hold is your business and you have one or more children competing to eventually take control.

As the business owner, it is more than likely your right to ultimately distribute and hand over the business in the way that you feel is most appropriate.

However, if an amicable outcome with business continuity and harmonious relationships are important to you, then you would be wise to include all the family members involved and communicate your intentions to gain feedback and acceptance from the main stakeholders. If you fail to communicate your intentions accurately with all involved, the outcome could spell disaster for the business, resulting in financial disappointment and relationship breakdown for all the interested parties.

CASE STUDY – Family disputes after succession cause business closure without a sale

Business owner Stuart was the father of three children. His eldest child, Tim, had worked in the business all his life and had contributed significantly to building the business value. When Stuart died, leaving an equal share of the business to each of his three children, Tim felt short-changed because he had made the business his life’s work.

The business had insufficient borrowing capacity and Tim could not afford to buy out his siblings, who insisted on liquidating the asset, forcing the sale of the business. Tim contested the will, insisting he deserved more than one-third.

Unfortunately, the business remained closed during the lengthy and costly lawsuit that continued for two years, resulting is irreconcilable family breakdown and decline in the business value due to loss of income and clientele.

To add insult to injury, an opportunistic competitor established a similar business across the road, effectively gaining all of the business clientele.

How to prevent family disputes after succession from destroying your legacy

This situation could have been prevented and all parties’ interests could have been protected if only Stuart had chosen to communicate with Tim about his intention of leaving equal shares in the business to each of his children. Tim could have expressed his passion for the business and his desire to one day own the business, which would have provided the opportunity for them both  to seek advice about how to structure it so that Tim could take over without his siblings missing out on their share of the inheritance.

The simple solution to this problem would involve Tim entering an agreement with his father to buy out the business upon certain succession triggers. The agreement could be arranged to provide Tim with full funding by using insurance and vendor finance terms to facilitate the transaction. Full details of the strategy and options for this case study are revealed in Part 5 of my book ‘Your Business Succession: How To Exit Your Business With Maximum Cash Flow and Profits.”

Revealing your succession intentions is only one part of the communication required within a business to ensure every stakeholder understands their rights and responsibilities. Communicating the exit terms from the very start of your business relationship is essential for a fair outcome during times of internal disputes, as you’ll discover in the next case study about situational errors in succession plans.

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

51% of small business owners in Australia exit before retirement age  in unplanned circumstances. Take the FREE business exit quiz to see how prepared you are to prevent this happening to your business and your family.

To Your Profitable Business Exit,
Leigh Riley

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Would Your Business Exit Strategy Gain The Royal Seal Of Approval?

Succession planning is an important part of every business, even when you’re in the ‘business’ of running an entire empire. The British royal family is an entity that needs to ensure continuity, just like any successful business, and as one of the longest standing entities in the world there are many succession planning tips that can be gleaned from their succession hiccups and subsequent strengths.

Consider one of the most famous royal succession dilemmas – the abdication of King Edward VIII in 1936. King Edward’s lifestyle decision to leave the family business left his brother Albert to step up with short notice to become King George VI.  Without a clear succession path already in place, and a suitably trained candidate waiting in the wings, the sudden change in the line of succession could have been a disaster.

The plight of the British Royals could have again been compromised when King George’s rein was ended by his sudden death.  His daughter, Elizabeth II, was forced to automatically assume the helm at the young age of 26.  A daunting task by anyone’s measure, especially for one so young.  However, the impeccable preparation helped to overcome a difficult and potentially unsuccessful situation, and produced instead, what is not only the second longest serving royal in history, but arguably the most successful monarch ever.

Such an exemplary track record was developed over time as a result of many instances of meandering succession. Back-up plans and specific succession strategies for the royal family eventually evolved and are now solidly in place. Instead of assuming succession will go to plan, they identify a second, third, fourth all the way down to 54th in line for the throne!

All those in the succession line have an understanding of their responsibility and the protocols of the business they are in, which maximizes continuity despite death, disability or any other unexpected events. No argument can change who will succeed because the details are well documented in the British Constitution – which contains the royal equivalent of a formal, written succession plan.

