Succeed Magazine Issue 4 by Nexia Auckland (formerly Hayes Knight)

[10]

Health Check Your business under x-ray

[12]

Succeed Scenario What would you do with this one?

[17]

Fish or Fix? Can you handle a bite?

SUCCEED

[18]

Managing Risk Riding the FX roller coaster

The experts’ guide to succession planning

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

SUCCEED.NET.NZ

ISSUE four

still smiling

ways to make hay when the sun doesn’t shine

Featuring ... Phil&Teds: design-led value Asset Management Network: future proofing success

( brent hayden, asset management group )

SUCCEED Issue Four Contents

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 where your business is now, and what direction it should be heading in the future. And it’s never too early to start. To find out how we can help with your succession plan, call the ASB Business Team on 0800 338 272 or visit www.asb.co.nz For general information on Succession Planning visit www.succeed.net.nz

ASB Bank Limited 56170 4306 0308

Simon Young EDITOR David Maida, Prue Norling WRITERS HB Media CREATIVE + DESIGN Image Centre PRINTER

04 still smiling

It may be gloomy outside, but that doesn’t mean your business has to follow the trend. Find five ways to make hay when the sun isn’t shining By David Maida and Simon Young

Case Studies 07 ASSET MANAGEMENT NETWORK

From glazier to nationwide service provider, AMN is building a business that will last

PHIL&TEDS

This award-winning company beat the odds by designing their business for success

12 SUCCEED SCENARIO SERIES

How do Trevor and Gail get ready to sell their business? Succeed’s panel of advisors weigh in...

BUSINESS HEALTH CHECK

Could your business be a walking time bomb? Take this handy health check—before you have to!

your succession checklist

Snookered by succession? Try this handy guide

Columns 16

Legal View Getting your ducks in a row

Employment is a great place to start, says Jim Roberts

Accountant’s View To fish or to fix?

Fishing is fun, but not unless you’re well prepared. The same goes for business, says Aaron Wallace

Banker’s View Making up the diffrence

Is your business riding the roller-coaster of interest rate and currency fluctuations? Dave Chambers offers solutions

SUCCEED magazine is provided for information purposes only. The advice in these pages doesn’t take into account your particular needs or financial situation. We encourage you to talk to a professional advisor for advice tailored to your specific circumstances.

SUCCEED / Issue Four

Photograph by Ian Robertson

succession sun showers Making hay when the sun ain’t shining – it could be the best succession plan you’ve ever done

… BRIEFLY About The Business

SUCCEED.NET.NZ

Asset Management Network: The company was established to assist corporate clients solve glazing and other contracting needs using a national network of glaziers and trades people. In just four years it has grown to become a network of 60 contractors with 20,000 transactions a year.  Succession strategy: The founders sought an experienced mentor to become an independent chairperson, who has subsequently invested into the company. The result is increased rigour and reporting.

SUCCEED / Issue Four

[case study 1—asset management network]

Glass act How to find success next door. Literally.

It’s drizzling in the capital late on a Friday afternoon. A thick mist settles on Nicholson Bay, and most Wellingtonian’s thoughts are turning to how the miserable weather will ruin their weekend. Well, not all Wellingtonians. From his desk in Eastbourne, Brent Hayden observes the rain, shrugs and gets back to the task at hand – managing a growing company that carries on, come rain, come shine. And he’s loving it. Asset Management Network is a fast growing, successful company that combines the resources of some 60 small glazing businesses around the country to offer a single point of contact to mainly corporate customers. Started on just such a Friday night in 2002, Hayden’s company now has dozens of large clients and handles 20,000 glazing transactions a year. No wonder you can’t wipe the smile from his face. The success of Asset Management Network is due to many factors. It’s well managed, it solves a real problem, it has customers who can pay – and on time. But along with many hundreds of Kiwi SMEs, Asset Management Network faces a new set of challenges: a slowing economy, rising interest rates, falling confidence and a squeeze on anything powered by oil. All reasons to be cautious, says ASB chief economist Nick Tuffley. “But it’s not all doom and gloom. It’s a year of subdued growth but a few things will pull the economy through.” Tuffley lists tax cuts, commodity strength, and the prospect of falling interest rates as positives. And what does a tough economy mean for your succession plan - that is, your plan for growing, investing, selling and retiring rich? The good news is that a slow, tough market could be the best thing that ever happened to your business for two reasons. First, economic downturns provide ideal opportunities to reduce waste, improve efficiency, refine systems, invest in staff and marketing, and - most importantly - concentrate on making every customer a satisfied one. Second, a succession plan requires business owners to tidy up the internals to a point where a potential buyer or investor can clearly see the opportunity. It could be that preparing for an economic slowdown could be the best succession planning you can do. “An economic slowdown may be just what the doctor ordered - a chance to stop and focus on internal practices and processes. If so, you’re already halfway towards creating an effective succession plan,” says Aaron Wallace, a succession planning expert with accountants Hayes Knight. Next time the economy turns tough, think positive. Here are five internal exercises you can do that both protect you from turbulence

and enhance value to a prospective investor.

