Succeed Magazine Issue 3 by Nexia Auckland (formerly Hayes Knight)

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Snakes & Ladders The new succession game

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Fit or fail Would your business pass a WoF?

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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Business World Cup What’s your target for 2011?

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Spot the buyer Who will buy your business?

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

ISSUE Three

plain sailing How to use succession planning to reduce four major business risks Featuring: Ezi-Buy, House of Travel & Papercoaters ( Mary Shields, Milford House of travel )

SUCCEED Issue Three Contents

Vincent Heeringa EDITOR Simon Young WRITER HB Media CREATIVE + DESIGN Image Centre PRINTER

04 Plain Sailing

Business is full of risk. Rather than hoping for the best, smart business owners prepare for the worst. Here are four major risks and what you can do to prepare—and then act

By Simon Young

Case Studies 07

Milford House of Travel

Mary Shields sidestepped the threat of competition—by joining it from day one

Papercoaters

Former majority owner Graham Mountfort managed his exit with a smart management buy-out

Profile Ltd

Investing every dollar back into his business was the best way to secure a sale to Ezi-Buy, says co-founder Chris Cook

Snakes and ladders

Succession planning is full of ups and downs. Get some practise before you start the real thing

be prepared

Get insured for the worst—including these three scenarios

Columns 15

Legal View Your business WoF

Do you want to drive your business sale or have it hijacked? asks John Kirkwood

Accountant’s View Tackle the future

How will your business look after the 2011 Rugby World Cup? Aaron Wallace acts as coach

Banker’s View Succession choice

Who will buy your business? And can they pay? David Verry has a few suggestions Plan your succession today Contact us to receive this free succession workbook. With helpful checklists and tips from experts, you’ll find getting started a cinch. Call 0800 338 272 and ask for the succession workbook

SUCCEED / Issue Three

Photograph by Jessie Casson

plain sailing … BRIEFLY

Travelling well

About The Business

Mary Shields, of Milford House of Travel, has increased the value of her business five-fold, thanks to a smart co-investment and blimmin’ hard work Succession issue: Corporate competitors threaten independent retailers Response: Don’t beat ’em, join ’em. Shields signed up with House of Travel on day one

Business is full of risk. Rather than hoping for the best, smart business owners prepare for the worst. Here are four major risks and what you can do to prepare—and then act By Simon Young

SUCCEED.NET.NZ

SUCCEED / Issue Three

Your business should run like a conveyor belt, not a treadmill. It should work for you, rather than you working for it / Aaron Wallace

[case study 1—house of travel]

In the House Mary Shields avoided industry competition from the start—by joining it

‘When one door closes, another opens’.

That kind of down-home wisdom your granddad dished out might have been good advice when you were young. A bad job interview, a failed exam—it all seemed so important at the time. But as Pops predicted, it all worked out for the good. When bad things happen in business, euphemisms and helpful pats on the head are not very, well, helpful. When a megacompetitor moves into your patch, when debts turn bad, when illness strikes you or senior staff, or when fire destroys stock, it’s far better to turn to a pre-planned strategy. Rather than wait, you should choose which door opens. It’s a lesson even the wisest and most experienced of us need to remember. Japanese temple builder Kongo Gumi was the world’s oldest continuously operating family business, having started in 578AD. In modern times demand for temples fell and by 2006 the company succumbed to excess debt. No matter how solid, stable or optimistic a business and its market appear to be, it pays to be thinking ahead. Of the many threats to your business, we’ve chosen four to highlight, not just because they’re common, but because they’re difficult to anticipate and hard to prepare for.

1. Industry obsolescence Change is the one constant we can rely on, and major changes to an industry through advances in technology or corporatisation can create enormous pressure for business owners, sometimes overnight. When the mega-stores found a way to bundle their buying power into one handy location near you, mainstreet New Zealand pretty much became obsolete. The response from many retailers has been to slowly dwindle into closure. Whatever happened to the local hardware or haberdashery? But it’s not just competition that can make you yesterday’s news. Government legislation, such as the threat of carbon taxes or the withdrawal of government assistance, such as farmers’ subsidies in the 1980s, can wreak havoc with whole industries. New technology can quickly render lines of business redundant— anyone remember the telex machine, or its manufacturer? The fax is going the same way. A recent study revealed that the average age of companies in the USA has shortened from 15-20 years to 10-15 years. It’s harder to stay in business longer.

