Succeed Magazine Issue 2 by Nexia Auckland (formerly Hayes Knight)

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Martin Hawes How many summers left for you to succeed?

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Think big Wanna get rich? Act like a big business, now

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Selling your business? Here are 5 keys to success

SUCCEED U N L O C K B U S I N E S S VA L U E • M A X I M I S E P E R S O N A L P R O F I T S

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Bank rules 10 ways to work your bank harder

The experts’ guide to succession planning SUCCEED.NET.NZ

ISSUE TWO

Seeding Success

Clever succession planning is propelling small business to the big time. Here’s how. Featuring: SnowPlanet, TDC Sawmills & Dyson Importer Avery Robinson ( Tony & Clare Davies-Colley TDC SAWMILLS )

VISIT

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SUCCEED / Issue Two

Write the last chapter of your business plan.

Vincent Heeringa EDITOR Dwight Whitney WRITER Benzine CREATIVE + DESIGN Image Centre PRINTER

SUCCEED Issue Two Contents

Features

04 SEEDING SUCCESS

Clever succession planning is propelling many small businesses to the big time. Here’s how smart business people are using succession strategies to generate growth, innovation and rewards Featuring: SnowPlanet, TDC Sawmills & Dyson Importer Avery Robinson 10

Summertime Dues

Investment specialist Martin Hawes asks how many summers are left to achieve your dreams? And what does that mean for your business? And you?

Being small. Acting big.

Interested in selling your business one day? By acting like a big business now you can expect to earn bigger returns tomorrow

20 Questions

ASU4959\TBWA

A business succession plan will help you maximise your business’s value if you decide to move on, making it an essential element of any business plan. Call us today on 0800 272 222 to learn how we can help you make the most of tomorrow.

www.asb.co.nz ASB Bank Limited.

A checklist for planning your succession

Columns 16

Accountant’s View Five good ideas

Five keys to success (or five steps to ruination) in selling your business

Legal View Club rules

Why a shareholders’ agreement should be written, but never read

Banker’s View Me and my banker

Ten ways to work your bank harder

SUCCEED / Issue Two

Photograph by Aaron K

COOL BUSINESS … BRIEFLY

SnowPlanet founder Eduard Ebbinge

About The Business

“A lot of people think SnowPlanet is a cool story. But actually it’s hard, hard work and not many people have the commitment required to make a business like this succeed. We had to get so many things right, securing the site, keeping costs down, solving difficult engineering problems and now growing the brand. For us succession planning is just another word for good management.”

SUCCEED.NET.NZ

What does “succession planning” mean for you? For these three SMEs it’s meant turning ambition and passion into solid growth and hard, hard cash

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SUCCEED / Issue Two

Photograph by Aaron K

Our philosophy was to bite off more than we could chew – and then chew like stink! / TONY DAVIES-COLLEY

Everybody loves the idea of a start up. The thrill of the risk. The sheer courage and vision of the founders. The prospect of one day making it big. Start ups are cool. And when it comes to start ups, you don’t get a cooler example than SnowPlanet, New Zealand’s first indoor ski facility. Inside it’s very cool, at minus 5 degrees. Outside, it’s aesthetically cool, with its giant shed, bizarrely angled up the hill like a barn built by Picasso. And as an idea, it’s awesomely cool, skiing all year round, 15 minutes from downtown Auckland. The innovative design of the facility makes it unique in the world for its energy efficiency and low cost of construction. The business has been a success with slope visitor numbers of 175,000 to March 2005 exceeding the expected 130,000 for the first year. All in all, it’s a very cool start-up story. So it’s a little surprising to find that founder and managing director Eduard Ebbinge was already thinking about the end, right from the beginning. “Whilst exit strategy represented an important part of the business case, I can’t say that it was item one or even two on our list. But a succession plan, and a method of maximising the value of the investment, is certainly a top priority for us.” Ebbinge is the face of SnowPlanet and its key driver. He left a successful career in corporate finance and has thrown his family’s assets into the high-risk venture. Behind Ebbinge is a group of private investors who have invested millions to make SnowPlanet the success it is already. But investors like these don’t want to see a business plan with “in the never-never” in the title. “We have some very clear goals about where and how we can drive the value from this business.” For one thing, the huge investment in the facility, which includes some unique and expensive snow-making technology, requires Ebbinge to drive traffic through the gates. “It’s very important for us to leverage our location. We have to create a destination for Aucklanders to come to. That means thinking of this whole area as an entertainment zone.” SnowPlanet’s location may turn out to be its true genius. Just north of the CBD and located in farmland next to the motorway, the facility avoids the not-in-my-backyard syndrome and yet acts as a giant billboard for itself. Next door, an existing gokart track and a luge under construction are helping the creation of an entertainment cluster. There’s plenty more land for expansion too. Second, the future potential of SnowPlanet is in the brand. Ebbinge won’t commit to agreeing with me but he smiles when I say that it’s not hard to imagine SnowPlanet Sydney, for example. Part of the deal is convincing Aucklanders that all year skiing could be as do-able as attending a Super14 game. And probably more fun. For someone who has been advising both sides of the merger and acquisition business, it’s thrilling to have his own skin in the