1. Keep your great staff It’s tempting for business owners to make kneejerk decisions about staff in tight times, without thinking of the long-term consequences. Shrinking your payroll might reduce costs and look good on a balance sheet, but it’s no strategy for growth. “Employers tend to look at the cost model, rather than the growth model,” says Jim Roberts, a partner with law firm Hesketh Henry. Interestingly, Hesketh Henry hasn’t seen a flood of redundancy requests from its clients, which would tend to signal any serious economic downturn. “It appears employers are holding their breath. I think people have bought into the fact the economy is going to level off,” he says. “But that could well change.”

2. Invest in training Businesses that overreact and cut staff also run the risk of being caught out when the economy picks up again. And given the tight labour market, it’s a tough time to recruit. Instead, try refocusing on training staff for changing market conditions. “Training might be an ideal means to encourage greater flexibility amongst your staff. Look at providing your employees with a range of skills so that they are adaptable,” advises Roberts. Keep employees informed and engaged so they don’t fear change and are able to adapt to varying conditions. Engaged employees are also playing an important marketing role, as traditional forms of marketing give way to the growing influence of word-of-mouth marketing. Staff who enjoy their work and understand their context create a better customer experience, leading to greater customer loyalty and, ultimately, profitability. This kind of staff loyalty is also critical for your succession plan. Afterall, if you don’t want to, or don’t plan to be in the office all day every day, who else will? Hopefully it will be your skilled and motivated staff. Now’s a great time to appoint managers and get them trained.

3. Check for sustainability A period of slower economic growth is also a good time to check on the financial health of your company. Aaron Wallace suggests cashflow modelling to make sure your business is sound. Cashflow is one of the first things to suffer when things change. Is your business geared up to generate cash when you need it? “Now is the time to start looking inwards in your business as opposed to outwards. Make your business robust because that will reduce the risk and increase the value for you when you go to sell SUCCEED.NET.NZ

it,” says Wallace. Stabilise your company and reduce your risks. An economic slowdown is not the time to take money out of the business and buy a new sports car, he says. “People who strip cash out of their business rather than reinvesting it, will have a hard time in the tough times.” Nor is a cash strapped business going to draw a high price when it comes to selling. Succession planning is a three-to-five-year process, and at some stage you’ll likely go through a slow growth period. “Be like a Boy Scout, be prepared!”

4. Pay attention to the details It’s more important than ever to stay on top of your debtors. Proactively chase up debts as opposed to just letting payments drift in. Stay abreast of how much tax you are going to owe. Forecast your provisional tax and pay it accordingly. And don’t stop marketing. “The first thing people stop is marketing. And you need to market when you haven’t got the sales,” says Wallace. The past five or so years have been economic good times, but they’ve also allowed a lot of businesses to fly by the seat of their pants. A good succession plan will require you to: (>) Check your contracts with staff and suppliers: are they updated, have they been signed, do you actually have them? (>) Revisit your borrowings: perhaps your overdraft is better as a business loan; or can your terms be renegotiated? (>) Expose dodgy accounting or slack recording of hours or work done: your systems may not be capturing all that billable time. (>) Perform an audit on your suppliers: how long is it since you put the blowtorch on your telco, utility or your cleaners? “Now’s good,” says the TelstraClear ad. Indeed!

5. Plan to Succeed! Succession planning should ideally stretch out three years in advance, but one year is the absolute minimum. Be a bit conservative over the next year and don’t over-extend the business. Trading without a buffer is trading recklessly. It’s also vital to follow the advice of Stephen Covey, author of The Seven Habits of Highly Effective People, and “begin with the end in mind”. What will your business look like when you sell it? What story will the numbers tell potential investors? What value will it deliver to you? Turns out tough times are great times for optimists like Brent Hayden. Why not make it so for you?