The response to this kind of threat varies. Technology change is hard to predict but not impossible to diagnose. A quick test is this: if someone invented an electric blanket, would you be found making warm beds or hot water bottles? In other words, does your business fulfil a need or simply flog a product? If it’s the latter, you’re vulnerable to sudden change in technology. Sometimes the answer is, ‘if you can’t beat ’em, join ’em’. When Mary Shields started her own travel business, she made a crucial decision upfront: join the big guys. The day that she bought her business in Milford, she also joined the House of Travel group and avoided being muscled out by a large, efficient corporate machine. (See Mary’s profile on page seven.) She did the right thing for her business but clearly this approach is not necessarily right for all businesses. According to the Franchise Association of New Zealand, franchise units have a survival rate of 94 percent in the first three years—more comforting than the overall SME survival rate of 47 percent over the same period. The most important factor is to realise obsolescence is inevitable. How willing are you to reinvent your business to meet the market?

2. Ill Health Everybody likes to think they’re invincible and most people shy away from thinking about accidents and ill health, but the consequences of ‘avoidance thinking’ can be far more devastating. Consider that sometime during their lifetime two out of five people will be unable to work for six months or more because of sickness or an accident (ACC BERL Report, November 1996). One in six males over the age of 30 will die before they reach 65 and one in nine females over the age of 30 will die before they reach 65 (General Cologne Life Re Australia, 2002). Those are some nasty numbers so setting up systems now that ensure that the business owner is freed from day-to-day management means staff can be as effective, or better, than the business owner. It also builds continuity and value in the business. Hayes Knight director Aaron Wallace says reducing reliance on the owner is fundamental to realising a maximum return on your business—and to protecting yourself from disaster. “Your business should run like a conveyor belt, not a treadmill. It should work for you, rather than you working for it.” Part of that conveyor belt planning is anticipating and planning SUCCEED.NET.NZ

for risks, before they happen. Some key questions regarding health are: (>) are your staff trained and equipped to run things by themselves? (>) do you have key man and other insurances to cover costs in an emergency? (>) are your financial and management systems transparent and understood? (>) Come to think of it, do you have any systems? (>) And of course, how’s your health (are you fit, dealing with stress, eating well and drinking less)? As Michael Gerber says in the bestselling book E-Myth, “you will know if the system you create works if it works without you to work it”. You may not be Superman or Wonder Woman but you can be super-prepared.

3. Ageing Findings by Hayes Knight point to the fact that 50 percent of New Zealand SME owners will rely on the proceeds of the sale of their business to assist retirement, yet 62 percent don’t have a succession plan. And only 38 percent have any semblance of planning in place to turn their business into retirement dollars. The statistics belie another fact: succession planning is an emotional issue. Retirement for many business owners is an insult— admittance that age is getting the better of them and a business that they worked so hard to create. Graham Mountfort, former owner of Auckland manufacturing business Papercoaters, admits that giving up his ‘baby’ was terribly hard. But he managed it well and the business continues to grow (see the case study on page eight). Graham, meanwhile, has become a business mentor and investor. “Many business owners have created significant wealth from putting their heart and soul into the business,” says Nicholas Stanhope, general manager of corporate banking for ASB. “The question is, where does this wealth go, and what changes need to be put in place to maximise the wealth created?” While it may seem natural to pass the business on to the family, sometimes the family lacks the skills or desire to take the business over. “A good option here is to engage a management consultant specialising in succession transition to search for ‘the person or persons’ who will not only add value as employees or managers, but also be the eventual buyer—all parties are typically SUCCEED.NET.NZ

Industry changes can bring succession issues to your door when you don’t expect them. Like many retail and service businesses, the travel industry has been consolidating into larger corporate groups, which share back-end operations, marketing campaigns and purchasing power. Stand alone, independent outfits find it hard to compete against these national or international chains. Six years ago, Mary Shields worked for an independent travel agent in Milford on Auckland’s North Shore. While she didn’t own it, Shields was an integral part of the business. But she had ambitions. However, when she was ready to take a step into business ownership, she faced two problems. First, in the small community of Milford, there wasn’t enough room for two travel agencies. “I didn’t want a situation where I was simply walking out and taking files clandestinely,” she says. So instead, Shields took a deep breath—and bought out the business that had employed her. “It meant a clean break. I took the customers, phone number and fax with me across the road. It was ideal—if expensive. Competition was eliminated, and there was no bad feeling.” So far so good. But Shields could also see the larger industry trend towards consolidation. So instead of waiting for a group to put her out of business, she