game. “This is a long term investment. It’s not like an Internet business, for example, where the growth is fast and costs are low. It’s operationally complex and what we need to do now is improve, enhance and grow.” SME for success SnowPlanet’s an SME business, by any definition. But small doesn’t mean small-minded: it’s a good example of how “big company thinking” can be applied to any operation. Management experts are calling these sort of companies “gazelles”, for their ability to move so fast. (see the next story “Be Small. Act Big”). “It’s never too late nor too early to begin to plan for growth – and an essential part of the growth story needs to be a succession plan,” says Craig Fisher, a partner and director with accounting firm Hayes Knight. By succession, Fisher doesn’t just mean selling the business. “Succession planning is really about creating options: to find new investment partners, to list on the stock exchange, to pass it on to another generation, to sell the business outright or through a management buy out or even just to take a step back from the dayto-day involvement. These are all the end result of a succession plan. A good succession strategy begins with the question: ‘what do you want to achieve with this business?’ ” Sound simple? Yes, but Kevin Reilly, ASB National Manager Key Accounts, says it’s amazing how few companies and their founders have a succession plan in place or have even talked about it with their partners and spouses – let alone their bank. “So many business people leave the succession question to the end. But we recommend putting it at the beginning. At its heart it has the question: what is this company for, to a create job for me and maybe my spouse? Or is it to create some serious wealth?” Succession for growth For TDC Sawmills the question of succession planning means one thing and one thing only: growth. When founders Tony and Clare Davies-Colley left farming to start a sawmill business they knew they had their work cut out. Farming provided regular returns and the couple were good at it. “But it frustrated me that I couldn’t control what happened to the product after it left the farm gate,” says Tony. “I wanted to maximise my effort by working with the customer.” After farming, the next venture they knew was sawmilling, so they leveraged the farm to buy some equipment and launched into milling low-cost timber for pallet manufacturers. “Our philosophy was to bite off more than we could chew – and then chew like stink!” he says. Timber’s a notoriously tough business and competing on price meant TDC had to achieve volume – 100 cubic metres per day. SUCCEED.NET.NZ

… BRIEFLY

TDC founders Tony and Clare Davies-Colley

About The Business

The business: $40 million in sales, 215 staff, Whangarei The philosophy: “There’s no luck with managing a business. Either you do it well or you take a walk. In that regard we are more risk averse than the bank. The biggest task for us in the last few years has been building a structure where the key people are not a risk.”

SUCCEED.NET.NZ

SUCCEED / Issue Two

Photograph by Aaron K

‘Succession Planning’. You can call it what you like, we call it good business practice / BRETT AVERY

It got there in four years. The company grew 50% per year for the first six years, even though its first customer went bust. At first, Tony and Clare did everything, running the mill, sourcing the wood, selling the timber, marketing the business, hiring staff, managing accounts and doing the administration. As a pair, they work well, with Clare being systematic and thorough and Tony hands on and entrepreneurial. The hard work paid off: TDC now employs 215 staff, turns over $40 million and runs 24 hours a day. So where’s the succession story in this? Tony is the first to point out that their devotion to so many tasks was a great way to start the business. But without extra help the growth would have stalled. “When we got to 90 staff and began a second shift, it was time to employ some key management personnel.” In the last four years TDC has employed a financial controller, a sales manager, a human resources manager and two production managers. The goal is now to appoint a general manager within the next year. “The biggest task for us in the last few years has been building a structure where the key man (me) is not essential to the business. Everyone puts pressure on you to reduce that risk and that’s a good thing, really.” For Tony, the end game is not to have a job, but a business that runs without his daily input. “I’d like a slightly better lifestyle, where we have more flexibility to do what we want.” Of course, as ASB’s Kevin Reilly points out, the only way to achieve this is to create a business that can last the distance. “TDC is a great example of building resilience into a start up. Tony and Clare’s succession story is admirable.” Succession as a discipline You could say that Mark Robinson and Brett Avery are too young to know any better. The family friends have been in business almost nine years now – and are still learning new things each day. Avery Robinson Ltd was formed in 1997 to bid for the license to import and distribute the unique UK-based Dyson vacuum cleaners in New Zealand. The young duo (at the time 25 and 26) beat their more established rivals, some of whom import hundreds of electronics brands, by being singular in their focus: they promised to work, breathe and sleep no brand other than Dyson. The determination has paid off. Dyson is now a market leader in the $49 million floor-care market, with approximately 30% share; Avery Robinson employs 18 staff; and it has single-handedly reversed the declining value in the premium vacuum cleaner market. “Retailers loved having Dyson enter the market because it injected some life and value into a declining category,” says Mark. As with TDC, the first few years of life for Avery Robinson were a grinding effort by the pair who did everything, from sales and shipping to customer support and logistics. But as the sales grew,

