Succeed Magazine Issue 5 by Nexia Auckland (formerly Hayes Knight)

[12]

Farewell recession, hello succession

[16]

Muscling up for market

[18]

Your lasting impact

[19]

Life’s fourth certainty

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

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

hand me downs Featuring ... Lewis Eady Ltd: four musical generations Team McMillan BMW: road to joy Youngman Richardson: all in the family

How to pass the torch to a new generation (and avoid the family feud) the third and fourth generations: john eady and his son john eady

SUCCEED Issue Five 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 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 For general information on Succession Planning visit www.succeed.net.nz

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

04 hand me downs

ASB Bank Limited PPU32585

.back way your working and end the at starting means planning succession Good

Handing down the company from one generation to the next sounds like a great idea—until you actually have to do it. Here’s how to navigate generational succession Plus: 8 tips for avoiding the family feud

Case Studies 07

Play it again, John:

Music retailer Lewis Eady has been a family business for 150 years. Here’s how

08 Young and all:

When Youngman Richardson needed new staff they found them, in the family

RoAD to joy:

BMW agent Bob McMillan is planning for the future, and this time it involves his son

research 12 The ASB Succession Planning Monitor

Farewell recession, hello succession? As more businesses step out of the recession more are also considering selling—and buying. ASB research reveals a new trend in succession planning

advice 16 Is  your business robust?

Buyers of businesses want to reduce their risk, now more than ever. Here’s how to make your business robust and attractive to potential buyers. Plus: Corporate calisthenics—how to bulk up your business

opinion 18

Accountant’s View Carpe diem!

What you can learn from the Romans about building your business. By Aaron Wallace, Hayes Knight business improvement director

Banker’s View Life’s fourth certainty

Change is the only constant. So how are you communicating with your bank about change in your day-to-day affairs? By David Verry, Relationship Executive with ASB

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 Five

Photograph by Chris Skelton

hand me downs A favourite succession plan is the generational route—when the reins of enterprise are passed on. It may sound simple, but family emotions can cloud judgement and the fallout can tear families apart. Dwight Whitney learns how to keep it in the family

… BRIEFLY About The Business

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Lewis Eady Ltd: Family-owned for four generations, acoustic music specialist Lewis Eady was bought in 2006 by John Eady from his father, also John. He’s still serving many of the same families that this grandfather did. Succession strategy: Know your customers and keep a relationship beyond the sale.

SUCCEED / Issue Five

[case study 1—Lewis Eady ltd]

Imagine the family feud at the breakfast table spilling into the boardroom. Then imagine the one who perceived himself as Daddy’s ‘golden boy’ not being the chosen after all—in fact, it’s his sister. Who would want to be involved in such a rich mixture of possible factionalism when business itself is tough enough? Many of us, of course—just look at the number of firms with ‘& Sons’ or ‘& Daughters’ in the brand name, and you’ll see that wealth and legacy creation tend to go hand in hand. While this might appear the natural order of things, the success rate of generational succession is catastrophic. Research says that only one-third of all family businesses are successfully transferred to the next generation, and only 13 percent are transferred onto the grandchildren. Make it beyond four generations and a Nobel Peace Prize should be in the offing. So why the carnage? One mitigating factor may be that family-based decision making produces very different results from a typical business. Even when negotiating with your own flesh and

blood, the process needs to be managed as carefully as if you were selling your business ‘baby’ to a complete outsider. Another potential deal-breaker comes from balancing fairness with fiduciary duties. When seeking the anointed one among a number of children, or even grandchildren, you’ll need to assess skill levels, compensation levels and the all-important ownership levels. Remember the histrionics around the Christmas tree when someone thought someone else’s present was bigger or better? That same jealousy and potential infighting can wreak havoc on any business operation. But before relegating this mode of succession planning to the ‘too hard’ basket, a little honest soul searching won’t go astray. Ask yourself first: why did you create the business? Was it to keep the family employed for generations, or was the purpose to provide for their needs instead? Next ponder whether any of the offspring have the talent, drive or interest to take the enterprise to a higher level. If at first glance they don’t pass the recruitment test but you still dream of keeping the family name at the forefront, think about engaging outside guidance. If the business is big enough, think about some independent board members. Or talk to your key trusted advisers. With the help of their dispassionate advice, you may decide that hiring professional management other than offspring might be better for the business. Or if you want to entertain a compromise position, you might consider selling your business with you still in charge and with provisions for family members to be employed as part of the sale agreement. In the end, family characteristics inevitably will play a role as to whether management succession will be a process or a crisis. The more adult children (and even their children) are involved, the more complex the issues and expectations become. Human nature being what it is, those heirs not involved in the business may also expect some compensation. More traditional, or tightly knit, families might find the undertaking easier but given the variance between Baby Boomers and Generations X and Y, expect some speed bumps along the road. But it can be done. Here are three great stories of family succession that are working.