joined up, with House of Travel, New Zealand’s largest travel franchise chain. “I’d known [House of Travel founder] Chris Paulsen from an earlier job with an airline. I’d always thought if I did go out on my own, House of Travel would be the way to go.” With an existing House of Travel branch already in nearby Takapuna, Shields didn’t raise her hopes of becoming a House of Travel franchisee. “But then House of Travel approached me to see if I’d be interested,” she says. House of Travel operates a 50/50 joint venture approach to its franchises. Franchisees like Mary benefit from the enormous buying power and marketing reach that the big brand can play. Not all franchises are created equal and Shields has advice for any business owner looking to buy into one: “investigate the franchise very carefully. Make sure the model is right long-term and you have trust in that hierachy. A solid line of communication is essential.” “Work blimmin’ hard,” she adds. “Your franchise brand will carry you to a certain extent, but you do have to market within your own community. People don’t shift their brand loyalty very easily, they have to feel very comfortable with the new brand.” It seems to be working for Shields. This year House of Travel Milford’s value has increased five-fold since opening.

SUCCEED / Issue Three

Photograph by Jessie Casson

incentivised to make this work,” says Stanhope.  John Kirkwood, partner at Hesketh Henry, says it’s essential to clearly map the path to ownership, rather than simply giving a percentage of the company away. “With a clear strategy and path to ownership it can work, but it needs to be properly documented with a good shareholders agreement that details the right exit strategy for both parties if it doesn’t work. Many business owners think that key employees will jump at the chance to become stakeholders in the business. But this isn’t necessarily the case, and commonly isn’t. You need to question your motives for offering a stake in the business. If it is just trying to put ‘handcuffs’ on an employee rather than as part of a long-term succession strategy it just won’t work. In my experience, if the deal isn’t right they just walk anyway.” A well-written shareholders agreement can also keep a business owner’s options open. “If you set it up correctly at the start you can retain control by using what we call ‘drag-along’ provisions in the shareholder agreement. This means the majority shareholder can require the minority shareholder to come along for the ride if a sale or other opportunity too good to miss presents itself,” says Kirkwood. “There are also ‘tag along’ provisions, which give the minority shareholder the right to have their shares or interest in the business bought at the same price as the majority shareholder, thus offering a potential upside to the minority shareholder.”

4. Investment A lack of capital can be a major threat to a business, especially when a large acquisition or capital expenditure is needed to simply stay competitive. According to Statistics New Zealand, lack of capital is stated by owners as the most common inhibiter to business growth and a key contributor to business failure. But there’s capital and capital. What owners usually mean is cashflow and the ‘cash cycle’—the time between invoicing and payment. Cashflow management is the bane of small business and there are plenty of solutions from simple tricks such as invoicing sooner, shortening the terms and securing cash upfront to more sophisticated answers like integrated billing systems and factoring. Aaron Wallace of Hayes Knight says profit is like food, cash flow is like oxygen.  “You can survive a short period without food, but not very long without oxygen. Growth in sales and profit

[case study 2—Papercoaters]

Paper trails Graham Mountfort went about his own succession story with engineering-like precision Graham Mountfort saw the future— and unlike most other business people, he did something about it. The former majority owner of Papercoaters, an Aucklandbased cardboard and packaging business, acknowledged the fact he wasn’t going to be around forever. “We all age, and we all need to move on at some stage. Back in 1990 we had a growing business but someone said to me, ‘you are the company’ and I took it to heart. I realised that if the company was to continue I needed to do something about it.” Papercoaters was already a significant business, with transTasman customers and packaging machinery unique in the southern hemisphere. Mountfort had been a manager with the company since the 1970s when it was a division of AHI and Forest Products. A series of corporate takeovers through the 1970s and 80s was followed by a management buy-out , which led to his appointment as managing director and majority owner in 1998. One of his first acts as MD was to appoint an independent board, including a lawyer and an industry expert. “That board introduced a huge level of intelligence into the company.”