so has the sophistication of the business. Two crucial decisions have meant that growth has been “exponential” without being wobbly or out of control. “First we decided to automate as many of the tasks as possible, so we very soon established reporting, inventory, customer care and accounting systems,” says Brett. “Second, we’ve focused on getting the right staff almost before we’ve really needed to. That’s meant that we can delegate tasks to qualified and trained people.” This “invest as you grow” approach has won the admiration of one of their professional advisors, John Kirkwood, a lawyer with Hesketh Henry. “I see Avery Robinson as a great example of how getting the system and procedures correct at the beginning can lead to a very significant business within a short number of years. It’s a great example of succession planning in its broadest sense.” To Brett and Mark the idea of calling what they do “succession planning” is a bit like saying Daniel Carter practices “projectile aeronautics”. “You can call it what you like, we call it good business practice,” says Brett. “We think we need to ensure the business is well managed because that’s a good way to run a business.” This high standard of management was the first thing Nigel Wilde of Hayes Knight noticed when he took over as an accountant for the company a couple of years ago. “It was great to go to a client monthly board meeting where they have formal agendas, minutes and a monthly reporting pack. It was pretty obvious why they had been successful.” The future for Avery Robinson is bright. The systems put in place now, mean the company can continue to grow to an estimated 40-50% of the market (as it is in Australia and the UK). Last year Dyson invested over $144 million and has over 350 engineers working full time on research and development ensuring lots of very exciting times ahead. As with TDC and SnowPlanet, the Avery Robinson story is linked by one over-arching theme. By employing systems, staff and careful investment, the three companies have managed their spectacular growth without getting the speed wobbles. At Succeed, we’d call it good succession planning. Others might just call it cool.

… BRIEFLY

Dyson distributors Mark Robinson and Brett Avery

About The Business

The business: 232% growth over five years, 18 staff, Ellerslie The philosophy: “We invest in systems and staff now so that when the company grows it won’t experience problems. We ensure the business is well managed – today and every other day – simply because that’s the only way to run a successful business.”

Special offer to Succeed readers Succession planning is a process. It’s also a team effort. To kick off your own succession process or speed up your progress, Succeed magazine is offering a free, one hour consultation for the first 10 applicants. Go to succeed.net.nz to find out more. SUCCEED.NET.NZ

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SUCCEED / Issue Two

Summertime Dues

How many summers do you have left to achieve your goals? Martin Hawes, investment writer and advisor, has some thoughts

Martin Hawes loves nothing more than trekking up steep cliffs, picking his way across an ice face and conquering the world’s alpine heights. But two years ago, when he turned 50, he realised the challenge was not how many mountains were left to climb, but the number of summers left to climb them. “I had to make the next 20 summers count!” he says. Hawes is one of New Zealand’s most successful personal investment writers and advisors and the mountain-top experience gave him an idea for his next book: Twenty Good Summers – Work less, live more and make the most of your money. The book has plenty of good ideas and advice for SME owners considering the problem of exit, retirement or even just succession planning in general. We asked Martin the biggest challenges his business clients face in dealing with the difficult question of succession. (>) Hawes: By far the biggest challenge is emotional. And there are two main areas of emotion. The first is to do with disclosing what they’ve held close to their chests for decades: the numbers. For the average SME owner, the process of selling their business is a bit like taking their clothes off and walking down Main Street. For years they’ve run their business privately. They talk in code, even to their friends: they’ll say ‘oh trading was up 3% on last year’, but they’ll never reveal what the actual number was. They also have to show all the bad things about their business: the customers that they lost and why; who’s really spending the money and what the actual losses in some areas might be. Sometimes it exposes problems in the business that they have not acknowledged or dealt with. So there is some real sensitivity around disclosure, even for good companies. Succeed: And many of the people who see this for the first time will be tyre kickers and competitors, right? (>) Hawes: Yes, so you need a procedure to deal with enquiries. I’m doing this at the moment with a client who’s selling or looking for investors. We won’t let just anyone see the books. They have to show genuine interest