A little honest soul searching won’t go astray. Ask yourself: why did you create this business? Was it to keep the family employed for generations? Do your offspring have the talent, drive or interest to take the enterprise to a higher level?

Avoiding the family feud Hayes Knight says that before thinking about putting your offspring in the decision making seat, consider the following: • Do your children want to run the business? • Are your children capable of running the business right now? • What is your business really worth? • Are you willing to hand over control of the business and leave the children in control? • How will the transition be financed? Are your children able to buy you out? Will you maintain an interest in the business? If you do maintain an interest, will you have a role in the business or will you be a silent partner? • How should the transition be structured? • What will the impact of you stepping away from the business be on your customer base? • What are the tax implications of the succession plan? There can be some fairly hefty taxation implications for both you and your children if this issue is not managed correctly.

SUCCEED.NET.NZ

Play it again, John Close to 150 years after the doors of Lewis Eady first opened, the fourth generation Eady has taken his place at the corporate keyboard. A highly skilled musician, he learned early in life that hitting the high notes doesn’t necessarily pay the bills.

lan John Lewis Eady, commonly known as John, begins each day with the eyes of founder Lewis R Eady, his son Ray Eady and grandson John Eady Senior looking down on him from photographs on the showroom wall. They’re a reminder that rich traditions and relationships are in his hands. As one of five children, John grew up with the business as part of his life. But knowing about it was one thing; he had no inkling that one day it would be his. An avid sportsman, he also had a passion and talent for classical music. He passed his LTCL & LRSM diplomas, and was awarded a scholarship to the prestigious Royal College of Music in London where he studied performance and teaching for four years. His instrument of choice was the clarinet. In order to pay for his ‘habit’, he became a property developer and renovator and learned how businesses tick. In 2000, a marriage breakup coincided with his father beginning to make noises about succession planning. Change seemed a good idea. “All the family members

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were asked if they were interested. They were not, so it was agreed that I would come into the operation and then decide if I really did want to take over the ownership,” John says. Though he was comfortable reading both balance and song sheets, hard data alone didn’t tell the full Lewis Eady story. Long-term relationships were a key part of the enterprise. “Making a $150,000 investment in a Steinway is a big step and the process never involves a quick sale. We have a number of client families who have been with us for three generations so I had to understand this aspect of the operation.” His father remained managing director while John was given responsibilities for marketing, promotions and human resources. It wasn’t until 2006—after what he says was a rather extended due diligence process—that he formally bought the business. “One of the hardest parts was negotiating with Dad. We both found it a challenge to step out of our traditional relationship and take a totally hard-nosed approach. It wasn’t a case of playing with a few

numbers while having a beer. We both had lawyers and the process was done quite formally based on finding a fair market price for the business,” he says. But the deal was struck in the knowledge that both were part of the family, with close ties and long traditions. By nature there would always be some give and take. His father stayed in the business for two years but John has been flying solo ever since and has added his own touches. “We’re traditional and conservative, but must also remain current and innovative. We have launched a Music School with the aim of getting ‘cradle to grave’ music lovers and purchasers. We have a charitable trust to support the arts. We’ve also embraced IT. When I arrived we had no website and only one computer,” he says. “We joke that we missed a century— going from the 19th straight to the 21st.” That situation has changed. Yet, some of the lessons learned from the past haven’t gone unnoticed. “In light of the recent recession, the durability of the

operation has paid dividends. I had minute books dating back to the Great Depression to give me some insight. I found there was an increased need for servicing and repairs versus new sales. Subsequently I geared up this side of the operation.” Much as he would probably like spectacular growth, John is realistic about the business being what he calls a “niche within a niche”. “Six percent of the population are into their music—and being a traditional, acoustic-oriented business, we’re a niche within this. We build the business on relationships and aren’t sales driven per se.” Though John is still young, what will happen when his time is up is already on his mind. He has three children and will steer the opportunity in their direction at a suitable time and place. “If they aren’t interested I’ll find another means of keeping the family name alive. When you reach four generations in business, you want to make sure you’re not the one to be the author of its demise.”