Another key decision was to hire young management talent, with a view to eventually owning the business. “I chose people who could step up. Some people hire those who are no threat. I’ve always wanted people around who challenge me.” He gave the young team increasing responsibility, especially Brent Devlin, who is now filling Mountfort’s shoes as MD and owner. Hired at 28 as commercial manager, Devlin in time took over the Australian operation and was given the option of earning a share of the business early on. “It was a case of nurturing people and then stepping back a bit to let them run things. It was quite hard because it’s your baby and you have to resist the temptation to take over.” In the end Mountfort was spoiled for choice, selecting Devlin from three quality candidates to lead a management buyout. The investors backing the MBO (Direct Capital) told Mountfort at the time that the quality of the management team was a key reason to invest. Asked if he has advice for owners in a similar position, Mountfort is very clear. “Get this process started early. You’ve got to get the people in place—and then be prepared to step back.”

SUCCEED.NET.NZ

… BRIEFLY About The Business

SUCCEED.NET.NZ

reflecting on a job well done

Graham Mountfort, former owner of Auckland packaging manufacturer Papercoaters, planned his exit for over 10 years and is now mentoring other businesses Key succession issue: How to replace the ageing owner Response: Recruit and develop a winning management team to stage a management buy-out

SUCCEED / Issue Three

Photograph by Jessie Casson

is critical to on-going success and is good bait for attracting potential buyers.  However, those buyers are also looking for a cash return.  The risk in preparing a business for sale is that attention to cash flow is often not given the consideration it deserves. Growth will suck cash from the business to fund debtors, stock and capital expansion as required, sometimes leading to the downfall of a successful company.” Capital also means the money you need to really grow and reach your potential, whether it’s for machinery, R&D, new product development, market development or business acquisitions. For many businesses capital is not just nice to have, but a key to survival. When TradeMe started in Sam Morgan’s spare room, it could survive on his own sweat and inspiration. As it grew, Morgan faced critical moments where cashflow would not have secured its future. Investments from friends, family and angel investors meant the company could survive and grow with equipment, software and staff acquisitions. Investors in TradeMe benefited more than usual but it’s important to remember that at the time there was no guarantee and without their capital there would be no TradeMe. A good succession strategy recognises the threat that a lack of capital poses and starts to plan for it. There are as many ways to source capital in New Zealand as there are ways to get to the beach. Essentially there are two broad approaches: debt and equity. David Verry from ASB has written a handy summary on page 18 of this magazine. And there are some simple rules of thumb: ask yourself why would anyone invest, really? Most investors will consider a company that is already established with a good track record of profits and revenue growth. They’ll be looking for a ‘franchise’ by which we mean the thing that separates your company from the rest and gives you protection from competition. Which all suggests planning for investment and succession. Chris Cook, founder of Profile Limited, says every dollar invested in your business now, equates to four dollars at the end when a sale is concluded. (see his profile on this page). In other words it pays to invest now for benefit that comes later. As author of The Seven Habits of Highly Successful People, Stephen Covey says, “begin with the end in mind”.

[Case study 3 – Profile Limited]

Raising Profile Investing in your business now, could be the best succession plan you ever make, says Chris Cook of Profile Ltd Is your business a cash cow or a saleable asset? That’s a vital question to ask yourself early on in your business, according to Chris Cook, founder and 50 percent owner of corporate uniform manufacturer Profile Ltd, which sold to Ezi-Buy in 2006. When Profile was founded 17 years ago, Cook and his business partner decided their business wasn’t going to be a vehicle to dodge tax or subsidise their lifestyles. Instead, “from day one we thought of ourselves as employees of the company.” Sounds like hard work, but it was done with a long-term view in mind. “For every dollar you save yourself personally by charging to your business, you’re actually losing four times that multiple on the saleable value of your business,” says Cook. Early on, the Profile team knew they had a successful business on their hands. “Because it’s a very well-founded company with blue chip clients and secure long-term contracts supported by cutting-edge design, it put us in a position to value our brand accordingly,” says Cook.

He says no business is too small to understand corporatisation and best business practice. “Everything you do year-on-year has an impact on the valuation of your business,” he says. When the time came to sell, the challenge was finding the right buyer. “We didn’t want to sell to the first available buyer. We needed to ensure we were in the best position to realise maximum potential value.” Some key drivers to maximising Profile’s value were rigorously planned and designed systems, and good financials. “Auditors commented our books were some of the best they’d ever seen. They said the same about our inventory and systems.” Now Cook is an executive director with Ezi-Buy, and thoroughly enjoying it. “We had several parties interested, but strategically we were thrilled with Ezi-Buy,” he says. “When you look at your business as a saleable entity, develop the right systems, get good external advice and have a solid exit strategy, you tend to make the right decisions for the business.”

