This Way Out A Roadmap to Business Transition

Transcription

1 This Way Out A Roadmap to Business Transition Effective Succession Planning How your Company can benefit Alan Fahey ROCG Europe 7 Doctor Croke Place Clonmel Co Tipperary E: T: M:

2 But..What does succession or transition really mean to you?

3 What does succession or transition mean to a business owner? Work less or not work at all Gradually ease away from the business Sell to investors or maintain ownership Pass on to family members Groom others within the business to take over Get the business ready for sale / investment Increase the value of the business Transfer business wealth while working rather than counting on maximising exit value Transition means something different to each business owner

4 ROCG s definition of Business Transition It s actually about business wealth transfer: Business transition consists of planning and implementing the actions required to successfully transfer business wealth both while operating the business and upon exit. Transition Succession replacing the owner as an Operating Officer Exit transferring ownership of the business Transition deals with both the owner s role in the business and their investment in it.

5 This is how many business owners think about succession is this you? Too early to plan for succession 60 No time to deal with the issue 28 Can't find adequate advice/tools to start 17 Too complex Other Don't want to think about leaving 8 Conflict with family/employees One Self Evident Truth: You will inevitable leave your business one day so you have 2 choices now 1. A Planned Exit on terms of your choosing optimal date, optimal value 2. Do Nothing and Crisis Exit as best you can join the disappointed 90%

6 Other barriers? The Owner s View Financing for the successor 46% Finding a successor 42% Too dependent on me 39% Valuing the business 32% Conflicting vision with family 13% Access to cost-effective advice 12% Conflicting vision of employees 8% 6 Source: CFIB Succession Can Breed Success: SME Succession & Canada's Economic Prosperity Report, June 2005

7 Why Transition planning is so important What our basic research has indicated Between 50-70% of family owned businesses will experience ownership change in the next ten years % would like to exit within 5 years. 60% of owners in the bracket have no definite plans Many businesses will simply close with little transactional value being transferred upon the owner s exit. Less than 10% of business owners will get a value even close to what they expect upon transitioning their business % of FOBs w/ Change in Ownership over next 5 yrs? % w/ a Succession Plan in Place Only 5% of those 40% have a formal succession plan in place. Precedence indicates that 70% of these will fail to survive the second generation after the death or retirement of the founder 60% of all entrepreneurs aged have yet to start discussing their exit plans with their family or business partners.

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9 In truth many owners simply feel trapped, even institutionalised within their own business & without a plan! I m telling you, these walls are funny. First you hate them. Then you get used to them. Enough time passes, it gets so you depend on them. That s institutionalised. - Red

10 For most transaction day only occurs once in a lifetime Planned Exit Day Create and begin implementing business transition plan Smart folk - Begin thinking about exit strategy issues x x x X For Most initial thoughts of exit Y I think I need a plan x Crises Exit Day Start-up Growth Maturity Decline time Typical Business Life Cycle

11 Realisation dawns that.transition planning requires more than a single expertise where do I start? Consulting Strategy Business coaching Project management Personnel Personal counseling Training & development Accounting Tax Audit Accounting Transaction Services Legal Corporate Finance Financial modeling Due diligence Business brokering Expert reports Brokerage Professional business writing Sale contracts Wills, living wills, PoA Valuation Financing Private equity Personal Finance Advice Personal financial planning Personal insurance planning Investment broker / fund manager

12 The Advisory Team different perspectives and expertise Attorney and legal Owner Estate planning Private banking Legal and financial professionals Insurance and benefits professionals Financial planning Taxation Financial and accounting advisors Strategic and operations consultants Business operations consultants Investment counsel Family and management coaches Business broker Valuation Real estate

13 Synergistic approach is more than important for...what may be the most important business decision owners will ever be called upon to make Legal, financial & banking professionals Insurance & investment professionals Owner Business operations consultants

14 A synergistic approach is also important when integrating personal and business needs to create a unique and easy-to-implement transition strategy Personal review Transitional objectives Owner Family Personal initiatives Business Transition Strategy Business review Business Business strategy

