Are Verbal Agreements in Business Succession Plans a Good Idea?

In business situations, verbal agreements about succession plans, or indeed any aspect of the business, are usually made because the people involved share a relationship of trust. Operating on verbal agreements appears to be quite acceptable among members of the extended family, with friends, or with partners, because there is the belief that the quality of the relationships will ensure that agreements will be honoured in the manner intended.

What happens to the verbal succession plan when things change?

However, the problem with verbal agreements in business is that circumstances can change – people’s recollections become distorted over time, and the resulting misunderstandings can cause not only relationship breakdown, but also breakdown of your business.

Case study – verbal agreements in a family succession plan leave the successors vulnerable

Sonya retired and handed over her farm business in equal shares to her two children, who had always worked hard on the property.

Sonya asked for no payment for the business, and the children agreed to pay a lease fee for use of the farmland to provide Sonya with the income she needed to fund her retirement.  They did not have a formalised lease and arranged the terms on a verbal agreement basis , which seemed fair to everyone at the time because of their family relationship.

When Sonya suffered a heart attack, she decided to liquidate her assets by selling the farmland. She felt entitled to do this because it was her property.

Verbal Agreements Can Lead to Relationship and Business Breakdown…

Unfortunately Sonya’s adult children could not afford to buy the land and the new owners plans for the land did not include allowing Sonya’s children to continue farming under a lease arrangement. This resulted in the children losing everything they had worked for – they were effectively out of business and even out of a job.

This sorry story is an excellent example of why verbal agreements are not suitable succession arrangements, even in loving or close families.

How to protect all members of your family in your succession plan

One straightforward succession solution to avoid this disaster would have been to arrange a written, formalised lease agreement between the family members so that the rights of all involved would be protected. The agreement could have been extended to allow the adult children first right to buy upon Sonya’s decision to dispose of the property.

Furthermore, funding could have been arranged with terms to arrange payment over time, or by using insurance to provide immediate funding upon certain events—such as a heart attack.

Discover more succession solutions

You can read the full details of suitable succession strategies for similar situations in Part 5 of my book “Your Business Succession: How To Exit Your Business With Maximum Cash Flow and Profits.”

To Your Profitable Business Exit,
Leigh Riley
Succession Solutions Specialist

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January is almost over and by now you have probably had enough time to think about what you plan to achieve for your business in 2011.

Historical example of a powerful family’s succession plan

If you’re anything like I am, you’ve mixed your business planning time in amongst some recreation time, and been to some movies.  If you haven’t seen it already, I can highly recommend you check out “The King’s Speech” starring Colin Firth and Geoffry Rush.  It’s an unbelievable, but true story of unexpected succession thrusting the stuttering, ill prepared Prince Albert to the forefront of the British Monarchy after his brother Edward VIII abdicated, having served less than 11 months as King.

Poor Albert was forced to assume the role of King George VI (they changed his name from Albert because it is a German name that was thought to be unpopular given the political rise of Hitler).  The underconfident Prince went into overdrive attempting to prepare himself for the business of being King of England and to fill the large shoes his father George V had once worn.  He had many fears to overcome, particularly with his speech delivery; and given his life long stuttering problem, he definitely didn’t feel up to the task.  But his royal duty was calling so he had little choice.  Undoubtedly it caused him a great deal of distress, but fortunately despite his lack of confidence, he did in fact have the qualities that enabled him to become the great King George VI.    The outcome could have been quite different had Albert not had the ability to rise to the occasion.

I have to wonder how many of you may be leaving yourselves open to potential failure due to a poor choice or no choice or strategy for your business succession.  Just how well prepared are your successors to fill your shoes should you suddenly leave your business.  What kind of solutions have you put in place to ensure the continuity of your business along with assuring your own financial success?  Will your legacy live on beyond your reign?

Even if you have your succession plan in place, how well prepared are you and your business to cope with the unexpected and unplanned events that may force a space at the helm of your business such as the one experienced by the royal family in this story during 1936?  Have you chosen your successor by virtue of a formula such as ‘leave it to the eldest child’ as is the practice of the British Royal family?  Or have you taken the time consider who may be best prepared to takeover for the better of the business?

Succession planning should position you and your family for the best financial outcome through any circumstances.