… BRIEFLY

well dressed

About The Business

When Chris Cook, founder of Profile Ltd, a clothing manufacturer, was tempted to spend company money, he recalled the formula: one dollar spent now is potentially four dollars lost when you sell Succession issue: Building value for the long-term Response: Cook and partner kept reinvesting profits in the brand, design and customer support

SUCCEED / Issue Three

Succession Snakes & Ladders Succession planning is a complex journey, a bit like a game of Snakes and Ladders, really. Only the stakes are much higher. Begin your plan with a visit to a professional advisor: your banker, lawyer or accountant. See, that already propels you 13 squares! Once started, you can avoid those nasty snakes with a business improvement plan that reveals all the skeletons and kick-starts growth. And remember you’re never too old (or young) to play Succession Snakes and Ladders. Good luck!

59 42 43 40 39 37 23 21 18 17 2 3 The deal looks good but your buyer has second thoughts

The contracts are signed. You can officially retire— or start again!

You have a buyer but continue to plan for an alternative. Move 2

EBIT & cashflow improve. Roll again

You find unsigned employment agreements. Go back 2

You sign contracts for supply, leases and staff

You make a realistic estimate of company value. Move 3

You instigate a review of all systems: IT, HR and financial.

Succession is here. Make a

START

A heart-attack puts you in hospital and you’ve done nothing to reduce reliance on yourself

You and your bank restructure your debts and O.D. Roll again

You decide to seek professional advice

56 45

Cut along dotted lines and configure characters as shown.

You’re making financial plans for life after the sale. Roll again

Your sale and purchase has been checked out by your lawyer. Move 2 steps

Oh no! Your business partner becomes ill.

Plan A fails and you don’t have a plan B or C. Go back 3 steps

Your company’s transparency and systems attract interest. Move 3

You pull together a marketing and sales pack. Move 5 steps

47 48 34 32 31 25 28 29 13 12 11 15 9 5 7 A potential buyer spots a mix-up between personal and business accounts

A key staff member decides to leave next month & you have no replacement

You identify the sale options and choose one

Your accountant, lawyer and banker are in concert. Move 3

You take out or review your keyman insurance. Move 2 steps

A supplier refuses to formalise your ‘understanding’. Miss a turn

You decide to appoint a board or independent advisor. Move 2

You examine your legal situation on contracts & agreements. Move 3 steps

You start thinking strategically about the future

Your partners & spouse join the discussion

You start a financial diagnosis. Roll again

SUCCEED / Issue Three

Photograph by Aaron K

Legal View

Be prepared

Your business WoF Do you want to drive your business sale or have it hijacked? asks John Kirkwood

Getting insured for the worst —including these three scenarios

Life is full of risks and pitfalls, in business especially. Succeeding in any given venture is challenging enough, without having to worry about the unexpected consequences of illness and injury. Most people are aware of the need to insure against property loss or damage, but what about the threat to your most valuable human resource—you, and the people who are vital to the continuing success of your business? The loss or temporary loss of key personnel can have a dramatic effect on any business, and can even be terminal. Nobody wishes for early succession, but it’s something we all need to be ready for, should the worst happen. It’s not unusual for a business owner to have a ‘mental succession plan’ without having fully realised his intentions and considered all possible outcomes and permutations. Business insurance makes sure your wishes are actually carried out. Consider the following scenarios and options for businesses of various type. Each option will entail further challenges and decisions. How would you fare? What would you do? 1. What happens when a key person dies, becomes disabled, or suffers a major health trauma? If the loss of the key person results in a reduction of revenue, profit or value, the owners may be faced with these choices: 1. Recruit a qualified replacement, quickly 2. Train an existing employee to do the job, quickly 3. Contract work out to a qualified competitor 4. Borrow to fund a reduction in cashflow, quickly 5. Sell assets to fund a reduction in cashflow 2. What happens when a business owner dies, becomes disabled, or suffers a major health trauma? With the death or disablement of one of several business owners, who has been active in operating the business, then the remaining owners must accept one of the following alternatives: 1. Buy out the deceased/disabled owner’s interest 2. Take the deceased/disabled owner’s representatives into the business 3. Sell the interest to the deceased/disabled owner’s representatives 4. Take outsiders into the business to purchase the deceased/ disabled owner’s interest 5. Liquidate the business or sell to a third party