and then, if they want to see the accounts, they can come into the office and have two hours alone. But nothing leaves the premises. You need to control the process. Succeed: But if you were the buyer ... (>) Hawes: Oh, if I was buying I’d want to know everything. I’d want the last three years’ accounts and probably more. I’d want to see forward projections including cashflows. I’d talk to suppliers and customers. I’d be saying ‘let’s develop a plan that manages the owner’s transition to ensure continuity.’ And I’d have expectations about the ongoing performance of the company, which is then tied back to the price. Overall, I’d want to know that I wasn’t going to take a bath on this investment. Succeed: What’s the second area of emotion for SME owners? (>) Hawes: Well, for many of them this is all they have known. What else will they do with their time? You often hear of people getting sick after they’ve stopped working. And in some cases their partner will say ‘I don’t really want him or her at home doing nothing!’ There’s a real fear that selling the business will mean the end of everything. So I’m a big fan of selling down in stages. You identify someone you want to buy the business and sell it in two or three portions and move towards taking a title like “executive chairman.” Succeed: That seems like a dream scenario. Does it actually happen? (>) Hawes: Yes, in fact I’ve got a client who is working through this right now. His business had nine offices in different cities. He had built it up over 30 years and was thoroughly sick of running it. So he found a way to sell down to the nine area managers and took on the role of executive chairman. The result has been incredibly satisfying to him and to me as his advisor. The business has actually grown, because those managers are now entrepreneurs (and importantly not his competitors) and he has got his golf handicap down from 22 to 12. SUCCEED.NET.NZ

Succeed: Every case is different – what were the common lessons others could apply? (>) Hawes: He had time and he planned it well. He recognised early enough that he was tired and ready to move on to the next stage of life. He also recognised – and this is crucial – that there is a need to take on a different role. You have to be prepared to take a step up to a mentoring role. That means letting other people make decisions and sometimes make mistakes. He’s still involved – they like to use him to solve problems and meet important clients. But you can’t keep control and sell your business, there has to be a compromise.

SEVEN REASONS TO SELL DOWN

In contemplating a sale, SME owners should first look at selling down their share, rather than exiting altogether, suggest Hawes. He lists seven good reasons why. (>) Continue to receive profits and capital growth

(>) Remain involved without the daily grind (>) Receive cash from the sale to reinvest or retire

debt

(>) Increase the range and number of people who

could afford to buy your business

(>) Prepare the new owner for a total sale down

the line

(>) The business gets a new lease of life and may

grow faster

(>) Emotional rewards from seeing the business

continue

SUCCEED.NET.NZ

Excerpt

When is enough, enough? In his book Martin Hawes devotes several chapters to the vexing problem of knowing how much money you will need when you stop paid work. The issue is as relevant to retirees as it is to business people contemplating a sale. How much is enough? In many cases, says Hawes, people have been bullied into the idea that they need an enormous sum – up to 25 times the amount of tax paid income. That suggests you’ll receive only a 4% return on investment, which is very poor by any standards. “The capital you need is more like 10-12 times,” he says. Hawes recalls the sobering story of a client-couple locked into an unhappy spiral of hating their business yet fearing they couldn’t sell it for a sufficient sum. “I calculated that Patrick and Mary would need around $2 million in capital to give them the passive income they needed to live the life they wanted. When we valued the business it was apparent that it was worth over $4 million (the competitor had offered $3.5 million just a year before). Patrick and Mary had a net worth of $5 million and needed less than $3 million to live the life of their dreams. “I could not see what their problem was. ‘Let’s sell the

business now and get on with the life you really want,’ I said. Patrick immediately folded his arms across his chest and shuffled uncomfortably. ‘No, $5 million is not enough – we need $6 million,” he said. Clearly this was not true (we had done the numbers) but he was unshakeable. “I have never really found out what was stopping Patrick and Mary from making the break. In spite of what Patrick said, it was not the money. Some 18 months later they are still running the business, still hating it and still saying they are going to to sell when they ‘have enough money’. I doubt ‘enough’ will ever be enough.” The way Hawes sees it, people are closer to financial freedom than they realise. “There is wisdom in being able to say that you have enough – that you do not have to keep striving for more.” Twenty Good Summers – Work less, live more and make the most of your money – Published by Allen&Unwin; 2006; $34.95 (>) Free! Go to succeed.net.nz for a chance to win one of 10 copies of Twenty Good Summers

SUCCEED / Issue Two

SUCCEED / Issue Two Illustration by Daron Parton

BE SMALL. ACT BIG.

Small is beautiful, right? Yes, but for ambitious SMEs, behaving like a big business today can net bigger returns tomorrow By Dwight Whitney