SUCCEED / Issue Five

Photograph by John McDermott

Bob Youngman left and buisness partner Tim Richardson

[case study 2—youngman Richardson Co Ltd]

All in the family When personal and financial survival is your primary focus, it’s unlikely that bringing family members into the business will be on the immediate agenda. But construction, hire and agricultural industries supplier Youngman Richardson Co Limited has managed to find a place for three generations—so long as they cut the mustard.

ob Youngman received the expected ‘don’t come Monday’ message. The next day he was out one door and in through another. All had been going well for Bob and his soon-to-be partner Tim Richardson when they were part of established machinery supplies company Richardson McCabe. Bob joined in 1972 and was appointed a board member the following year. Tim was manager of the construction machinery section. Over time, a strong working relationship evolved into an enduring friendship. The venture grew, they joined forces with a similar ‘old school’ company Tappenden Holdings, and their worlds remained unruffled. That was until 1979 when they found themselves in the sights of corporate raider Brierleys. A 50 percent stake was taken and immediately on-sold to Ceramco. A week after Bob’s departure, Tim followed suit. They were both at an age and stage where they were likely unemployable but were also well into survival mode. Creating Youngman Richardson became the best option.

Bob—nine years Tim’s senior—decided they would set up a limited liability company rather than the ‘kiss of death’ partnership option. They had equal shareholding and operated under a formal board structure and operating procedures. With the contractual ink barely dry, the two men boarded a plane to Japan with the aim of securing a range of franchises. They returned with relationships established with Robin/Subaru Engines and Denyo Generators. Slowly and surely they acquired more dealerships and larger premises, and the business duly prospered. The move to bring family into the business came not through a bout of nepotism but rather through a search for good people. “Family essentially came on board when we needed people,” says Bob. The first off the rank was his son-in-law Tony Fairfield. He had been general sales manager at Morgan Furniture so he’d already built his own reputation and had a track record that could be assessed. Three generations now work in the business. Tony is

managing director. His son Phil is national sales manager and Tony’s son-in-law is the current Tauranga branch representative. Tim is chairman, after being handed this position by Bob Youngman four years ago. His son Ed is sales and marketing director. Part of the success of this succession route is that all the offspring established themselves first in other situations. If they had come straight from school without additional life experience the results may not have been so enduring. That said, both Ed and Phil got their taste of the operation at an early age. “Both used to come in during school holidays and work in the warehouse but then when they finished school they went off to make their own way elsewhere,” Tim said. When Ed returned from working overseas with multinational North Sails he asked his father about the possibility of a position in the family firm. His request was referred to Bob to avoid any notion of favouritism. “At the time we had nothing available. Six months down the track a suitable position became

available—in the warehouse.” Both Phil and Ed started in this role which created a ‘sink or swim’ urgency underpinned by the instructions each received on day one: “Don’t let us—or yourself down.” Each founder agrees there is a natural risk of overprotecting kin that anyone in the succession planning process needs to contain. There have to be clear performance measurement criteria and responsibilities expected. The generational involvement in the business has sent positive messages to the bank, the marketplace and also key suppliers—especially the Japanese. “The family connection is well regarded and helps maintain and build strong relationships. With one key supplier, Mikasa, we have dealt with the grandfather, father and now son. Like us, their offspring started working from the ground floor up,” says Bob. Bob comes and goes from the business but remains on the board. Tim comes in three days a week and will remain, he says, as long as he has work to do and is not a nuisance. “You know when it is time to go home.”

… BRIEFLY About The Business

Youngman Richardson: Originally a partnership between two former colleagues and friends, the Auckland-based manufacturer and distributor now has staff from both families. Succession strategy: Keep a professional structure, encourage outside experience and expect performance.

SUCCEED / Issue Five

Photograph by Chris Skelton

[case study 3—team mcMillan]

Road to joy Joy, says the BMW brand proposition, is not having to compromise. Team McMillan founder Bob McMillan is experiencing considerable joy at his ‘second coming’ back into the business. So how is he managing handing over the corporate keys to his son, Andrew?

