Wealth Blog
PUBLISHED : Wednesday, 26 June, 2013, 9:19am
UPDATED : Wednesday, 26 June, 2013, 9:20am

Don’t leave it too late

BIO

Anna is a business writer. During her 20-year Hong Kong career, she’s written everything from stock market reports and luxury goods sector analysis to speeches for the HKSAR Chief Executive and served as president of the Foreign Correspondents’ Club for two years.
 

Half of business owners have done nothing about planning their exit strategy. As the population greys, unprecedented numbers of them will be retiring in the next few years, but appear to have done nothing about succession planning.

Keeping wealth going demands appropriate attention, say accountants and business advisors Baker Tilly International. They note the baby boomers will retire and move out of full-time management of their businesses soon, with these companies worth trillions of dollars.

It’s easy to glaze over at the mention of succession planning, as yet another private banker drones on about tycoons, but it’s a big issue for many family- and privately-owned businesses, regardless of whether they are in the super-rich bracket. They too want to pass on something worthwhile to the next generation, and leave a lasting legacy. We all know that men especially hate facing mortality and often think making wills and facing up to it is tempting fate, but if you have assets, it has to be done. As Baker Tilly point out: it involves recognising and coming to grips with many complex family, individual and business issues in the evolution process.

It’s an old message but one that needs repeating - business owners approaching retirement should act now as succession planning process can take up to five years to sort out. Throw a few stroppy family members into the mix and it can become a real headache. “Failure to plan ahead, delaying or leaving it too late can diminish the value of the business,” they warn.

According to Baker Tilly’s Global Family Business Succession survey International, 57% of family business owners expect the business to stay in the family. Another 27% plan to sell it, leaving 16% dithering.

There’s no one size fits all and each business is different, with options ranging from outright sale to a third party; transfer of day-to-day management to family members, along with some form of ownership control; sale of the business to a management team; or closure because it all got left too late.

When to start succession planning?

Even if your departure as owner is many years hence, to maximise the value of the business you have to ensure that it ticks all the boxes that make it saleable. But grooming a business for sale is not a last minute thing.

Exit planning should start at least three years ahead of a sale, say Baker Tilly.

 

Get your house in order

An important part of exit planning is ensuring your company’s accounting procedures are up to speed. Owner-managed companies often fall into the trap of the lines between personal and business activities becoming blurred. For example, where company assets, such as cars or boats, being used to entertain family and friends. There are huge tax exposures in this so it’s vital to clean up your act as soon as possible.

Inappropriate use of assets is not the only trap. The greatest risk is an ongoing and undiscovered problem with goods and services taxes, income tax or corporation tax returns that could sting the buyer at a later date, they warn. The tax authorities go back six years, and add interest and penalties where they small and find rats.

Providing assurance to buyers is vital. As well as having your tax affairs in order, contracts with staff, suppliers and customers should be formalised. Having a holistic view of the business is key. Very often owners invest time and money in what they know about and ignore important areas of the business that are vital but outside their area of interest. “This can mean that energy is expended on, for example, marketing and developing products, with not enough attention being paid to the back office function or the IT system,” says Baker Tilly.

While prospective buyers will be looking at your books with forensic interest, they will be equally focused on future prospects. That means it is important to provide robust forecasts which not only present buyers with projections, but also with explanations of the underlying assumptions. These forecasts should be produced on an ongoing basis, with accurate and timely management accounts. Smart buyers judge the long-term prospects not just on the profit projections and monthly sales and cashflow figures, but on other factors. They expect to see a sustainable management strategy. This may require a reorganization of your management team; if the business relies too much on you. Hard as it may seem, it’s important that you are not perceived as irreplaceable by buyers.

So remember that old line that graveyards are full of people who thought they were indispensable and if you are planning to exit gracefully from your own business any time soon, start planning now. Sounds like common sense but you’d be surprised how uncommon that can be.

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