3. What happens when a sole trader business owner dies, becomes disabled, or suffers a major health trauma? Upon the death or disablement of a sole trader business owner, who has been active in operating the business, the executor of his/ her estate must decide to do one of the following: 1. Liquidate the business 2. Sell the business on the open market 3. Give or sell the business to a successor owner from the deceased’s family 4. Sell the business to one or more employees 5. Sell the business to a competitor The business of personal insurance is increasingly about customising products to suit the wide-ranging needs of customers. The flexibility of today’s cover options mean life insurance is every bit as relevant as a commercial safety net, as it is a domestic one. You can choose from a product range including life insurance, income protection, disability cover, locum and business overheads cover. Your adviser can give you a full outline of the products and possibilities available to you. Business protection: It’s not a case of can you afford it?, but ‘can you afford to be without it?’ (>) 1 in 6 males, and 1 in 9 females, over 30, will die before 65. (>) 1 in 6 females will be diagnosed with cancer between 30 and 64. (>) Males have a 2 in 5 chance of suffering a critical illness between the ages of 30 and 64. (>) There is a 37% chance of a female, and a 32% chance of a male, becoming disabled for six months or more, before the age of 65. A good insurance plan can: (>) Eliminate any shortfall the successor may face, and reduce the need to borrow heavily to meet obligations to other family members. (>) Preserve the successor’s inheritance for investment outside of the business, in preparation for retirement. (>) Ensure a company has the resources to pay out a retired business owner’s current account with the family company. Keith Styles is a Sovereign regional manager for Auckland North keith.styles@sovereign.co.nz

SUCCEED.NET.NZ

Every time I take my car for a warrant of fitness I have a sense of foreboding. I’ve gone through the carwash on my way and I’ve binned all the empty pie wrappers from under the driver’s seat. That’ll help, I think. I pay my fee and get the clipboard with the checklist. But deep down, all is not well. I know I should have fixed the handbrake they warned me about in the last check, and the tyres that scraped through last time have done a few kilometres since. I rifle through the pile of old magazines in the waiting room looking for something suitably masculine to pass the time. The guy with the overalls and the clipboard has control— and he knows it! Is this how you want to feel when you are selling your business? Do you want the purchaser to be like the clipboard guy and control your sale? Or is there a better way? The answer is ‘yes’. Read on to find out how.

Typical legal issues for a vendor warrant of fitness check include: (>) contracts/agreements— do they exist? What are their terms? Can they be assigned? (>) employment—do your agreements comply with employment laws, are there redundancy or other issues? (>) intellectual property (IP) and information technology (IT)—is IP protected and is IT and software compliant? (>) property and leases—are leases reasonable, do they have sufficient time to run? What are the assignment terms? (>) litigation—is there any current litigation? (>) regulatory issues and corporate records—where are the business and corporate records and are these compliant? Are all regulatory requirements up-to-date? (>) structuring—is there any restructuring that is desirable or necessary prior to sale?

‘Vendor due diligence’ is a bit of a buzz phrase but it’s really just another term for a pre-sale business warrant of fitness. An independent check of your business against a checklist of points to flush out problems and, having completed the check, dealing with the necessary corrective actions.

So why don’t business owners do a pre-sale warrant of fitness check? I put it down largely to time and cost. Vendors don’t see the investment value in time or money. But the value is there! To fully understand why the vendor due diligence is so critical, it is useful to fast

SUCCEED.NET.NZ

forward to the negotiation and documentation of the deal. Timing is often critical. Once a potential purchaser is on the hook it is essential to be in a position to anticipate purchaser information requirements and provide clear, concise information in accordance with a tight timeframe. The vendor also needs to anticipate the terms a purchaser will likely require in a sale and purchase agreement. Even better, prepare a pro-forma of the agreement and present it to the purchaser and dictate these yourself. Another key issue in any vendor due diligence involves considering those issues which will likely be the subject of warranties in a sale and purchase agreement. If you haven’t undertaken a due diligence as vendor, how can you be satisfied that the information and warranties you provide are correct? Remember, a breach of warranties could lead to a damages claim. My experience from involvement in many business sale transactions over recent years provides some salutary lessons for vendors who don’t undertake a pre-sale warrant of fitness check and necessary corrective actions. Some examples include: (>) Most businesses are taken