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

You can learn a lot more about the essential attributes of a successful succession plan in my book “Your Business Succession“.  But before you invest in your business future, you may like to assess just how well positioned you are by taking the FREE customised assessment I’ve designed especially for you to determine how well prepared you are to exit your business.  Simply go to www.BusinessExitQuiz.com The quiz takes about 3 minutes to complete and then I will provide you with feedback about the areas you need to focus on to ensure your most profitable outcome when you leave your business.

If you would like to know more, you can email me your questions or be brave and call me direct … I’ m expecting your call on 1300 499 225.

Here’s to your Profitable Business Succession!
Leigh Riley

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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 reduced business succession outcome for you.

In my previous business exit case study I revealed how poorly structured assets can impact the amount of tax payable when you exit your business. This case case study reveals the folly of substituting an estate plan for a properly constructed business succession plan.

How An Estate Plan Can Create An Unwanted Result When You Exit Your Business – Case Study

MontanaCo was an old family company whose ownership was passed down through the generations via estate planning in each shareholder’s will. This practice resulted in uneven ownership of the company and caused problems for its management, with the family slowly losing control to external parties.

Several problems developed through the generations:

• The second generation had one child (the daughter) missing out on ownership altogether, effectively disinheriting her, with control being shared between the brothers. This unfairness caused friction and family breakdown.
• The third generation experienced very uneven ownership when shares were distributed between the various beneficiaries. In fact, one shareholder had no beneficiaries, so bequeathed her shares to her favourite charity, resulting in the family company being 25% owned by an external party. As the largest shareholder at the time, the charity held the largest percentage of voting rights.
• By the fourth generation, the shareholding became very messy, with family ownership and control being diluted. Decisions became difficult to manage and uneven power caused problems. One family member divorced and lost 6.25% of her ownership to an ex-husband, introducing further problems of control and dilution of ownership within MontanaCo.
• The Managing Director in fourth generation held only 4.166% of the shares making it difficult to manage the company with few voting rights by comparison to others in the company.

The following image shows the succession tree of the MontanaCo family company, which used estate planning as its succession plan. You can see the percentage of shareholding being diluted unevenly as ownership is passed down through the generations.

Click Image to enlarge

Results of Using An Estate Plan As A Succession Strategy

By the fourth generation there are:

• 3 bloodline shareholders with 12.5%
• 3 bloodline shareholders with 6.25%
• 3 bloodline shareholders with 4.166%
• 1 non-bloodline ex-husband holding 6.25%
• 1 non-bloodline lost dogs’ home with 25%

There was no structure in place obliging non-bloodline shareholders to sell back to the family members.
Two of the family members who held the smallest shares had responsibility for management of the company and experienced a lot of difficulty from less-involved but more powerful shareholders, causing continual friction and leading to operational difficulties.

The good news for this family company was that the situation could be rectified with the majority shareholding vote. You can discover the full solution for this succession case study in Part 5 of my book, Your Business Succession: How To Exit Your Business For Maximum Cash Flow And Profit

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

Click here to take the FREE Business Exit Quiz (invest just a few moments of your time) and discover where your business succession strategy may be letting you down, and how to improve your chances of building a business for maximum profits cash flow and profit.

To Your Profitable Business Exit,
Leigh Riley

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Overcoming Business Succession Strategy Weaknesses

My previous post consisted of a case study about how to eliminate or reduce tax payable when you exit your business, and in an earlier a post I identified the 8 Exit Strategy Weaknesses that you want to overcome for a more profitable exit outcome.

Being in business requires you to maintain updated knowledge of a vast range of issues, and the economic factors impacting your business are just as important as anything else I’ve covered in this blog series.

Understanding the trends that will develop and change your business as a result of economic factors will be crucial for the longevity and continued viability of your business.

On Friday I was speaking with a dentist who was busy factoring in demographic population shifts and social change to his business decisions.  He was thinking about how these factors that he had identified would affect his Dental Practice earnings over the next 10 years.  Cleverly, he is actively planning his business for the shift in demand, to ensure his Practice continues to remain relevant to the market and profitable well into the future.

Who would have thought that tooth repairs would be affected by changes to the economy?  But dentistry is a business like any other, and this very smart dentist is fully across that fact.