Kyle Blackbridge credits one sentence with making him a multi-millionaire. Thirteen years ago, he sat sweating, as he took a final look at the paperwork that would see him acquire a small manufacturing business. What he saw most keenly was not the black and white of the words – it was the number: the amount he was borrowing from the bank and the risk it represented. Since starting as an apprentice at age 15 he had been a tinkerer rather than a business thinker. Now, at age 30, he was almost overwhelmed with the impending reality of owning his own operation. But his panic dissolved when his lawyer and friend John Kirkwood gave him one simple piece of advice: “You should focus on what you’re good at and let professionals who know their stuff take care of the rest.” It seems almost trivial to say it now, but the comment liberated his mind to concentrate solely on where his competencies lay: making and selling manufactured stuff. Today, Blackbridge’s company* is a multinational enterprise and it remains one of John Kirkwood’s favourite examples of how ‘big thinking’ can lead to big rewards – even for a small business. By ‘big thinking’, Kirkwood means starting with the simple acknowledgement that you don’t know everything, can’t do everything and are probably not very good at everything. Blackbridge’s willingness to look outwards for support is the exception. It is not in the New Zealand ‘do-it-yourself ’ nature to admit any shortcomings, nor easily hand over control. It is also most certainly not in the SME psyche to view legal and accounting advice, and commensurate invoices, as an essential investment for a fledgling operation. Evidence, however, is growing that those small ventures that take the ‘big business, big picture view’ from the outset have a better chance of avoiding pitfalls and fast-tracking success. Are you a gazelle? Like any modern business phenomenon, these ‘little big thinkers’ have a name – in this case ‘gazelles’, representing small, fleet-offoot ventures on a path to growth. Taking inspiration from the idea that ‘mighty things from small beginnings grow’, the savvier small operators recognise the disciplines more often found in bigger

business can produce large-scale rewards. Technology has helped fuel this trend. It has drastically reduced the cost of communicating and time spent finding, distributing and receiving information. Think of Trade Me: a $700 million company with just 45 staff. It’s also allowed small companies to have a global foot-print. Think of the many New Zealand export success stories of late: like Icebreaker and Untouched World, two clothing brands that have the majority of their sales overseas, yet are entirely New Zealandowned and remain SMEs by any standard.

The savvier small operators recognise the disciplines more often found in bigger business can produce large-scale rewards But it’s not just a technology story. The emergence of niche marketing, the importance of design, the use of China as a manufacturer, the shrinkage in the skills market – these factors have all combined to force small business to adopt big business practices. Think about what it now takes to retain good staff. Competitive pay, fun, a sense of belonging and a quality work environment are the sort of issues only big business used to struggle with. Now they are on all business’ agenda. With this in mind, and with over 86% of New Zealand businesses being well and truly on the ‘smallish’ size, you’d expect our economic landscape to be fair teeming with bouncing bambis. Not so, says New Zealand Institute of Management chief executive Kevin Gaunt. The fact that business styles have changed dramatically over the past 10 years has been recognised by some but missed by many. New management techniques The way Gaunt sees it, SME management has to change to adopt

*Kyle Blackbridge runs a multinational manufacturing company that would rather not be named

SUCCEED.NET.NZ

SUCCEED / Issue Two

20 QUESTIONS

Big Action Here are five key ‘big company” behaviours that SMEs can employ

A checklist for planning your succession By Matt Bellingham

Talent management. Are you a great place to work, with fun, meaningful jobs and regular training? (>) Brand investment. Big companies are maniacal about their brands. Are you? (>) Regular reports. Big companies produce regular, transparent financial data. What are your weekly reports? (>) Outside help. Get independent, outside assessment and assistance. Avoid myopia today! (>) Strategy. Big companies have big, hairy, audacious goals. What’s your end game?

the best of the big business habits. “Old style management was akin to what took place down on the farm – if the sheep don’t move you just bark louder. Many would argue that their only concern is the day-to-day running of operation and that the apparent ‘theory’ of big business practices has no place on their agenda. The world is such that, as with their larger counterparts, they must now contemplate how to create an attractive environment for getting, and retaining, good people – be it employees or customers. The ‘warm and fuzzy’ domain of HR concerns is now integral to business growth and direction.” Having created a well-researched, management-based approach that focuses specifically on the ‘big behaviour’ that SMEs need to think, Gaunt has a very clear idea of what would be needed. “The starting point would be around management basics, albeit with a human flavour – the ability to plan, establish goals, involve people, measure outcomes and assess and share performance.” “Within this the human management skills are the critical ones. People are more educated, more discerning and more demanding. They constantly ask themselves ‘do I really want to be working here?’ Managers need to continually provide the reasons why they should. Again concepts like empowering, engaging and culture may sound like soft options but they are what people expect to see in operation.” Craig Fisher, a partner with Hayes Knight, says that in succession terms if you want a business that can operate without being dependent on you, you have to start thinking like a large organisation. “People will come and go, but large companies continue to grow. How are you embedding systems to manage your succession?” John Kirkwood maintains that those who bite the bullet at the outset, and take external advice to set up the right structures and processes, can avoid all nature of problems later on. “Most start-ups wouldn’t think of having an independent board, but having external advisers who can replace this function is invaluable. People don’t know what they don’t know but there are people like lawyers and accountants who know all about putting the right processes and procedures in place. A great deal of strife, cost and anxiety can be avoided if you admit this to yourself and seek answers from people who know the terrain.” “Most importantly, don’t fragment the process. If you trust someone, trust their advice – or the advice of those people they refer you to, if the nature of the problem is outside their scope. Don’t think solely of the price you’re paying for advice, think instead of the value that you’re creating.”

