Managing success(ion) in your business

For most entrepreneurs, the business you have created has been the thing that has consumed most of your energy, ideas and being for as long as you can remember. It is also the creation that has built your wealth (and corresponding lifestyle) to date. It would therefore be a real shame if that business were not to continue in existence after your working life has finished. Surely you would prefer to leave the footprint of your successful business by ensuring a proper succession plan, be it to a member of family, management or some other party. And you get the chance to realise the capital value in your business as part of your retirement plan.
Yet, the reality is that less than one third of owner managed businesses make it to the second generation and only 10% survive to the third generation. With that in mind, what are the things you should be thinking about right now, with an eye to the future?

Plan early by addressing the following issues
  • Who to bring into the business - the business needs to learn to operate independently of the alpha male that created it
  • Develop systems - tied into the above point, the business needs to have systems that will survive the vacuum of know-how and understanding left by the departure of the creator of the business
  • Take advice - you do not need to re-create the wheel yourself. At Meredith Harington, we have been advising business owners for decades on this very matter
  • Identify your successor - someone who is committed to the company's vision, has the ability to move the business forward, can think independently and exercise good judgement and has the leadership talents to make the hard decisions and motivate others
Closer to the time of your retirement, you need to begin considering the following:

How much is my business worth?
  • Valuations are subjective - there is not always a right and wrong valuation. Synergies and other economies of scale can make your business considerably more valuable to a particular buyer
The appropriate structure/methodology of the succession plan
  • Do you sell the shares of the company or do you sell the business? There are different legal, tax and corporate compliance issues that need to be considered before making this decision
  • How does the succession plan get financed? Will the deal be financed externally or internally? Will the assets of the company or the individual be necessary for security? If financed internally, what are the tax and other legal considerations?
Tax consequences
  • Are you aware that there is a capital gains tax exclusion on the disposal of a small business for business owners over the age of 55? In certain circumstances, there is a R1.8m exemption on capital gains for the sale of a business if the total assets of the business do not exceed R10m
  • Other tax considerations - while tax considerations should never override commercial considerations, there are significant tax issues to consider when selling your business. Very often, a structure that is tax advantageous to one party is disadvantageous to the other party. These considerations can therefore become very significant to negotiations
As a business owner, no matter where your company is in its business cycle, you do need to bear in mind the issues above if you want your business to survive into the next generation.

26 Jun 2014 15:52

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