to market too early and without adequate preparation. (>) Almost without exception the preparation and presentation of businesses for sale has been haphazard (at best). (>) In many cases instead of the seller driving the sale process, a lack of seller preparation means the process is hijacked by the buyer. (>) Buyers seldom proceed without undertaking their own buyer due diligence. (>) Buyer due diligence inevitably turns up issues which could have been rectified by some simple planning and corrective actions. (>) The buyer in many cases used its due diligence findings to leverage price downwards— commonly by tens of thousands of dollars and, in some cases, hundreds of thousands of dollars. (>) The sale has fallen over altogether for seemingly quite minor issues. In all cases this could have been avoided by the seller doing a pre-sale warrant of fitness check. By the way, my car failed so, my advice is, take the time and make the investment. It will save a lot of heartache in the end. John Kirkwood is a corporate and commercial partner with law firm Hesketh Henry john.kirkwood@heskethhenry.co.nz

SUCCEED / Issue Three

Accountant’s View

Tackle the future

How will your business look after the 2011 Rugby World Cup? factors) plus the opportunities and threats (external factors) affecting your business. This process is outside the comfort zone of many owners. Where do we start and what are some key issues we should consider? If there are any known holes or skeletons in your business today, then these should be addressed first as growth will only exploit a weakness. An honest criticism of your current situation is critical to success. Your business can’t afford to be suffering any internal bleeding when chasing a new battle. There are, however, recurring issues that should continually be revisited to ensure your business remains the benchmark in its industry: (>) Embrace the latest technology. If you’re serious about working smarter not harder and offering new solutions then you need to find new ways to do it. Introduce technology into your warehouse, operations, manufacturing, sales force, product lines, and finance. Ongoing research and development into all parts of your business are essential. It needs your energy and cash reserves but offers a return in growth and security, two qualities that are crucial to success.

(>) Review staffing resources. Employees are what many business owners believe are their biggest asset. The labour market is tight and it’s not expected to improve. Addressing the differing needs of the X & Y generations is hard. What will the needs of the next generation be? Glide time, hours of accessibility, training and transfer of knowledge, motivational tools, culture and a friendly working environment take effort and fine-tuning. What about recruitment? How many, when, how much will they cost, and where from? (>) Creating your next Unique Selling point (USP). This is what separates your business from the crowd and allows you to operate in that top quartile of businesses in your industry. If you have one, look for your next one. If you don’t have one, get one. To grow your bottom line you must grow your top line. You must have a product or service that everyone wants. Create the demand. That next USP could include improving quality or performance of existing products, introducing new products, or developing a new business altogether. Whatever your USP, make sure it’s in your marketing.

(>) Assess your capacity to perform. Is investment into capital expenditure required so that you will be able to cope with your growth plans? Are assets tired and in need of upgrade? Are your current assets costing you in efficiency? The outcomes derived from the three issues above will invariably impact on your capital needs. How are you going to fund it? Cashflow forecasting will be required and a timetable of events will unfold for product development, asset replacement, and marketing. You need to invest in the resources before chasing the sale to avoid the risk of underperforming for the customer, losing the sale and damaging goodwill. Back to the sports field, why not ask yourself: Where do you want your business to be after the 2011 Rugby World Cup, and more importantly, how are you going to get there? Aaron Wallace is a business improvement director with Hayes Knight aaron.wallace@hayesknight.co.nz

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SOV0218\TBWA

After the next Rugby World Cup, All Blacks’ management, coaches and the players will construct a strategy on how to build the next champion team. They won’t be alone. Olympians do it, footballers do it, Formula One drivers do it. Even referees plan for improvement. As armchair critics we do the same for our favourite teams. So, why don’t we as business owners take the same dedicated approach to growing business value? Planning, control, vision and purpose are all strong words we associate with winners. Practicing clichés such as ‘flying by the seat of your pants’ or ‘winging it’ aren’t acceptable by today’s business leaders. These leaders know that proactive planners will always have the jump on the reactive followers. Which do you want to be? Now is when we should be building strategies to ensure our businesses continue to be stronger and more profitable come the 2011 Rugby World Cup. I suppose the reason we avoid such planning is because it’s hard. It requires your board and senior management team to step out of the day-to-day operations to focus on the big picture. Consideration needs to be given to the strengths and weaknesses, (internal

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SUCCEED / Issue Three

Banker’s View

Succession Choice

Who will buy your business? And can they pay? David Verry has a few suggestions At some point, most business owners will consider selling their business. But to whom? And do the buyers actually have enough resources to see the deal through? At ASB we get involved in many such transactions. Sometimes we get asked to outline all the options. That’s a tough one, because there’s no one single way to transition a business. But there are some key facts about the who and the how. Who (>) Family. As the majority of New Zealand businesses are privately owned, selling the business to family members is an obvious option. But there are plenty of questions that go with this: can they afford it, assuming it is not being gifted outright to them? Are they capable of running it? Do they actually want to? Family businesses also have an additional challenge— the emotional connection. Not every family is equipped for inter-generational succession. (>) Trade player. For many years, this was, along with family, probably the most popular option for Kiwi businesses. It is still a natural possibility as trade players know the industry and can introduce synergies and cost savings which may allow them to pay more.