ith the click of a mouse, Bob McMillan watches a new part of the empire take shape in the form of the all new MINI Advanced Retail Brand Store— MINI Garage. Built in Poland, and taking shape on a prime piece of real estate on Auckland’s Ponsonby Road, a 24/7 webcam allows him to view progress and share the joy of watching this new undertaking gain traction. We talk briefly about the speed bump—more like a road hazard, actually—of some years back that put the brakes on his original succession plan. He sold a shareholding and left the business in the hands of someone else. with outcomes that were not to his liking. Now back in control, a successful succession remains Bob’s unwavering goal. As he puts it: “The horses haven’t changed, only the jockeys.” The decisions and actions made when he came back full-time into the business have helped the operation through the economic downturn. “Recession? What recession? Last year was the best we’ve had in over 27 years.” The opportunity to start afresh with a company that he

already knew intimately allowed him to take a long, hard look at the operation. “Between August and October 2007, and long before there were any recessionary trends, I focused on restructuring costs. I also cast my eye over the calibre of the people we had in the business. I knew we had the challenge of rejigging and reinvigorating the brand and operation. I wanted to get some vitality back into the balance sheet.” To do that, he took three initiatives. The first was to address financial issues. The second was to create smarter ways to understand what existing customers want and to solidify relationships. In the past, as well as helping get product sold and out the showroom door, sales people were expected to also keep BMW stalwarts coming back for more. In a sense, Bob McMillan has turbocharged this function with the creation of what he calls a Customer Integration Centre. “We now have three very experienced people who get all incoming communication. Their first responsibility is to make sure that some sort of

response is handled within the hour and then, if further followup is required, that it takes place. They also serve as an information gathering hub that can then be channelled back into the sales process.” A parallel process has seen the business go offshore and engage a group of women across the Tasman who, prior to maternity leave, were top sales managers of Australian dealerships. Bob McMillan reasons that they know the industry and how to turn tyrekickers into buyers. “Their role is to follow up people who came into one of our showrooms in the past day or so. It’s handled like a customer satisfaction call but they also have the chance to probe for more strategic, sales-oriented information. They can then feed this information back into the relationship and sales building process.” The third leg of the transformation has been taking the ‘Joy Is …’ concept from BMW corporate and turning it into an approach that is tailored to personal messages from the man himself. For these to have any sort of traction requires his ‘delight’ to be genuine.

He has also retained the focus of his new succession plans: his son, Andrew McMillan. He also has brought in one of his most favoured colleagues from Team McMillan Ford days, Ian Gibson, to help drive the business and to be a mentor for Andrew. Both came on board in 2007. Now manager of the used vehicle department, Andrew dusted his tyres in service and sales roles for one of Sydney’s largest Porsche dealerships. Before returning to New Zealand, he had become the top Porsche salesman in Sydney. “Andrew is on line to take over in due course. He is 30 now. The more he’s exposed to business the better, for I know that it does take time to develop great people. His Porsche experience set the scene. He has great natural people skills but the discipline of transferring this to sales was a great opportunity.” Having already had the experience of stepping aside, moving away, and relinquishing all management and day-to-day responsibilities, Bob McMillan is not in a hurry to leave just yet. There’s simply too much joy to be had.

… BRIEFLY About The Business

Team McMillan: Founded by Bob, left, and increasingly managed by son Andrew, right, the Newmarket dealer has over 40 years’ experience selling and supporting BMW vehicles. It’s also the exclusive northern dealer for Mini. Succession strategy: Make sure the business is performing well and your successor has time to grow into the job.

SUCCEED / Issue Five

SUCCEED / Issue Five Getty images / Kutay Tanir

farewell recession, hello succession? As more and more businesses are taking the first tentative steps out of the recession, what does this mean for those thinking about selling—or buying—a company? ASB’s latest Succession Planning Monitor reveals a new sense of certainty among business owners SUCCEED.NET.NZ

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SUCCEED / Issue Five

15 accountant lawyer business broker

whose advice will you seek?

commercial real estate agent bank relationship manager other

don’t know

farewell recession, hello succession?