WHAT IFS? You know how to make widgets but how about

mapping out and managing every contingency in the world of business? A good way to start thinking like the big guys is ask yourself the “what ifs?” (>) What if my partner and I argue and don’t like each other anymore and one of us wants out?

(>) What if I don’t pass the “big bus test” – that is, get flattened by one? Who knows what I know?

(>) What if we grow and need to start delegating some more tasks?

(>) What if we get a really big opportunity that we can’t meet with just the current team?

(>) What if the other guy dies and leaves me doing business with his wife?

(>) What if my business partner buys herself an Audi on the business and overlooks telling me?

(>) What, in a perfect (and less perfect) world, is our end game?

Succession planning is a process that many business people leave to the last. That’s understandable – it’s not a task that falls into the ‘urgent’ tray. But it is important – and like many important, but not urgent, matters there is a way to get them done: create a process. At Hayes Knight, our experience in succession planning suggests you need a minimum of three-to-five years to gear up for a sale. In those years, here are the five most important actions you need to take. (1.) Undertake a business diagnostic (>) This is a thorough review of your business – warts and all. It is designed to assess where the business is currently at, a level of risk analysis and an identification of the areas where the business could improve. (2.) Complete a valuation (>) You need to put a stake in the ground and know what the business is worth. (3.) Start on the housekeeping (>) Often we see businesses where some of the history needs to be cleaned up. This is often reflected in the balance sheet and may take some time to sort through. (4.) Business enhancement (>) Based on your diagnostic, start making changes in the business that will cause permanent and measurable improvement. (5.) Get your reporting right (>) Create the reporting and results trail that tracks the changes and the improvements achieved. At the same time build your forward budgets and estimates around the leverage that will come out of the change. When you have worked through this and established your trends over a three plus year time period then you are ready to go to market. To assist in the five-step process above, Hayes Knight has developed a com-

SUCCEED.NET.NZ

prehensive 40 point succession readiness checklist – some of which is reproduced here for you to use. Remember – succession is a process not an event! Matt Bellingham is a partner with accounting firm Hayes Knight matt.bellingham@hayesknight.co.nz

Yes No

(1.) Yes No Have you considered your succession completion date – the date that you will be out of your business with it transferred to new ownership? (2.) Yes No Do you know the processes involved in transferring your business to new ownership? (3.) Yes No Is the continuity of the business important to you? (4.) Yes No Do you have another business partner(s) who needs to be involved in your succession plan? (5.) Yes No If need be, would you be prepared to continue working in the business post sale? (6.) Yes No Have you identified likely purchasers of your business? (7.) Yes No Do those purchasers need assistance with funding? (8.) Yes No Do you have a current indicative valuation of your business? (9.) Yes No Do you believe that the business has any goodwill value? (10.) Yes No Are you primarily dependent on the maxi-

misation of value from your business in order to fund your post succession lifestyle? (11.) Yes No Do you need some tax planning prior to transfer of ownership or after the transfer has taken place? (12.) Yes No Is your industry subject to potential dramatic change in the next 5 years? (13.) Yes No Are there larger businesses buying up and consolidating businesses of your type at present or is this happening in your industry overseas? (14.) Yes No Are you able to totally leave your business and have it run without you in no worse position and performance for 2 months? 4 months? 6 months? (15.) Yes No Is your businesses regulatory requirements fully up to date? (16.) Yes No Are there any warranties, contingencies or commitments outstanding in your business? (17.) Yes No Do you have a lease in place for your business premises and can it be assigned? (18.) Yes No Do you have detailed systems in place to operate your business instead of this information being held mainly by the people in your business? (19.) Yes No Do you expect to see an increase in business succession within your industry in the short term? (20.) Yes No Are business plans, strategic plans, financial budgets, cash flow forecasts, breakeven analysis and asset replacement plans readily available to showcase your business?

SUCCEED / Issue Two

Accountant’s View

Legal View

Five good ideas

Club rules

Or five crucial mistakes (when exiting your business)

BY AARON WALLACE

Exiting your business can be a minefield or a goldfield – it depends on your point of view. But whatever your perspective there are five important lessons in maximising the value from your business. Find time As accountants, we like our jargon and you can probably guess one of our favourites: “de-risking the business”. The best way to de-risk any business is to create a number of options. This can include diversification of operations, customers, suppliers, locations, and seeking many potential buyers. As Grandma used to say “don’t put all your eggs in one basket”. She also used to say that haste makes waste. And no more so than in business. In our experience, a three-to-five year timeframe is the ideal. A hurried sale hurts you on two counts: the more time you have, the easier it is to build sustainable value; and the more time you’ll have to create options for yourself. Know your numbers Do you enjoy playing Russian Roulette? Probably not, yet we find so many business people operate their companies without a real knowledge of what’s in the gun. In most cases, business value is largely driven by future maintainable earnings, so understanding what drives value in your business is essential. The advice is simple. It’s the doing that’s hard. To ensure you get the real oil on your business we recommend developing three key performance indicators. First, cash is king! We find that cashflow is by far the best indicator of the health of a company. The second is growth and the third is return on investment. A company