(>) Existing management team. This group is a very logical buyer, especially where the owner has devolved responsibility to them over time. One of the perceived problems is ‘can they afford it?’ With the right structure the answer is yes, but there have been plenty of times when highly capable managers have missed out buying the business simply due to a perception that funding would be an issue. (>) New management team. Hired specifically one to two years prior to sale with a view they will become the new owners. The team is often provided equity through their employment package as an incentive. The trade-off here is to balance interim performance against the ultimate purchase price. (>) External (new) managers/owners. Sometimes called a ‘management buy-in’, this type of sale involves a new team buying and managing the business. It could be an experienced manager from a competitor or someone with enthusiasm and capability. This form of buy-out carries slightly higher risk due to the new owner’s possible lack of specific experience. (>) Private Equity. This is synonymous with high profile New Zealand and offshore

professional firms and deals such as Yellow Pages, NZ Crane Hire, Max Fashions and Kathmandu. But private equity also works at a more basic level when an individual or a group, with access to capital (the equity), makes the acquisition and raises debt against the business cash flows to pay for the balance, usually looking to appoint or retain a management team to run the business. (>) Combinations of the above. Any number of permutations of the above could occur, there is no single formula. For example, the existing owner may retain some shareholding alongside management (existing or new), there could be a combination of new and existing management buying the business (a BIMBO – Buy-In/Management BuyOut), and private equity firms will incentivise management with shares in the enterprise. How can a buy-out be funded? There are three main ways to fund a purchase. (>) Equity. Most purchases will require a level of equity to be put into the deal. Some purchasers will have the cash or can borrow against other assets or from other sources for their ‘equity’.

(>) Debt. This may provide the majority of the purchase price. The debt can typically be raised against the cash flows of the business or other businesses/assets the purchaser owns. The key is to be able to buy 100% of the business to access those cash flows. (>) Vendor and current owner. This can be a good source of funding. Often the vendor will play the role of the ‘subordinated’ or secondranking funder behind the bank but ahead of the new owner. Clearly the vendor, understanding the business, will be comfortable to ‘lend back’ some of the sale proceeds. Another popular mechanism is the ‘earn-out’ whereby the vendor gets part of the payment on settlement with the balance being staggered payouts over an agreed period of time. Whatever the sale process, the good news is that there are numerous ways to fund it. ASB is equipped to help as we understand business succession, for both large and small organisations, better than most banks. David Verry is a corporate banking relationship executive at ASB

THE ART OF SUCCESS requires a steady hand and nerves of steel. For success is not for the faint-hearted. Or the short-sighted. As one of New Zealand’s

(As well as many who are destined to join them.) They’ve trusted us to protect their interests, help chase their dreams and support all aspects of their operations, from employment issues right through to property development and mergers and acquisitions.

oldest and most trusted law firms, Hesketh Henry has helped to

Hesketh Henry has brought together some of the top legal

protect many a golden goose. Over the years, our ability to support

minds in their fields. Lawyers who can provide clients with

our clients’ business decisions with commercially pragmatic

both strategic insight and detailed legal analysis. We call this

legal opinions has given them the confidence to succeed. Today, we advise some of the country’s most successful companies.

THE ART OF LAW

david.verry@asb.co.nz

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succession Good

Even if you’re not thinking of moving on from your business, you should be. A succession plan will make it a more attractive proposition, by spelling out exactly how your business runs today, and what its potential is in the future. And it’s never too early to start. To find out more, call the ASB Business Team on 0800 338 272 or visit www.asb.co.nz Even if you’re not thinking moving onPlanning from your business, you should be. For general information on of Succession visit www.succeed.net.nz A succession plan will make it a more attractive proposition, by spelling out exactly how your business runs today, and what its potential is in the future. And it’s never too early to start. To find out more, call the ASB Business Team