70 60 50 40

As the recession eases, surviving business owners are turning their thoughts to the perennial question: Is now the best time to exit my enterprise? Particularly with the aim of achieving optimum value and beating to the market the anticipated flood of hundreds asking the same question. While the latest ASB Succession Planning Monitor reveals the ‘good time to sell’ index remains fairly static—with most business owners surveyed believing now is not a good time to sell— respondents are changing their perceptions about what drives the value of their business. ASB’s chief executive, relationship banking, Stewart McRobie says the impact of the economic recovery could well be influencing the results. “For the past year we have seen business owners battening down the hatches and putting off selling their businesses for the foreseeable future, or at least for the next five years” he says. “In the March quarter, the focus of this survey, we have seen a six percent increase in the number of business owners saying they are considering selling their business in the short term. Almost 20 percent now say they may sell within two years, as opposed to 14 percent last quarter.” This shift in sentiment is significant, he says, but also cautions that the next six months will be crucial to really gauge whether forward momentum is sustainable. Sellers, and more importantly buyers, seem to have a more realistic notion of the value of their businesses and are seeing indicators of prices improving. Over the past six months, the number of owners indicating the market value of their business is less than $250,000 has been dropping and is now down to 33 percent. This could be a result, says Stewart McRobie, of the recovering economy generating more certainty that business values are increasing again. A record 24 percent of owners indicated that the market value of their business lies between $250,000 and $500,000 (up from 18 percent). Other values cited in the findings include prices between $500,000 and $999,000 (14 percent); $1 million to $5 million (14 percent); and more than $5 million (five percent). While opinions on the value of businesses have changed, so too have the drivers of that value. For the first time since the survey began, profit is now considered the most important factor determining business value at

89.2 percent of respondents, a rise of seven percent. This could be a result of profits stabilising as the economy improves. Customer base is the second most popular determinant of value at 88.8 percent. The state of the economy also increased in importance by seven percent to 70.8 percent. If information and advice-seeking are signposts of an increased renewal of activity, then succession planning seems to have returned to the corporate dance card. It is not just any type of advice that is now being sought—the study’s findings show a renewed level of certainty about just what sort of guidance is needed when it comes time to sell. Larger businesses tend to consult with a lawyer as part of the advisory mix while smaller businesses ask accountants to lend them their ears.

Sellers and buyers are seeing indicators of prices improving. The number of owners indicating the market value of their business is less than $250,000 has been dropping, and a record 24 percent of owners indicate the value of their business lies between $250,000 and $500,000 The reasons for seeking a helping hand are varied. Business owners are likely to accept that potential purchasers are now more discerning and they certainly have greater choice in their targets. The more a seller’s affairs are in order, the higher the value they might hope to secure. Even though a sale is not on the immediate horizon if business-related issues are not managed well, or contained, then the window of opportunity down the track may be missed. The key is to work with advisers early, rather than postpone attention to a later stage. Bank managers can help work through matters related to borrowing, cash flow management and foreign exchange contracts. The survey also reports that: • There has been a large increase (12 percent) in the number of business owners who are planning to speak to their accountant for advice on exiting their business. • The main driver of this trend is small business owners, with 80 percent saying they will consult their accountant (an increase of 14 percent). Their lawyer came second at 45 percent. • In larger businesses there was a ten percent increase in SUCCEED.NET.NZ

respondents saying they will speak to their lawyer, at 69 percent. Accountants still ranked first at 80 percent. There was also a decrease of five percent in those business owners who said they did not know who they would seek advice from, and a three percent decrease in those who would have sought advice from sources other than their accountant, lawyer, business broker, bank relationship manager or commercial real estate agent. Encouragingly, the results show a significant drop in business owners planning to close down and sell their assets (11 percent), and an increase in those with plans to sell to a current staff member (12 percent). The most popular means of realising the value in a business was through selling to an unidentified buyer, at 27 percent, followed by sale to a targeted buyer outside of the business, at 22 percent.

30 20 10 0

Q308

Q408

Q109

Q209

Q309

Q409

Q110

Quarter

business seller’s index 0

Q308

Q408

net index

Q109

Q209

Q309

Q409

Q110

-10 -20 -30 -40 -50 -60 -70

-62.9 -70.7 -74 -81.1

-80

-77.8

-65.3

-76.3

-90

Quarter

In a nutshell

• The ASB Succession Planning Monitor reflects the economic recovery • Businesses are increasingly looking to sell in the shorter term • Owners’ perceptions of business value are changing • Profit is now considered the main driver for business value • Owners more likely to look to their accountant or lawyer for advice, and more certain of where they will seek advice • Business owners can reap rewards if they plan early. Businesses with their plans in order can seize opportunities and realise the best value from their business sale SUCCEED.NET.NZ

The Business Seller’s Index is the net percentage of responses to the question, “Is now a good time to sell your business?” with the ‘no’ responses subtracted from the ‘yes’ responses. A negative net percentage indicates an overall perception that now is not a good time to sell, whereas a positive net percentage indicates an overall perception that now is a good time to sell.

0-2 years

timeframe to sell business

3-5 years after 5 years don’t know

54.5

47.5 42

40 33.7

49.3

50.5

52.1

39.8 31.9

30 20

13.6

17.3

20.8

21.4

16.4

18.9

15.4

10 0

10.7

Q308

15 14.7

17.3 14.1

19.6 15.7 12.6

10.4

Q408

19.8

Q109

Q209

Q309

Q409

Quarter Answers the question, “When do you think you might sell your business?”