SUCCEED.NET.NZ

Here’s a story to warm the heart of all concerned: the entrepreneur, his wife, the neighbour and his accountant. It goes like this: A guy runs a small glass repair firm. His next-door neighbour comes over one Friday night with a business question. Five years later, they are running one of the largest and most innovative glass repair firms in New Zealand. Asset Management Network is a Wellington-based company which combines the resources of some 60 small glazing businesses around the country to offer a single point of contact service to customers, particularly in the corporate world. It is the brain-child of Mike and Sue Anders, owners of Mike’s Glass, and their neighbours Brent and Eve Hayden, owners of Hayden Consulting, a management consulting firm. “Mike and Sue were asked to have a look at a nationwide service for State Insurance’s glazing requirements. So they came to us for advice, one thing led to another and we decided to do it together,” explains Brent. The neighbours have used their combined expertise to set up the network of glaziers to provide a 24-7 service with a centralised call centre, personalised service, single invoice process and quality guarantees. “What we are able to do is centre the enthusiasm of all those individual business owners, groom that support and present it in the boardrooms of Queen Street or Lambton Quay or wherever it is that we are talking to national or international corporates. That in turns gives the glazier more time to get out on the job and fewer ties in the

office,” says Brent. Set up in December 2002, AMN won the contract to provide flat glazing for IAG New Zealand Limited (State and NZI brands). It has since added other customers including GSB Supplycorp (which is responsible for tenders and procurements for government departments) and currently handles around 20,000 transactions a year. Two years ago the company branched out into the auto glass market, forming a joint venture with Novus New Zealand. So where’s the succession lesson? There are at least two. First, AMN has spread its risk by sourcing customers from multiple sectors and across the nation. That’s a smart move, especially in tough economic times. What’s more, corporate customers, although hard to win, are good payers and they look good on the CV. AMN is building brand value and the kind of secure cash base that a buyer will value. Second, AMN has addressed a key problem inherent in any fast growing SME: governance. Through the Business Mentor Network, the shareholders invited Martin Lenart to take on the role of independent chairperson. “He gave us the perspective of somebody not working in the business on a day-to-day basis and also introduced some rigour to our self evaluation and board reporting, says Brent.” The move has been a success and has also provided the company with an easy solution to Mike Anders’ wish to sell his shareholding – he sold them to Martin. Now that’s succession planning at work.

SUCCEED / Issue Four

Photograph by Ian Robertson

[case study 2—Phill&teds]

Survival tools Phil&Teds use design – and outsourcing – to smooth out the bumps You would think that the recordhigh dollar, double-digit interest rates, a tough labour market and international competition would crush any exporter’s spirit. Let alone, distance to market. You obviously have not met the crew at Phil&Teds, the Wellington designled company selling baby buggies, high chairs, apparel, cots and car seats.

“We have to invest where we are going to have the most impact - which is in intellectual capital rather than fixed assets.” “As long as parents keep doin’ it, so can we,” is the companies’ up-beat philosophy. Obviously some parents are, because the company defied the export trends, growing 82 percent to over $30 million last year. Its products sell in 1800 stores in over 43 countries, including the high-profile chain Mothercare International. Phil&Teds is not just a lesson in defying tough economic conditions. It’s also an example of how to turn your succession story from striving to supreme. Ten years ago, the company was a struggling engineering firm producing threewheel buggies out of a garage in Newtown. One of the keys to the turnaround was the decision to move

the manufacturing to China. “We’re realistic about our strengths - which are in design and marketing - so we outsourced manufacturing to bring in expertise and capability,” says Richard Shirtcliffe, head of ‘show & tell’ (yes, that’s his title). “As a private company, our financial resources are limited so we have to invest where we are going to have the most impact - which is in intellectual capital rather than fixed assets.” Management has also worked hard on product quality control, which has improved from a 30% defect on any one product in 1999 to less than 0.5% in 2007. This has been achieved with a process that included hiring Mandarin speaking Chinese nationals, better production engineering, key relationship building with local Chinese suppliers, and the introduction of ISO-9000 practices. Another integral factor has been its focus on marketing and developing supply chains. The company has employed some very specific marketing strategies, such as putting a huge amount of effort into key retailer relationships like Mothercare, who chose Phil&Teds as their first full brandrange, global, roll-out candidate. It also deliberately chooses new geographic markets which are already familiar with the threewheel buggy concept to save itself the high costs of advertising and marketing a completely new

concept. “This leaves us to make our mark with uniquely innovative, adaptable and multi-functional products, in six parenting categories – push, sleep, feed, carry, drive and adapt.” The fun-loving and quirky nature of the company is also very much a feature of the way Phil&Teds conducts its business. “We play on our New Zealandness to the extent that Kiwis have a pretty unique way of doing business – relaxed, friendly yet extremely focussed. We’re like the mouse attacking the elephant, I guess,” says Richard. With an eye to the future the company is always looking at new innovations. Last year it launched 10 new products and drew some 75 percent of total sales from them. “We are very good at listening to customers, distilling their need and creating a design solution and marketing that back into the channel in short speed-to-market timeframes. More than 80% of sales are from products we’ve created in the past three years, so the range is always new and fresh,” says Richard. “There is a lot of doom and gloom out there for exporters, with high exchange rates and talk of a downturn, but we firmly believe there is a growing market out there for us as long as we keep delivering the quality and usability parents want,” says Richard. SUCCEED.NET.NZ