Here’s an economic reality that will affect every business, no matter what your industry or business focus may be.  The Global Financial Crisis (GFC) has had a long lasting effect in ways you may not have imagined.  Even if your business has grown and continued to prosper through this period, it is very likely it will bite you when you go to sell – unless you’ve put in place a healthy exit strategy.

How To Can the GFC Effect Your Business Exit?

If you’re expecting to sell your valuable business asset, start thinking about the price that someone will need to pay to buy.  If you’re like many business owners I’ve met, you may have built an asset that is not easily afforded without the buyer borrowing to purchase.

Now here comes the GFC crunch point: all financial institutions are scrutinizing very carefully the money they lend for business purchases since the GFC.  They will only lend to people who have substantial assets to back the loan, and in the absence of that, financial institutions require a very healthy business proposition with a high level of business asset backing and robust sustainable and proven cash flow.

That reality is certainly applying pressure to business owners who hope to make an easy sale in the immediate or medium term.  The situation isn’t likely to improve for some time, so it wouldn’t be wise to live in hope that it will pass soon.

How can you prepare to sell your business for the price you want?

You want to start preparing now!

• Boost your revenue and continue to show a healthy profit.
• Tidy up your business financial status.
• Identify the trends for your industry and start leading your business into the long term sweet spots of revenue earning.
• Develop a strategy that will position your business earnings for the long term.
• Think outside the square about who will buy your business, and how you can position your buyer to afford your business so you can exit with maximum cash flow and all the profits you deserve for the lifetime of effort you’ve invested in building your business.
• Gather a team of succession experts to assist you in locking in your strategy, and make sure they’re working collaboratively for your benefit, so that you receive the best possible solution that will overcome all the barriers we’ve identified.

If you need a quick summary of the aspects of your business that will get you started on preparing your business succession, you can take the Business Exit Quiz. It’s FREE, and you will receive a customized analysis of your exit readiness with a list of items that you need to work on to maximize your business sale price.  The 10 questions usually take 2-3 minutes to complete.  So what are you waiting for?  Click here now to take the Business Exit Quiz.

You could also read the book ‘Your Business Succession‘ for a comprehensive commentary on how to prepare your business for maximum cash flow and profit at your exit.  Order your copy of “Your Business Succession” online.

To Your Profitable Business Exit!

Leigh Riley

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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 reduced business succession outcome for you.
My previous post in this series revealed how to eliminate or reduce tax payable when you exit your business through a powerful case study about the impact on final profits of tax payable by an Australian company at the time of business succession.

How Your Assets Are Structured Impacts Tax On Disposal Or Transfer Of Business Assets When You Exit Your Business – Case Study

Myra and Eddie developed a thriving print manufacturing company over their lifetime. Their children Beth and Robert both worked in the company. This was a family who really worked well together, so when Myra and Eddie were ready to retire from the company, they were confident about transferring the company to Beth and Robert as joint owners. They required no payment from their children for the business because their superannuation fund owned the factory (worth $5 million) from which the business operated.

The business would continue to pay rent to Myra and Eddie via their superannuation fund, which happened to be very tax effective and provided more than enough income for them to live comfortably. Myra and Eddie had also arranged for the factory to pass onto Beth and Robert as their beneficiaries, so they did not worry about ownership of their business premises.

The business succession appeared to be organised and settled, and they believed that everything was structured to be as tax effective as possible.  However, there was one big problem awaiting Beth and Robert that no one had considered. Not even their existing tax advisers and lawyers had anticipated this problem and its devastating effect, as they were not experienced with succession planning.

In this case, once Myra and Eddie passed on the factory via their superannuation to their beneficiaries, Beth and Robert, a massive tax liability resulted. As adult children receiving the proceeds of their parents’ superannuation accounts, up to 30% tax had to be paid on the account value. Inheriting the factory, valued at $5 million, would attract a tax bill of around $1.5 million.

There was no way Beth and Robert could afford to meet that liability without selling the factory. However, selling the factory caused another costly dilemma, because their business relied on the location and facilities in the factory to continue its operation. Relocating could not be arranged easily without incurring a lot of disruption and costs to the business.

The stress of the situation engendered undue tension between Beth and Robert. They began to argue about the options, leading Beth to decide that she wanted to sell out her half. Robert could not afford to buy out Beth. The situation became very difficult, affecting the business’s performance in a slow economic environment. Their business could not find finance in the prevailing market.