In addition to a written plan, the royal family also has the Parliamentary Statute, which essentially acts as a ‘board’ to make fair decisions about succession problems if and when required.  The Statute has the power to deprive Sovereigns of their title due to misgovernment. It came into existence in 1868, when intervention by the government became necessary after King James II fled England, leaving the throne vacant. Parliament ruled that he had abdicated, and so they offered the position to James’s daughter and her husband as joint rulers.

How To Plan Your Business Succession Like A Royal

The lessons learned by the British royal family throughout history provide an excellent guide to the key elements required for your business succession planning success:

• Identify potential successors. The British parliament and the royal family would not allow just anyone to take over the throne.  Similarly, most business owners feel strongly about the kind of person they believe can successfully continue their organisation in the future.

Think about who the most likely candidates to take over and buy your business might be. Often the most suitable candidates are people already known to your business. They may be internal, such as co-owners or staff, or even external competitors or suppliers.

Are there special attributes or qualifications that potential new owners must have? This may include legal, financial, licensing or educational factors. Early identification of candidates for succession  allows ample time for the necessary training and personal preparation so the successor is ready to take the ‘throne’ when the time comes.

• Recognize that family ties aren’t enough to ensure successful succession. Family members in business often make verbal agreements because they share a presumed relationship of trust. Many business owners have fallen on hard times because they believed their relationship with other parties ensured the agreement would be honored in the manner intended.

The problem with verbal agreements amongst family members is that circumstances can change; people’s recollections become blurred over time and misunderstandings result not only in relationship breakdown, but also in business breakdown, often with devastating consequences for all concerned.

• Communicate the process clearly so that everyone involved understands what is expected. This is important because too often in business insufficient thought is put into who will step up to fill management roles.

Assumptions are sometimes made without consultation or discussion with the individuals concerned. How to divide a business in a family situation, for example, 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 children competing to eventually take control. If business continuity and an amicable outcome in terms of maintaining the quality of your relationships are important to you, a wise strategy is to communicate your intentions to all those involved, and to gain feedback and acceptance from the main stakeholders.

If you fail to do this you can be fairly confident that you will reap disaster in terms of financial disappointment and relationship breakdown.

• Document the legal process. The British Constitution wasn’t created in a day and it certainly wasn’t the work of one individual. Your accountant, lawyer and financial adviser need to work together to ensure your succession plan documents are in order to ensure a smooth and profitable succession.

One of the biggest mistakes made by owners is to assume that the business’s existing Shareholder Agreement or their personal estate plan is sufficient to handle the succession process. Depending on the strategy you choose, you may require any number of legal documents to ensure a smooth succession plus maximum cash flow and profit.

These may include a buy-sell agreement, which gives the first right of buy-out to a given party, or an Employee Share Ownership Plan (ESOP) which may be implemented to allow key employees to join in ownership of the company. ESOPs are already widely used globally and are increasingly being used more in Australia to ensure that successors are financially prepared to fund the buy-out.

• Prepare for contingencies because in real life things don’t always go to plan. Royal, or not, individuals change their mind, act unpredictably, sometimes irresponsibly and have their own passions and motivations.

Disputes, death, disability and divorce are also factors that can disrupt a business’s operations. Planning for all the positives is a good idea, but overlooking possible problems you may face isn’t realistic and doesn’t allow you to mitigate potential issues and create a more certain outcome.

• Appoint a mini board. Just like the Parliamentary Statute in place to oversee British Royal family operations, you can appoint a board to assist with decision making when required. A board may allow you to draw upon knowledge and experience that is not available within your business, and can benefit you by providing arms-length impartiality, fairness and accountability to your succession planning that may not be achievable on your own.

Many small to medium business owners believe that their size prevents them from having a board, but this isn’t the case. Even small businesses can benefit from having a ‘mini-board’ to ensure some degree of impartiality when it comes to making business decisions, especially surrounding what can be emotionally charged succession planning issues.

The succession strategies responsible for the longevity of the British royal firm offer clear evidence that these factors form the basis for assured long-term continuity, and that using these principles can allow your business legacy to live on, long into the future.

To Your Proftable Business Exit,
Leigh Riley

Leigh Riley is the author of the first book of Australian case studies on succession planning, ‘Your Business Succession’, providing  strategic, tactical, practical and educational support for business owners who want to exit their business with maximum cash flow and profits.

More information and free book chapters are available at Your Business Succession blog

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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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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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