… BRIEFLY About The Business

SUCCEED.NET.NZ

Phil&Teds: From a garage in Wellington to international success, Phil&Teds has grown spectacularly and overcome punishing export conditions by outsourcing manufacturing and concentrating on design and marketing. Succession strategy: Create a value story by focusing on quality, design and brand.

11 SUCCEED / Issue Four SUCCEED / Issue Four 10

Myopia Diagnosis: Buyers aren’t interested in your business because you’re seeing it through the lens of your own industry or experience. Treatment: Get your lawyer, banker and accountant to help you see your business as a buyer sees it - as an investment, with a rate of return.

Indigestion Diagnosis: Your information is poor, therefore your management is weak. Treatment: Dig down and discover the true threats and opportunities by running an internal audit. Use your accountant. He just loves probing in the messy entrails of your business.

Lifeblood Diagnosis: Profit is the lifeblood of any business but do you actually have any? Treatment: Start with your pricing: is there sufficient profit built in from the start? Move to cost control: do you have a grip on the real costs involved in each project? Finish with invoicing: get those invoices out now and chase chase chase to get them paid!

blocked pipes Diagnosis: Too much work in, not enough invoicing out. Your lack of coordination is causing some major blockages in productivity. Treatment: Investigate a better workflow system that’s linked to invoicing for managing your productivity.

Treatment: Sit down with professional advisors and create a business plan. Share it with your team and don’t bury it in your bottom drawer! Pin the top line summary on the wall.

Diagnosis:The business is trying to go in different directions because of a lack of leadership and focus.

Two left feet

Treatment: See your bank. Organise an overdraft that suits your needs. Or talk about shifting it to a business loan. Even better, start thinking about seeking an investor. It’s not that scary!

Diagnosis: There’s nothing worse than an under-capitalised business with potential. Get some cash and get growing.

Knee capped

Treatment: Consider replacing yourself with a more sustainable combination of talented management and systems.

Diagnosis: You may be the beating heart of your business, but should you be? Your heart won’t beat forever so why risk the business with your own frailty?

Heart to heart

Treatment: Try cash-flow modelling three years out to understand when you are in or out of funds. This should tell you when you can afford to take money home or when you need to reinvest into the business. Or here’s an idea: sell more!

Diagnosis: Profit is like food, cash flow is like oxygen.  You can survive a short period without food, but not very long without oxygen. How are your lungs?

Breathe easier

Treatment: Get your lawyer and accountant to separate the accounts; investigate setting up a trust for your personal affairs; and stop raiding the business account for your own purposes!

Diagnosis: Your personal and professional finances are closely entwined making it hard to see exactly what the business is earning (and spending!)

Confused signals

Doctor, Doctor, Give Me the News A business is a bit like a body—your body. It has soft, vulnerable parts that need protecting, tough bits that go out and do the work, feedback processes and mechanisms for growth, and of course health that varies over time. Just like you head off to the doctor for an annual physical check up, it’s a good idea to run your business through the x-ray machine and tap its knees for signs of life. We’ve taken the liberty of guessing how a medical report might look. And what you can do to fix any ailments. So how’s your business health looking? Go ask your professional advisor and find out for sure!

SUCCEED / Issue Four

Photograph by Troy Goodall

Meet Trevor and Gail Trevor (55) and Gail (50) run Shiny New Things, which imports and distributes commercial and high-end residential lighting. Shiny New Things has a great reputation for high service levels, and top-end products. Architects often ask Trevor and Gail for their help in putting together house or office plans.

Solid background Despite having nine full-time and three part-time staff, Shiny New Things strongly depends on the expertise of Trevor and Gail, with Trevor’s background in electrical engineering and Gail’s qualifications in interior design, architecture and art history.

Retail element The couple founded the business in 1990, and in 2003 purchased a small lighting retail business, a former customer that had fallen on hard times. The retail outlet contributes a small part of the overall operating profit of Shiny New Things. If pressed, Trevor and Gail will tell you they bought the retail outlet to preserve outstanding debts for goods supplied, which would have been lost otherwise.