15 Keys issues and risks One key to transition planning is to make sure that when the transition occurs, it is sensitive and structured, and results in the preservation of as much wealth as possible Business Continuity Implemented on a timely basis tax savings Often overlooked is financing How will the transfer of ownership be financed? Especially if the business remains within the family Business value can be tied up in intangible assets Fair treatment of next generation equal shares, active involvement of members and passive members, clarity on the distinction and ramifications

16 The ROCG Roadmap to Business Transition A 3 Phase Process not an event! Process and expertise are required to lead an Advisory Team in both the planning and the implementation of the owner s business transition Transition Planning Phase 1 Transition Management Phase 2 Transaction Management Phase days to develop the plan 1-3 years to implement the plan 3-6 months to execute

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18 Phase 1 Analysing, Identifying, Selecting. and Creating the Plan

19 What s the Status Quo? How ready are you Really?

20 What are the Deliverables? The four things you must decide before you can make the successful transition: 1. How much do you need to live on? 2. When do you want to get out? 3. Do you want any ongoing involvement? 4. Are there family members or other people who want an ongoing role?

21 What are the Options?

22 Value Equity risk factors Smaller = riskier Lack of management depth Over-reliance on key personnel Instability of the industry Lack of product diversification Over-reliance on too few customers Over-reliance on suppliers Fluctuating earnings Pressure on earnings margins Over leveraged financially

23 The Reality of the X Factor X 10+ X Factor 5 4-6X 6-8X 2-3X 0 1m 5m 10m 100m+

24 Transition Timing Triangle Personal Timing

25 What s the Plan?

26 The final decision to implement will then be a well considered decision to move forward for the key people involved The final product is a written succession plan that clearly communicates everyone s role going forward The final product from Phase 1: a formal Transition plan It acts as a quasi contract between shareholders...a promise to support the plan Once the plan is implemented, it must be periodically re-examined to ensure it is on track and remains in the best interests of everyone involved

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28 Core Impact Areas Objectives Measures Targets Initiatives

29 Portfolio Analysis A Private Equity Perspective Current Position Assets & Liabilities Yields & outgoings Analysis No Planning

30 Up to 10 separate The Business entity consolidations The laying hen or hungry mouth Valuation Funding Capacity Income & Pension 5 Year Plan Capital Yield

31 Cash Flow = Receipts & Payments Further Analysis & Post Planning Position Current & Projected Domestic & Tax Capital & Revenue Post Transition

32 Domestic Payments Personal & Lifestyle expenditure Current Classified Post Transition Personal Insurances Lifestyle Change Projected Inflation

33 Taxation Current & Post Planning Position Optimisation Protection

34 Post Planning Projected Balance Sheet Reflecting the Capital Impact of Planning Initiatives Consolidation Plan Core Portfolio Elements

35 Property Portfolio Detailed Analysis & Planning Income Yield Asset Class Outlook Disposal & Gearing 5 Year Management Plan

36 Pension Portfolio Detailed Analysis & Planning Capacity Tax & Structure Investment & Yield 5 Year Management Plan

37 Debt Management Detailed Analysis & Planning Refinance Bank Sentiment Redemption 5 Year Management Plan

38 Transition Strategy Retirement Sale of Business Attracting external investors Succession Divorce Estate & Trust Planning Financial Independence Strategic Planning Transition Financial Consolidation Integrated Iterative Analysis

39 Phase 1 Analysing, Identifying, Selecting. and Creating the Plan

40 Phase 2 Managing For Transition Building Value, Grooming, & Changing Dependencies

41 How do we maximise Business Value?

42 No. of Improvements It s too early.isn t it? Required Value Early & Often Procrastination Time Building Value Faster Target Date

43 Strategic positioning Numerous Opportunities Need to be careful about taking on risks Selectively Expand Aggressively Develop Positioned to take on higher risk options Critical Weaknesses Shore Up Identify and Develop Core Competence Acquire Major Strengths Exit Diversify Should only consider very low risk options Can pursue higher risks with caution Significant Threats