Q110

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muscling up for market

SUCCEED / Issue Five

A business that is performing on all cylinders is one that will attract interest. Performance could either mean growth or, in an economic downturn, stability. ROI is always the key to the deal so buyers will pay a premium for something that’s performing well. If they get a whiff of internal or external problems, or feel that their own strategic guidance and input might improve the offer in their favour, the money being offered will reflect this. Keeping a grip on your own affairs is tough enough but what is happening in the general operating climate will also help or hinder sales. Obviously, an overall economic downturn will result in corporate belt tightening. At the same time, potential buyers will be more discerning and aware that a better bargain may lurk somewhere else. Don’t be depressed, but do be realistic about your expectations. Sudden decision-making or a need for a quick sale will almost always mean a price reduction. The longer the time to prepare for sale the better the outcome, at both a personal and business level. Get a periodic valuation of the business and also ensure all legal and accounting matters are up to date and compliant. Kevin Reilly, ASB’s National Manager, Key Accounts, says most buyers would have a realistic understanding about what is, or is not, beyond the business owner’s control. There are, however, ‘micro’ signposts that buyers will look for in deciding if an operation is wonderful or weak. Fittingly, he says, the factors that make a business attractive to a buyer are also the ones that will help the business owner regain momentum in the wake of events like a global financial crisis. Successful companies, says Peter Robinson, ASB’s National Manager, Business Solutions, are those with strategic and tactical plans that flow seamlessly into high quality financial forecasts. They demonstrate long-term viability, sustainability and liquidity. “On the corporate catwalk, the new combination has to be an offering with both brains and brawn. Enough muscle and tenacity to be a market force but also with the intellect and grey matter to convince a prospective owner, or successor, that this is a smart venture to buy.” The end is nigh if the pace of external change outstrips the ability to change internally. Read the signs and the warnings they may contain. Otherwise, not only will there be no business to sell, but no business to operate. Kevin Reilly says a good business plan will have the KPIs and other material that will allow someone to make a diagnostic assessment

Most business buyers aren’t looking for a risky purchase; they want something reliable and robust. We ask the experts how to get in shape

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of the health of the operation. Businesses generally fail, or fail to be viable, for one reason: cash. They are either losing money or they have already run out. Yet the symptoms can be indicative of a myriad of possible causes. Far from wanting to waste time on diagnosis or damage control, the incoming owner will be immediately looking for ways to create and manage change. They will want to see evidence of an enterprise that is durable and robust enough to allow for expansion and development. Moreover, the strategy and forecasts need to be capable of execution via the existing team, allowing the new owner to work on the business rather than in it. External events, says Hayes Knight Business Improvement Director Aaron Wallace, are hazards that most business owners could neither forecast nor react to quickly. Yet having various levers and disciplines in place to protect the all-important cash flow provides some comfort and succour, as well as the ability to weather the effects. “In business, there are icebergs. Basically, like the Titanic, a business will sink or be unattractive if it doesn’t have the mechanisms or capability to see the hazards. Not to the point of obsessiveness or paranoia, but in navigating treacherous waters you have to know what to look for, how to look for it, be able to react in time and avoid actually hitting the iceberg—which would be akin to having a full blown cash crisis. “Quite simply, if you don’t have a plan you have no idea what to be on the lookout for. Anybody assessing your business who does not see a comprehensive business plan will most likely walk away.” Aaron Wallace says a perennial message to clients is not to sit back and fly by the seat of your pants. Short cuts and shoddiness aren’t currently attractive commercial traits. “Like any type of training or conditioning, you must have discipline and routine, and put in the hard yards. In today’s climate you must practice good governance and have all the hallmarks of a sound and prudent business practice.” Ironically, adds Kevin Reilly, there will be some businesses that have survived the recession only to falter now. “A once strong but depleted balance sheet kept them alive during the recession, but with resources having been exhausted, there is nothing left in the tank to exploit the advantages of an economic upturn. “Anyone adopting a focus solely on traditional measures such as P&L may find themselves short-changed. More important indicators of good buying or good business are equity, the vitality of the balance sheet and sustainable cash flow. ” Aaron Wallace says that ‘new thinking’ will help lead to new ways of doing business and grooming your enterprise for sale. “Current customers are important, but businesses should also be looking at who else to target down the line. To attract them you may have to change your attitude to issues that are important to SUCCEED.NET.NZ