Who owns what? Both businesses are operated by a company jointly owned 50/50 by Trevor and Gail. The company also owns its own warehouse, while the retail outlet operates from leased premises. The lease expires in a year, and Shiny New Things has right of renewal for a final term of two years after that. On the board: Kevin Reilly, John Kirkwood and Aaron Wallace

Meet the family Trevor and Gail have two children, Nigel (27) and Peter (24). Nigel is active in the import side of Shiny New Things, and Trevor reckons he might be able to run the business - in a few years. However, Nigel hasn’t shown any actual interest in doing so. Peter, meanwhile, lives in Queenstown - some of the time. The rest of the time, he’s in Whistler. Peter’s a ski instructor, and doesn’t have anything to do with the family business.

a professional

opinion

The last year Times have been good for Shiny New Things, particularly for the import business. The high dollar, booming commercial and residential property markets, and high demand for top end products has made for busy, prosperous times. In the past year, Shiny New Things received $3.2 million in revenue, with a gross profit of $900,000, and EBIT (Earnings Before Interest and Tax) after shareholders salaries of $385,000.

A Succeed senario: Trevor and Gail own and run Shiny New Things. Now what? We ask three experts for their advice SUCCEED.NET.NZ

SUCCEED.NET.NZ

Questions: Should Trevor and Gail think of selling now, or delay selling? Aaron Wallace: Succession is a journey not an event.  Is the business in a saleable position that will generate maximum price?  If not, it may be worth delaying a sale to get these things right. John Kirkwood: Trevor and Gail are relatively young.  They’re probably not ready to sell now.  There’s also a lot of work to be done before they can achieve a successful exit.  While Nigel’s involved in the business, it’s not clear if he has the necessary attributes to take the business over.  Nor is it clear whether this is an option that Trevor and Gail are actively pursuing. Kevin Reilly: Before they think about selling, Trevor and Gail need to decide what it is that they want to do after “Shiny new things” and in what time frame. What resources will they need to achieve what is next, whether it be another business or a comfortable retirement from business ownership and management? This will determine whether they can consider selling now and moving on, or putting in place a succession and transition plan to improve the business and obtain a better value when the time’s right. John: The first step is to get together with advisers to discuss the various available options. Options mean choice.

How do they need to think about the company to get it ready to sell? John: Trevor and Gail need to think about the structure of the business, even if they may not sell.  Succession planning is not just about selling.  It’s just plain good business sense. Kevin: They should do a SWOT (Strengths, Weaknesses, Opportunities, Threats) analysis of the business. That’ll help them pinpoint key things to address before the business is attractive to a potential buyer. For example, they’ll see that they and their expertise are critical to the business. What is it worth without them? Aaron: That’s right. Trevor and Gail need to divorce themselves from the business and reduce the reliance on them as working owners.  This will lessen risk and ultimately increase value or attractiveness to the market. They need to ensure they have a business to sell, not a secured job.   I’d recommend they undergo an internal due diligence and find out what makes the business tick, and what makes it sick. This involves dissecting the business model, operations, financials, marketing, opportunities - all the parts of the business.

SUCCEED / Issue Four

Your Succession Checklist

Snookered by succession? Try this handy guide

It’ll provide action points on how to increase the value and saleability.  It’s essentially a business ‘warrant of fitness’ and any potential buyer will undergo the same process at offer time.  Do it first and address any issues beforehand to ensure any offer turns into an acceptance.  John: They need to assess whether Nigel (or for that matter Peter) have any interest in taking over the business, whether this is an option mid- to long-term, and just as importantly, whether either son has the necessary skills - or is capable of developing the skills necessary to run the business. They also need to consider the downstream effects of their decisions for both sons. Family succession isn’t just a matter of fixing a date and handing the business over.  It involves some quite complex accounting, taxation and legal issues which need to be addressed to transition the business.  Kevin: From a banking perspective, Trevor and Gail need to review their businesses funding structures. Is the type of debt in the business now appropriate? Are personal and business aspects separated as they should be? Have they recognised and addressed the critical risks, like keyperson insurance, life-cover, foreign exchange risk, interest rate risk? Have they put in place programmes to keep other key staff loyal and engaged? Things like retirement savings plans, work/life balance, longterm incentive schemes? John: There’s also the warehouse and retail business to consider separately. At the moment, a single operating company owns the warehouse, undertakes the significant distribution business and also holds the retail business.  As part of any restructure, they may wish to think about whether they should sell the warehouse into another entity or family trust.  This effectively separates it from the business and will give them the option later to either hold on to the warehouse property or to on-sell it as a separate transaction.  The retail business contributes a small amount to the bottom line.  Again, they may want to consider whether this should be hived off into a new company.  With only a short period to run on the initial lease period, they may need to think about whether the time is right to sell that part of the business or to wind this down.   If they decide they want to sell the business, they should seek an extension of the lease (preferably by way of a number of rights of renewal) so that any incoming purchaser has a reasonable lease period within which to continue the business.  If they decide to wind it down, they may want to do that before extending the lease period, thereby getting rid of any potential liability under the lease.  Remember, most leases to companies require personal guarantees from the primary directors and/or shareholders. Kevin: All of these processes shouldn’t just be about getting it ready for sale, but simply making it a better business.