44 Managing the disconnect between Actual and Perceived Strategic Position Numerous Opportunities Selectively Expand Aggressively Develop Critical Weaknesses Shore Up Identify and Develop Core Competence Acquire Major Strengths Exit Diversify Significant Threats

45 The Key Outcome - A Robust Business Model The preferred options = new vision Document the new way forward in terms of products/services provided, customers sought after and how the business will make a profit Benchmark and validate it against the Why The business Valuable Formula can then be extrapolated into a full strategic plan

46 Developing the Business Model into strategic business plan that will deliver the vision We need to expand that Business Model into a full strategic business plan The strategic business plan will be the roadmap that takes the business to its desired vision It will outline goals for each functional area of the business, which, if achieved, will ensure the vision becomes a reality

47 The Strategic Business Plan Outline Vision Business Model Drivers Marketing Goals Products/ Services Goals Finance Goals Business Model Enablers Sales Goals People Goals Culture Goals Systems & Processes Goals

48 A four phase approach to Dynamic Strategic & Business Planning Phase One: Document your strategic business plan Phase One Phase Two Phase Two: Identify the critical success factors (CSF) Phase Four: Develop a management reporting system Phase Four Phase Three Phase Three: Establish key performance indicators for each CSF

49 Transition Readiness A Self Assessment Test for You

50 IF YOUR TOTAL SCORE IS: less than 35 between 35 and 45 greater than 45 You need to create a plan for your business transition and succession While this is a hard step to take, the earlier you begin your plan, the better prepared you will be for unexpected events and achieving business independence. You ve made a great start and are well on your way to finalising your plan Now would be a good time to develop a list of action items to cover off all the elements of your personal and business transition plan, in order that it provides you with the highest possible value With the plan now agreed you should review for any changes It is a good idea to review and update your plan as business opportunities and/or concerns arise. This is particularly important if some other significant change has occurred in your life.

51 How do we make it investor ready?

52 How do we change core dependencies? Business on the Owner

53 How do we change core dependencies? Owner on the Business

54 Phase 2 Managing For Transition Building Value, Grooming, & Changing Dependencies

55 Phase 3 Marketing, Negotiating, Settlement, Exit and Moving On

56 Who are the optimum investors?

57 How do we negotiate the best deal?

58 Types of buyers Strategic usually interested in acquiring a niche for own business & generally pays more; needs less admin; generally has to pay seller find this type buyer first Financial usually buying just for an ROI; opportunistic, e.g. Private Equity Firms Individual usually buying a job, poorly financed, they may get poor advice, can be buyer of last resort / least desirable buyer 62

59 Taxation Wealth Extraction Income Salary tax band optimization Pension Approved Retirement Funds (ARF) or PRSA s Dividends personal or corporate Termination Payment golden handshake Capital Share Sale family or third party Voluntary Liquidation

60 Reliefs Available - Capital Retirement Relief Age Age 66+ Family Third Party Family Third Party Spouse Involvement T&C s Entrepreneur Relief Business Relief

61 How do we close the deal and optimise continuity?

62 How does the owner move on with confidence?

63 Phase 3 Marketing, Negotiating, Settlement, Exit and Moving On

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65 Get busy Living or get busy Dying 1. One Certainty 1. Tempus Fugit 2. Two Choices 1. Prepare and plan 2. Join the 90% 3. Three Challenges 1. Create a climate for Change this starts with urgency 2. Engage and Enable Change 3. Implement and Sustain Change

66 A well thought out plan will Dramatically increase the chances of achieving transition goals Ensure business continuity, succession, asset protection & management Look after the people you wish to care and provide for - preserve culture and values Maintain control of your future with clear financing and funding plans Structure the timing of the wealth transfer on a tax and risk effective basis Entrepreneurs with clearly communicated exit plans reduce anxiety for spouses, children, co-owners and employees and most of all THEMSELVES