customers in their purchase, or relationship development decisions. So instead of dismissing issues like sustainability or green business, think instead about what opportunities there might be in growing a base of people who find such concepts essential.” Finally, says Peter Robinson, in preparing a business for sale or looking at one to buy, be very certain about whether key relationships are personal or rest with the enterprise. “Personal relationships are the harbinger of more formal business tie-ins, but if they rest with one person alone vulnerability becomes an issue. This is also part of instilling a sense of governance and discipline. “Those looking to buy, or those who are lending the money, have well and truly returned to a time of business prudence and accountability.” To understand what purchasers want, company owners should adopt the same mindset. Once they can see their own business the way a buyer might, it’s time to fix the flaws and get the enterprise in shape.

Corporate calisthenics Differentiation is often a precursor for bulking up the balance sheet. A good starting point is looking at what everyone else in your sector is doing—and then daring to be different. 1. Be very clear about the customers you want to serve and do business with. Define who they are and even dream up an archetypal Best Customer profile. 2. Spell out precisely and concisely how you are different, and give tangible evidence. 3. Then think of on-the-job ways of making this crystal clear to staff and clients—and prospective purchasers. 4. Know how you make money by understanding your revenue sources. Come up with how you’re going to increase revenue, where your costs are and what it will take to keep profits flowing over the year.

SUCCEED / Issue Five

Accountant’s View

Banker’s View

Aaron Wallace

David Verry

Life’s fourth certainty

Your lasting impact

When Benjamin Franklin said that birth, death and taxes are the only certainties in life, he may well have added a fourth: Change. Which makes communication with your bank all that more important

When planning the fate of your empire, take a leaf from the Romans You can pick your friends but not your family—which can make generational succession planning a risky road. The third emperor of the Roman Julio-Claudian dynasty, Claudius, is a case in point. Though he made a name battling the British tribes, his promotion to the big time was unplanned. He was acclaimed emperor only after his unstable nephew Caligula was assassinated and his brother Germanicus (originally groomed by Tiberius for the position) met a suspicious demise somewhat earlier. Out of all this instability some better planning and selection mechanisms should have been put in place rather than a ‘flying by the seat of your toga’ approach. Sadly, they weren’t. Having foiled one attempt to circumvent his reign, Claudius made the fatal error of then backing his fourth wife’s snivelling offspring, Nero. Concepts such as generational succession, management buyouts, or changes in partnerships, sound straightforward enough until you factor in a plethora of underlying issues. For example: • The next generation buying out the family share in a multiple shareholder company or partnership • The management buy-

out of a share in a multiple shareholder company • A third party purchasing a major stake in a multiple shareholder company. The challenges in realising a successful exit from business are undefined at the start of the succession journey and often many aren’t identified until the last steps are taken. Nevertheless, from our experience there are five common indicators that need to be read like tea leaves in order to increase the odds of the empire continuing. (>) 1. Attitude Are the inheritors commited to the business? In generational succession, the son ordaughter must be passionate about future success, and not there merely to continue to get the lifestyle that Mum and Dad had. (>) 2. Entrepreneurship Do they have the skills to push the business forward in an ever changing environment? Their ability to develop new markets, steer through industry risks, engage new technologies and seize opportunities will be integral to ongoing success. (>) 3. Leadership How will they be viewed by other employees, the management team, and in multiple

shareholding companies, by their co-shareholders? Envy, disrespect, and unwarranted promotion are common emotions associated with a sudden elevation. Do they have the ability to instil strong governance yet also possess a ‘work in the trenches’ trait? (>) 4. Financial Acumen Do they understand enough about financial management and liquidity to build a robust business? Can they link their strategic ideas with financial parameters and create a stronger return to investors? What about their financial needs and capabilities as they buy in—how will this be funded and are other shareholders protected?

(>) 5. Technical Nous Do they fully understand the nuts and bolts of the products and have the ability to answer the tough questions from customers? Can they improve or adapt the offering or are they still reliant on other key employees of the business? Is there an unaddressed risk? These are by no means the only issues but the message in this regard is simple: invest the time up front to get it right rather than incur a cost later on to unwind an ineffective changeover. Aaron Wallace is a Business Improvement Director at Hayes Knight aaron.wallace@hayesknight.co.nz 09 379 7013

Carpe Diem As business advisors, all too often we are asked to unwind succession strategies because they haven’t been planned properly. What we’d recommend NOW in order to avoid a Nero lookalike sitting in the business driver’s seat is to: • Grab the succession planning ‘bull’ by the horns. Front up, face the issues, engage someone independent and/or experienced to help guide the process and make decisions. • Make sure you have good governance systems and processes in place. To help guide you through the process and to make the incoming person’s life less stressful. • Think about some sort of ‘mentoring’ or transition program for the new blood as a prerequisite of success. • Ensure all funding issues and sources are identified.