How do Trevor and Gail value their business? Aaron: My immediate reflection is that they don’t, they get an independent who’s not emotionally attached to the business to do it for them. This independent should have experience in valuations.  Often the owner will not be realistic on what the market would pay - a bit like how people often overvalue their family home. A good question for Trevor and Gail would be what they would pay for the business, not what they would expect. There are various ways to value a business; they should select the appropriate one and compare it against another for reasonableness.  The valuation could be based on an asset-based valuation method (where there are low or no returns) or an earnings-based valuation method where perhaps a premium may be paid for the extra cashflow generated from a good profit return. A risk profile of the business will help determine this premium, so it’s essential that Trevor and Gail attempt to minimise as much risk as possible - including reliance on them.

What next step should they take, right now? Kevin: Determine what their personal goals are, check-in with their key advisors and formulate a plan to take them to where they want to get to and beyond. This could include the appropriate funding and ownership structures for the business, assessing and covering key risks, and looking to grow a portfolio of assets outside the business, in such areas as superannuation, shares, or managed funds. Aaron: Be proactive and take some action rather than sitting around waiting for something else to happen for them.  Engage some professional advisors who regularly act in this space.  Separate the warehouse out of the business.  Determine how long their succession timetable is. John: Trevor and Gail should get good legal and accounting advice straight away, and get their advisers in the same room, so everyone’s on the same page.  While business has been booming for the past few years, the year ahead may be more difficult.  This is an excellent time for Trevor and Gail to step back from the business and to focus their energies on ensuring that they have good systems, procedures and planning in place to ensure a sustainable business for when they ultimately determine to exit.

Kevin Reilly is National Manager, Key Accounts at ASB kevin.reilly@asb.co.nz Aaron Wallace is a Business Improvement Director at accounting firm Hayes Knight aaron.wallace@hayesknight.co.nz John Kirkwood is a corporate and commercial partner at law firm Hesketh Henry. john.kirkwood@heskethhenry.co.nz

It’s easy to get bamboozled by the all the ‘to do’ items in succession planning. Which is why we’re here to help. Every succession plan starts with some basic questions, such as the ones below. You’ll find this page in a handy little workbook that Succeed has created to guide you, and your professional advisor, through the succession process. Start with these now and call us to get the book. By the way, it’s free. How’s that for service?

Plan your succession today Call 0800 338 272 and ask for the free succession workbook. With helpful checklists and tips from experts, you’ll find getting started a cinch!

SUCCEED / Issue Four

Legal View

Accountant’s View

Getting your ducks in a row

To Fish? Or to fix?

Employment is a great place to start

Fishing is fun... except when you’re badly prepared. The same is true for your business

What kind of risk taker are you? We’ve found New Zealand employers fall into three broad categories when it comes to compliance with employment law: • Compliance avoiders, • The “halfway house” business owners who comply in some respects, but not others; and • Those who attempt to comply fully. (>) Compliance Avoiders. Their risk-taking attitude tends to flow through most aspects of their business – tax, health and safety and, of course, employment. Recruitment also gets short shrift, with employers going by ‘gut feel’ at an interview, or employing a mate of a mate. Employment history and references are only glanced at, if checked at all. Not that avoiders have unsuccessful businesses. Often a great product or great people keep the business afloat, despite a lack of proper systems. Particularly for a startup company, systems and compliance appear as costs, distractions from the main goal of getting the product to market and growing the business. But there’s a flip side. Every successful business outgrows