One simple solution would have been to use insurance over the couple’s lives to fund the anticipated tax liability payable on the transfer of the factory from Myra’s and Eddie’s super fund to the adult children.

Another option would have included a strategy to withdraw the business premises from Myra and Eddie’s super fund altogether. Under current tax law, no tax would be payable by Myra or Eddie provided they were aged 60 years or more; however, stamp duty would be payable on the transfer. It would be prudent to weigh up the transfer costs against the potential tax costs of transfer upon death before arranging, to ensure Myra and Eddie would not be disadvantaged. They could come to some arrangement with Beth and Robert to meet the transfer costs, which are likely to be a lot lower than the superannuation death tax that would apply.

You will find more specific information on how to reduce tax by choosing the best structure in Part 5 of my book, Your Business Succession: How To Exit Your Business For Maximum Cash Flow And Profit with specific solutions to Beth’s and Robert’s family’ succession problem.

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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Business Exit Profits Key #2 | Video

One of your core business exit goals is to keep as much of the profit from the sale of your business as possible. To achieve this you want to have a business succession plan that takes advantage of Capital Gains Tax Concessions that are available to business owners who meet certain criteria.

View this short video to discover four types of Capital Gains Tax (CGT) Concessions that may boost your business exit profits.

Four tax concessions that may provide capital gains tax relief when you sell your business in Australia.

These only apply if your business meets the definition and eligibility criteria of a small business.

1. 15 Year Exemption provides 100% capital gains tax relief.  It means your business must have been operating for longer than 15 years without any change to its structure or ownership during that period and to qualify you must also meet certain further criteria.
2. 50% Reduction Exemption can provide 50% relief from capital gains tax, but only if you meet the eligibility criteria.
3. CGT Retirement Exemption provides 100% capital gains tax relief on up to $500,000, but only if you meet certain eligibility criteria which may vary with your circumstances.
4. CGT Rollover Relief provides 2 years automatic deferral of capital gains tax.  It applies only if you meet the eligibility criteria and you are using the proceeds from the sale of your business to purchase another business.

Capital Gains Tax Eligibility Rules

The eligibility rules are too complex to go into detail here, but you can read all the details in Chapter 16 of my book ‘Your Business Succession: How To Exit Your Business For Maximum Cash Flow And Profits’ which demonstrates the effects with real life case studies.

To be certain of your eligibility you should seek the advice of a qualified, certified practicing accountant (CPA or CA), and you want to do this well before leaving your business so you can make full use of the available concessions.

More Business Exit profits Keys

Read about the other six Business Exit Profits Keys in detail here.

Secure your own copy of my book ‘Your Business Succession: How To Exit Your Business For Maximum Cash Flow And Profits’ for real life business exit case studies that show you what you want to do to to ensure your cash flow and profits are maximised when you leave your business, through either planned or unplanned circumstances.

To Your Profitable Business Exit,
Leigh Riley

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Finally ‘Your Business Succession’ book is ready to purchase from the publisher

After almost 23 years of focus on winning the best possible personal and business financial outcome for my clients, reviewing business exit strategies with allied professionals, and continual research into best practice in business succession strategies, I can’t tell you how excited I am to finally hold this book in my hands and be able to share the valuable information it contains with business owners and professionals who advise business owners.

Proven strategies to boost business profits from start up to step down

‘Your Business Succession’ contains more than 20 detailed case studies, dedicated to all business owners who labor to see their legacy live on. While this book recommends the Stephen Covey principle of starting with the end in mind (7 Habits of Effective People), I can’t stress strongly enough that if you are a business owner who did not start with the end in mind, then the time to start planning for a profitable business exit is now.  Throughout the case studies I reveal the mistakes that you must avoid if you want to exit your business with maximum cash flow and profit.

How to enter, execute and exit your business for maximum cash flow and profit

‘Your Business Succession’ identifies five reasons too many business owners fail to achieve a profitable exit from their business, and also details the exact plans and processes you must follow for your business to achieve maximum cash flow and profits, not only as you exit your business but at all stages of the business cycle.

