As New Zealand moves forward from the worst recession in 70 years, thorny questions surrounding succession planning will again be at the fore…. and it’s going to be a rough ride for some.
Let’s look at the figures. New Zealand leads the world in the number of privately held businesses that are expected to change hands in the next 10 years – a staggering 69%, well ahead of second-placed Australia on 45% and miles away from the global average of 25%.
So what does this mean? Firstly, business owners will be competing in a crowded market with plenty of opportunities for would-be investors. Secondly, the credit crunch has tightened the flow of money making the procurement of a business much more difficult. And thirdly, the world is gun-shy. Buying a new business is considered by many as a brave move.
Privately owned businesses are often focussed on enhancing cashflow, reducing costs and managing day to day operations. The risk of this is being blindsided by the future. Business owners need more than a short term plan and it’s essential that they understand the factors that enhance business value. Well managed drivers can improve cashflows, attract investment capital, strengthen compensation structures and differentiate a business from its competition.
Privately owned businesses typically need to find ways to enhance cashflow while minimising risk. Companies that hope to maximise value upon succession should consider planning at least three to five years before a transition.
The establishment of a sustainable business model can help business owners achieve a wide range of business and personal objectives – from maximising the sale price of the business, creating ownership opportunities for key employees, to maintaining an on-going role in the business, sharing in future upside or leaving a lasting legacy.
Given the importance of value to strategic decision making and to succession planning, one might assume that every business owner knows the value of their company at any point in time. This is generally not the case as arriving at a business value is as much an art as a science. The scientific approach is the domain of the professional valuer who uses various tools and methods. The ‘art’ is where value becomes the price the market will bear between a willing buyer and willing seller.
To maximise the selling price to a third party the business owner needs to present a compelling vision of what the business could become rather than an historical perspective. A compelling story and competition amongst bidders will more likely achieve a selling price above any scientific value.
Conversely, if transitioning to a family member or employee, the business owner may wish to consider a valuation that reflects what the business and successors can afford. Too high a valuation may hamper their ability to buy into the business. Too low a valuation may leave exiting shareholders without sufficient future cash flow.
Privately owned businesses need to understand how their value drivers can affect both short and long term performance and take the necessary steps to enhance the viability of the business over time to both improve and preserve value. This may include:
- Cleaning up the balance sheet
- Ensuring the right management is in place
- Trimming expenses
- Strengthening internal processes
- Introducing new products
- Expanding to new markets or
- Investing in other strategies to drive profits, growth and sales.
In short, business owners need to think about their ownership in the business. There maybe trade offs to make that affect value in that some business owners may prefer to retain family management over more qualified successors, or happiness of workforce decisions that can affect long term value, profitability and viability of the business.
Further enquiries, please contact:
Grant Thornton New Zealand Partner, Privately Held Business
T +64 (0)308 2576
Issued on: 4 March 2014
Disclaimer: This article represents the views of its writer, and GrownUps does not endorse the content of this article or any product or service mentioned in it. Please seek advice from a professional in relation to your own circumstances.