the start-up entrepreneurism of its founder or founding team. That’s what growth is all about. And when the founder’s personal dynamism is no longer enough to drive the business, you need systems already in place to sustain that growth. ‘System’ sounds dreadful, like an institution, but systems are the only way of consistently applying the same ethos to all parts of the business. It is necessary. One person can no longer do it all. (>) Halfway Houses. Believe it or not, halfway houses are worse offenders than compliance avoiders. At least compliance avoiders have decided to take the risk; most halfway houses – in fact most businesses – mistakenly assume they’re not taking risks. We’ve found many halfway houses have rigorous systems – but only in areas managed by someone with enough clout to insist on those systems, such as finance. The business needs an overall view with a consistent risk management ethos that focuses its resources at its biggest risks. Just as you need systems to streamline production or service delivery, you need systems to ensure your business reduces its risks. This includes identifying a

team of employees who believe in the business, and can carry it forward. When you use a consistent approach to allocating budget, you may discover you need to do more marketing, develop your product or sort out your financial systems. It may also reveal that you’re at risk from a lack of employment compliance, at risk of losing key staff or you simply don’t have key staff. (>) A Risk Management Culture. Sometimes employment regulations seem like a barrier to getting things done, but in reality they provide an opportunity to develop rigorous systems, gear up your company for growth, and make it an attractive asset for a potential buyer. A risk management culture will not only sort out your compliance but help you make the right decisions throughout your business. By making decisions systematically, you’ll be seen as a safer bet by potential investors or lenders – especially in tight financial times. (>) Compliance and Succession. Succession is not just about exiting your business; it’s about taking you and your business to the next level.

Succession can mean raising capital by borrowing, encouraging direct investment, or forming strategic partnerships. There are different ways of doing this, including selling shares to external investors, selling or issuing shares to senior employees, and a myriad of external options. No matter how capital is raised for the business, it’s important to move the brilliance of your founders from an operational to a strategic role. Leave operations to the key group of employees in the business. Maybe that key group just isn’t there yet. In that case, your task is to identify the kind of people your business needs. This is where getting your ducks in a row goes back to the beginning: recruitment. To make the right recruitment decisions, you need the right processes. If your processes are based on risk management principles, you’re far more likely to make the right choice, every time. jim roberts is an employment law partner with law firm Hesketh Henry jim.roberts@heskethhenry.co.nz

SUCCEED.NET.NZ

I remember my trip last spring to the Barrier with the boys vividly. Off we set for a five-day adventure, with nothing in our heads but how many crays we were going to get, whether to go after Kingfish or Hapuka, and who was going to land that elusive 20lb snapper. Day one: A blown dive regulator air hose and a weight belt left back in Auckland meant the boys had to dive in shifts - eating into valuable fishing time. Day three: Two dive tanks out of test and unable to be filled. Day four: Finally hooked that 20lb snapper! But then the reel seized, the line snapped. We came home with a sinking feeling - and no fish. We all knew we were better than that. Why hadn’t we addressed the basics and planned properly? Back at work the following week, a client called me. “I’ve got this opportunity to tender for a major contract, but I need to state some key facts about my business,” he said. “They want to know my asset replacement policy, my capacity to fund high stock levels, my ability to give priority service at short notice and to attract new employees, my reliance on key

SUCCEED.NET.NZ

suppliers...and so on.” My client could clearly perform the contract to a high level, but these questions painted his business in a poor light. I felt a chill of recognition as he said, “We’re better than this, but I just haven’t spent the time on the basic building blocks of my business.” There was one important difference. I missed a 20lb snapper. My client faced missing an important deal for the future of his business. (>) Sometimes we need to understand when to cut bait and when to go fishing. Too many times we’re searching for growth and that “next big one”, but neglect to address the basics that’ll get us there. We need to put some time aside to dissect our businesses and discover what areas need better focus. More importantly, we must choose to act on those issues once unearthed. Your business needs a ‘health check’ from time to time, and you need some independent help to ensure you reveal your company’s true position. But what does a health check entail? Simply put, it leads to

a review of the bones of the business and its stability. It can include a breakdown of each operating unit, branding and marketing strategies, financial stability and returns, customer dependability, competitor analysis, employee issues, environment (industry and economic sustainability), suppliers and fulfilment of compliance matters. Each business will have it’s own hot issues to address. It’s a matter of accepting what action is required, by whom and by when. An honest business health check will help build a business plan and launch a business to the next level. In conjunction with this plan, you should also perform cash flow modelling, which incorporates marketing initiatives and capital expenditure, so you know what to expect and the timing of your working capital requirements. (>) Too often we concentrate on the financial indicators (including sales growth) but overlook the non-financial values. Employee attraction and retention, energy into innovation, and reducing reliance on the owners are examples of focusing on the non-financial lifelines of a busi-

ness. Improve these and you will improve business value. In planning for succession we need to reduce business risk. This will help increase business attractiveness and ultimately provide a better chance of realising that desired sale price. Your business should be robust enough to ride through an economic storm, recover from a poor contract or sales line, and have a strong base from which to launch growth or win that major job opportunity. Buyers are looking for future cash flows and the lowest risk possible in realising them. Succession is a journey, not an event. It starts with a thorough investigation of where your business is now, so you can reel in that big one! AARON WALLACE is a business improvement director with Hayes Knight aaron.wallace@hayesknight.co.nz