Advance praise for ‘Your Business Succession’ book

1. “A very timely book. A huge tsunami of business sales is about to happen… in this book, no stone is left unturned. For the business owner prepared to read the book from cover to cover, here is a sure guide on how to conduct a business succession.” Anthony Jensen, AEOA committee member, and currently a lecturer with the school of economics and business at Sydney University.
2. “In ‘Your Business Succession’, Leigh Riley brings real world experience with passion, and solutions to the issues facing business owners leaving their business. This is very positive reading.” Helen Hasty, former manufacturing business owner.
3. “Succession planning is a huge latent problem for our SME market. This book is an end to end toolkit in one place for a proprietor considering succession, and is a solid resource for any professional advising to business owners.” Australian executive business banker.

‘Your Business Succession’ will help you assess how well prepared you are to:

• ensure the quality of lifestyle you’ve worked so hard for
• maximize your business valuation and sale price
• find the right successor
• pre-arrange the sale terms of your succession to lock in your business valuation
• safeguard the value of the business legacy you will leave
• remain in a position of financial power and security at each phase of your business
• be released from debt commitments and exit your business with financial freedom
• maximize your cash flow
• maximize your profit
• exit your business with ease and peace of mind

I trust you will not only enjoy reading this book, but also benefit financially from the valuable information you will discover in the 366 pages of ‘Your Business Succession.’

Click here to buy your copy of “Your Business Succession”

Here’s to your Profitable Business Exit!

Leigh Riley

Seven Business Succession P.R.O.F.I.T.S. Keys

All business owners want to exit their business with maximum cash flow and profits. My previous posts and series have mostly focused on identifying the habits and faults that will weaken your business’s potential to generate the cash flow and profits you desire when you leave your business, either through planned or unplanned circumstances.

This post holds out a candle of hope by presenting practical exit strategy steps as I introduce you to my Seven Business Succession P.R.O.F.I.T.S. Keys. My next series of blogs will detail real life case studies in which I will refer frequently to my Succession P.R.O.F.I.T.S. Keys, so this is a timely opportunity to introduce them:

Succession Profit Key 1: Proceed with the End in Mind

• Plan your business and exit sale NOW
• Set your exit goals
• Schedule and program the implementation of your business exit plan
• Formulate policies prevent fraud within your business
• Develop standardized procedures to support your business policies
• Create systems
• Employ the right people

Succession Profit Key 2: Reduce Tax by Choosing the Best Structure

• Seek advice about the right structure to minimize exit taxation from the start
• Plan to leverage capital gains tax relief laws

Succession Profit Key 3: Organise Your Business to Be Free from Debt Commitments

• Understand your obligations with guarantees
• Inform yourself about different types of guarantees
• Discover how to release your business from a guarantee
• Recognise when you can transfer responsibility to another guarantor

Succession Profit Key 4: Flag Potential Funding Solutions for Your Profitable Succession

• Explore your exit strategy options
• Identify various vendor finance arrangements
• Understand Buy-Sell Agreements
• Consider the possibilities of an ESOP (Employee Share Ownership Plan)

Succession Profit Key 5: Identify Ideal Buyers and the Selling Process

• Prepare early to find a buyer
• Learn how to identify a potential buyer
• Formulate your Business Vendor Statement
• Find your potential buyers
• Plan for the transfer
• Buyer – conduct due diligence
• Seller – conduct due diligence
• Negotiate your sale price
• Finalize your contract of sale
• Be prepared for post-sale emotions

Succession Profit Key 6: Take Control of Your Business Sale Price

• Be prepared for unplanned events and exits
• Have a plan to cover disputes within your business that may affect your profitable exit
• Insure against contingencies
• Understand the various types of business insurance that you may need
• Use insurance to protect your business sale price
• Understand how to structure insurance ownership for a smooth and profitable succession

Succession Profit Key 7: Seek Guidance from a Team of Suitably Qualified Succession Specialists

• Understand why you really want a team of succession experts to guide your business exit plan
• Appreciate the role of each specialist with a succession planning team
• Assemble your team succession specialists

To Your Profitable Business Exit,
Leigh Riley

PS
My next post will begin a series of real life business exit case studies. While you wait, 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 (it’s FREE and will take no more that 5 minutes of your time) to 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 must do to ensure you will overcome any potential situation with P.R.O.F.I.T.S outlined earlier in this article.

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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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