must measure its ability to grow and know the real opportunities in the market place left to capture. A purchaser will look for a business with the chance to capitalise on untapped markets, not one that has already reached its peak. Return on investment will tell the buyers how much profit they can expect back from their investment. The higher the business risk, the greater return an investor would expect. This key ratio helps measure business ‘attractiveness’. Get real Who’s the person in the mirror – a ruggedly attractive individual? Or something else? It’s hard for anyone to answer that question objectively. It’s the same with business. The business worth is determined not by your hopes and dreams but by what someone else will pay for it. To avoid disappointment, get an early estimate of the value from your accountant. If nothing else, the valuation process will often highlight areas for improvement. Then, as the improvement process winds up, get a formal audit from an independent auditor. This level of objectivity will build confidence in the buyer’s mind. If I am buying an asset that is going to make me money, I will be much happier to pay for it if I can see it has a good track record of making money as well as good future prospects.

What have you and your co-shareholders agreed?

a Tensing. Who makes up your team? All businesses need the skills of a variety of different professionals to succeed; professionals in areas such as accounting, law, finance, marketing, HR and risk management. The reality of most New Zealand businesses is that they are too small to have all the skills on the payroll. Prepare for a journey – not a destination Business improvement is an ongoing exercise. While a business sale may look like a single event, those that have been through the process understand that even an event like the sale is actually made up of a whole lot of little steps that happen over what, in some cases, is many years. It’s like the joke about how you eat an elephant: One bite at a time. AARON WALLACE is a business improvement specialist and director of Hayes Knight. Contact Aaron at: aaron.wallace@hayesknight.co.nz

Don’t DIY it Kiwi’s love affair with DIY is one of our endearing features – it certainly got Sir Edmund Hillary up the last part of Mt Everest. Apparently there’s still a Hillary Step up there in the ice and snow. What’s less acknowledged is the team that Hillary was a part of, from fellow climbers to logistics personnel. For every Edmund there’s SUCCEED.NET.NZ

BY JOHN KIRKWOOD

When I was a kid growing up in provincial New Zealand, a bunch of mates from my street and surrounding area decided one weekend to form a secret club. It was a club so secret that even several decades later I am loathe to disclose its membership. Having settled on a name, secret handshake and passwords we then turned to discussing rules. There were a few fundamental ones that everyone agreed on, like “no girls” and that sort of stuff. We then wrote them down (we imagined they were signed in blood) and buried it in a box. So far as I can recall we never looked at them again and nor did we need to. We knew what we stood for, and still do (although we did drop the silly handshake). I often think of the shareholders’ agreement as the rules of the business club. Some basic agreements between the parties that will operate as a touchstone in their daily operations and a key document in the event of a later dispute. I am not suggesting that the shareholder agreement be pinned to the wall and all actions measured against its terms. On the contrary, it is generally filed away and never seen again until something goes wrong! However, it is just as important that right from the outset, the parties have discussed and agreed key issues, contributions and desired outcomes. The Companies Act 1993 and the company constitution (if it has one) provide some general rules for the incorporation and ongoing operation of a company. Shareholders’ agreements, on the other hand, are about the specific relationships between the shareholders and between those shareholders and the company and its directors. So what do you include in a shareholders’ agreement? Remember, other than in SUCCEED.NET.NZ

certain limited circumstances, the directors control the operation of the company. A shareholding in a company, in the simplest kind of ownership structure, generally entitles the shareholder to vote on any resolution, the right to an equal share in dividends authorised by the Board and the right to an equal share in the distribution of surplus assets of the company. Those rights may of course be negated, altered or added to in the constitution itself or in a shareholders agreement. Some fundamental (but far from exhaustive) points include: (>) Shareholding Structure – Who will hold the shares? Consider whether it is appropriate to have trusts or other entities as shareholders. Tie those entities to the shareholder agreement. (>) The Core Business – What is the core business of the company going to be? This is an important provision. Any material deviation should require the unanimous consent of shareholders. (>) Allocation of roles – A clear outline of the expected contributions and roles of each of the shareholders. (>) Death or Disability – What happens if one party becomes ill and cannot function within the business in the way originally anticipated? If a party dies, do you want to be in business with their relatives? Include provisions to deal with these circumstances. (>) Buy/Sell Insurance – Consider obtaining buy/sell insurance to enable the remaining shareholders to buy out shares in the event of the death or disability of a shareholder. (>) Key Person Insurance – Consider obtaining key person insurance for the benefit of the company to cover the death or