SUCCEED / Issue Four

Banker’s View

Making up the difference How does your business manage FX and interest rate risk? As you probably know well, events way beyond our shores can have a significant, often negative, impact on your operation. For example, the ongoing fallout from the US sub-prime market is squeezing some New Zealand exporters in two ways. On one hand, the crisis has caused borrowers’ premiums to rise, even though sovereign debt yields have fallen. At the same time, the crisis has generally weakened the US dollar against a number of currencies, including the NZ dollar. That makes life pretty difficult for NZ exporters selling in US dollars with local borrowings. Banks, through their Treasury operation, have a number of products that can help stabilize the cashflow of business clients by giving certainty of revenue or cost throughout an agreed period. While there’s a range of instruments to choose from the Treasury arsenal, the most commonly used products are IR swaps, IR caps, IR collars, and IR swaptions for IR risk, and forward exchange contracts (FEC) and FX options for FX risk. Treasury products generally fall into one of two categories,

i.e. Options (FX Option, IR Cap, IR Swaption) or Contracts (FEC, IR Swap, IR Collar). With all options a business does not have to exercise the instrument if prevailing market conditions are more favourable than the exercise rate of the option at its maturity. Because of this inherent flexibility, the business pays an upfront premium for any option. This cost is based on a number of factors including: • volatility of the market in which protection is sought • the term of the option, and • the proximity of the exercise rate to the current market rate. Options are normally used for uncertain future events, e.g. tendering for business, when you’re not sure of future rate movements but believe they will move in your favour, and uncertainty around current exposures - for example a loan that might be repaid early. In contrast, Contracts incur no cost to set up, but there is an obligation on a business to deal at the agreed rate with a bank (FX or IR), even if prevailing market conditions are more favourable during the agreed term of the contract. Contracts are

normally used for certain future events, e.g. receipt of offshore trade receivables.

In brief: (>) IR Swap. More versatile than a vanilla fixed rate loan. Enables a business to swap its floating interest rate for a fixed rate for an agreed term. Suits businesses that want to separate their funding decisions from their interest rate views. For example, forward booking a borrowing rate or loan restructuring during the fixed rate period. (>) IR Cap. An option that lets your business cap its interest rate at an agreed maximum for an agreed period while still enjoying any lower rates that prevail during the term. (>) IR Collar. Lets your business trade within a band of interest rates, contained within a ceiling and a floor, over an agreed period. Normally at no cost, a collar enables a business to cap a maximum interest rate during the agreed term. A collar also allows the business to enjoy any lower rates down to the floor that prevail during the term of the collar.

(>) IR Swaption. A hybrid of an option and a contract. A swaption gives a business the right but not the obligation to uplift an IR swap at some future date. A swaption is useful for businesses where a transaction may or may not go ahead (e.g. property syndicate). If the swaption is exercised and an IR swap is entered into at the agreed rate, there is an obligation on the business to pay that rate during the swap term. (>) FEC. A contract in which a business agrees with a bank to buy or sell a currency at some future date at an agreed rate. (>) FX Option. An option that gives a business the right but not the obligation to buy or sell a currency at an agreed rate at or before an agreed future date. In the past, Treasury products have been mostly used by institutional clients to help mitigate IR and FX risk. That’s changing fast, as more small to medium business owners discover the benefits. Dave Chambers is National Manager, Business Development for Business and Corporate Banking at ASB. dave.chambers@asb.co.nz

This article is provided for information purposes only. Derivative transactions involve numerous risks including, among others, market, counterparty default and liquidity risk. In preparing this article, your financial situation or particular needs were not taken into consideration. Accordingly, you should not take any action in reliance of this article without considering your particular circumstances and, if necessary, taking appropriate professional advice.

SUCCEED.NET.NZ

Reaching your ultimate business goals is a lot easier with the right partner. Hesketh Henry are specialists in succession planning, giving your business the health check it needs to ensure you maximise its value. Start planning today, call John Kirkwood on 09 375 8712. HHSUCCEED1001_P HHSUCCeed1001_P