Very little in business remains static so when change occurs, those affected—like your bank—would like to know what’s happening. Similarly, we owe it to our customers to keep them in the loop. Just as customers don’t like surprises, neither do banks—but if we know of a problem or an opportunity we should be able to help. Some customers have endured tough times during the past two years. But how their banks reacted most likely was influenced by the way customers have communicated. In cases where communication has been open and two-way, banks will have had the opportunity to work with their customers and look at options to navigate through tough issues.

Here’s what we mean by open communication: • Providing both historical and budget information and covenant reporting as promised, and on time. It’s also important that customers can explain significant variances to budgets; • Updating business plans and sharing that information, or involving the bank in the updating exercise; • Advising, ahead of time, when debt is going to overrun (outside of contractual arrange-

ments) or breaches of covenants will occur; • Making sure that bank funds are only used for the purposes for which they were borrowed; • Identifying any issues proactively, and developing solutions in partnership with the bank; and • Ensuring there are no surprises. Holding off telling bad news can make the situation worse. Granted, in boom times some of these disciplines may have fallen by the wayside. Now is the time to resurrect them.

Our side of the bargain Not surprisingly, there have been a few changes to the way banks operate following the financial crisis. These include: • More conservative debt multiples (against cash flow) and percentages of lending against specific assets (for example, land and buildings); • The need to include some of your own funds in investments. There has also been a return to the inclusion of equity ratios as one of the covenants in deals; • A need in some cases for customers to repay a portion of debt; • A move back to core principles of banking, which include having more than one way out for debt repayment. This could

be a combination of cash flow, sale of assets, sale of a business or the ability of shareholders or guarantors to make appropriate contributions; • The increased cost of bank funding influenced by investor and depositor returns, competition for funds and Reserve Bank of New Zealand capital requirements.

What it means for succession First and foremost some of the ground rules and conditions have changed. Again, by being involved in the process and helping to manage expectations and some conditions, we may be the difference between success and otherwise.

Of late we have noticed that: • There are investors with equity looking for investments. For example, local private equity firms have access to the necessary funds if good opportunities exist, and there are many individuals or groups looking for appropriate investments; • Fewer investment deals are closing than before the financial crisis, because the quality required (in terms of both the business and its earnings) are not being met;

• Some great businesses have had a couple of tough years with reduced cash flow. Owners are rebuilding their cash flows and profits to maximise the price of their business; • Banks are requiring greater capital investment from buyers; • The acquisition multiples have returned to more “normal” levels. One of the biggest flow-on effects of the crisis has been a change in business values. Before the crisis, a hypothetical business with an EBITDA of $5 million, might have buyers prepared to pay a multiple of five times. That business had an enterprise value of $25 million. Now, the EBITDA on that same business may have reduced to $3 million, the multiple a buyer is prepared to pay has reduced to 4 times, so the business now has an enterprise value of only $12 million. While the owner may build the business back up to an EBITDA of $5 million, the question remains: will the multiple go back up? Only time will tell. But in the meantime if you haven’t talked to your bank of late, change the situation. David Verry is a Relationship Executive at ASB. David.verry@asb.co.nz

The information expressed in this article is provided for general information only and is derived from respondents to a survey conducted during the period January 2010 to March 2010 and were compared with results collected in the previous quarter; October 2009 to December 2009. Any views or information, whilst given in good faith, are, not necessarily the views of ASB Bank Limited (“ASB”), and not warranted by ASB and are given with an express disclaimer of responsibility. No right of action shall arise against the ASB or its employees either directly or indirectly out of any views, advice or information.”

In other words, stop fiddling and seize the moment.

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Great succession plans donâ&#x20AC;&#x2122;t happen by accident. The difference between a successful succession that realises the full value of the business and one that falls short of the ownerâ&#x20AC;&#x2122;s expectations, will be in the planning. For advice and assistance to manage all your succession needs, talk to your Hayes Knight adviser. Visit hayesknight.co.nz or contact Aaron Wallace T 09 379 7013 E aaron.wallace@hayesknight.co.nz