disability of a key person in the business. (>) Funding – What are the initial funding requirements of the company and how will any new funding be provided? (>) Appointment of Directors – How are directors appointed and removed? What limits are to be placed on their ability to make decisions? (>) Unanimous agreement of shareholders to certain matters – Some matters are so fundamental that any change should require the unanimous consent of shareholders. For example, changing the scope of the business, buying another business, selling all or any part of the business, issuing further shares, acquiring capital items over certain specified amounts, etc. (>) How profits will be distributed – An agreed dividend and reinvestment policy. (>) Termination Events – Other circumstances which will lead to termination and the obligations of the shareholders upon termination. For example, the material default of a shareholder triggering buyout rights for other shareholders. (>) Dispute Resolution – Include mediation and arbitration provisions. (>) Valuation of Shares – Include a clear mechanism to value the shares in the event of a shareholder exit. The best time to think about a shareholder agreement is right at the beginning of the venture. However, all is not lost if this has been overlooked. Deal with it now! A bit of time spent on the “rules” of your business will pay enormous dividends – literally! JOHN KIRKWOOD is a partner with Hesketh Henry. Contact John at: john.kirkwood@heskethhenry.co.nz

Going up?

SUCCEED / Issue Two

Banker’s View

As one of New Zealand’s leading commercial law firms, Hesketh Henry is used to dealing with companies with high aspirations. So we were naturally delighted when Australia’s Verticon

Me and my banker

Make your bank your buddy – not the brake

Group Limited, one of that country’s largest crane hire companies, selected us to assist them with their plans to expand into New Zealand. Verticon had set its sights on local crane company, Daniel Smith Industries, with 20 staff and over 40 cranes

In days gone by, clients would take a deep breath, and even have a deep drink, before going to see their banker. They naturally needed finance but bankers were seen more as a hindrance than a help. I’m pleased to report things have changed. Your bank should now be hoping to become your partner in your growth, success and succession plans. The relationship with your bank these days should be a lot more like those you have with your good honest friends: the more you tell them the more they can help. In particular, we love to get key information early. You may find it hard to believe but having ‘been there, done that, seen all’ it is unlikely you can present us with a financial situation we’re incapable of solving. At the very least we’ll introduce you to someone else who can. So rather than being last on your Christmas card list, there are a great number of advantages of moving us well up to where we can provide thought and action. Here are 10 winning strategies I’d suggest you could employ to get the most from your bank. What you can expect from your bank: (>) (1.) The world’s not all numbers. Even though banks deal with myriads of businesses that may be very similar, we will try to take the time to understand how you see the business rather than rely on our preconceptions. So expect to meet with someone who understands what really drives your business. (>) (2.) A customised offer. Yes, the building blocks will be the same but your bank should start with services that will make a difference to the day-to-day opera-

tion of your business and build from there. (>) (3.) Open information. Banks want you to be open, so expect to get an honest answer back. Expect to receive helpful hints and even leads to other business. Your bank should want you to grow. (>) (4.) Prompt replies. A bank will want to know early what’s happening to your business, so you should expect the same in response: speed and accuracy make for effective decision making. (>) (5.) Agreed expectations. You should be able to agree on terms up front. Banks have standard documentation that needs to be completed. But expect nothing if not reasonableness and transparency right from your first meeting. How to get the most from your bank: (>) (6.) Communicate proactively, be open and be honest. And, if there are issues looming, let your banker know. The two ingredients banks like most are plenty of time and plenty of warning. (>) (7.) Make your financial information robust, accurate and realistic. Again, surprise-free and early information makes it so much easier for a bank to be proactive. (>) (8.) Tell us if you have either positive or negative things to say about the service you’re receiving. Customers are our best source of business intelligence. (>) (9.) Share your innermost workings and strategies about your goals and vision as well as more technical financial information such as budgets and forecasts. Banks have so much experience in so many different types of industries and businesses. (>) (10.) Join the banks’ network. Banks love to be in positions where they can introduce you to others, be it as suppliers, possible purchasers of another client’s

venture or possible sellers. Likewise, who can you introduce to your bank?

spread around the country. The $45 million deal

ASB is seriously committed to helping Kiwi business grow – which includes succession planning. When it comes to thinking about selling, moving up or simply slowing down, ASB has a strong commercial interest in business succession and a history of case studies and successes we can draw on for advice and help. Getting the right structures and process can make the difference between success and failure. If you want to get more out of your banking relationship, try applying these 10 tips. Or better still, give the ASB a call.

involved a team of lawyers, led by Geoff Hosking, from all of our specialist areas, including banking and finance, securities law, employment, mergers and acquisitions and commercial property. Their ability to work closely together as a team ensured a smooth and successful outcome for Verticon, who

NICHOLAS STANHOPE is General Manager Corporate Banking at ASB Bank. Contact Nick at: nicholas.stanhope@asbbank.co.nz 0800.272.222

are now very pleased to be part of the NZ crane industry. We’ll continue to do whatever it takes to help our clients succeed. If you want to move up in the world call Erich Bachmann on 09 375 8709.

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BY NICHOLAS STANHOPE