KEY POINTS:
As the babyboomer owners of many of our larger private companies contemplate retirement and succession, they may have more options than they realise.
That at least is the message from ANZ National Bank which has done a survey it intends repeating annually of what bosses of mid-sized firms are thinking.
These firms generally fly under the media's radar. But they are an important slice of the country's business demographics.
It is estimated about 3500 companies have a turnover of between $10 million and $150 million a year and are a major source of employment and employment growth.
The 330 respondent to ANZ's survey employ about 30,000 and have revenues of $11 billion a year.
So it would be a worry to the economy if this segment of the business community was slowing down and becoming more risk-averse just because their bosses are getting on in years.
Unfortunately, the survey suggests that is a significant risk.
Nearly half of the respondents - 46 per cent - said they expected to retire or move on within five years.
In two-thirds of the firms, the main shareholder is over 50 and, in 28 per cent, over 60.
But while succession is cited as an issue by nearly half of the respondents only one in 10 has a formal succession plan.
Releasing time - either to spend with family or to try something different - is a bigger motivator (40 per cent) than releasing capital (21 per cent).
But will such motivations prevail over a reluctance to let go the reins, especially if it is a firm the main shareholder founded?
"This natural reluctance to dilute an owner's shareholding or to share management responsibilities may be causing damage to the very asset that owners seek to protect," ANZ says.
The result could be businesses failing to pursue opportunities or to invest in maintaining competitiveness.
And it could result in a frustrated next generation of middle managers.
There's the rub. Some 58 per cent of respondents regarded present managers as capable of taking over the business and interested in doing so.
But only 15 per cent identified management employees as their preferred successors.
Is it a case of blood being thicker than water, then?
Not really. While 45 per cent said family members worked in the business in some capacity only 22 per cent regarded passing it on to family as their preferred form of succession.
That is despite 31 per cent believing family would be interested in taking over and 37 per cent regarding family as capable of taking over.
Instead, the commonest preferred succession mechanism is a trade sale; that is, sale to a buyer in the same industry.
Why this gap between the perceived desire, and managerial capacity, of existing managers or family members to take over these companies, and their current owners' preference to sell to them?
ANZ suspects it reflects a belief on the incumbent bosses' part that those potential buyers would not be able to come up with the money they want or need.
That belief may well be mistaken. The bank makes the point that there are all sorts of ways of structuring the finance for such deals.
They include the use of private equity and quasi-equity like non-voting preference shares as well as good old-fashioned debt.
The possible permutations and combinations, while not endless, are likely to be more varied than people think.
There will always be a correlation, of course, between the amount of risk the bank or other source of external finance is taking on and the return they will seek.
ANZ says its experience of many transactions suggest that not only can managers afford to buy businesses - with the assistance of their bankers or private equity backers - but also that the price they are prepared to pay commonly matches, and sometimes exceeds, what other buyers are prepared to pay.
It is also a bit peculiar, when one in five respondents cite agreeing a value of the business a significant barrier to succession, that more than half of them say they do not have their financial statements audited.
Succession does not necessarily mean selling up entirely. You can surrender the helm but stay involved and stay invested - so long as you are not a control freak.
A smooth inter-generational transition is not just about changing management and arranging finance, however.
It also requires good governance. And here the survey makes disturbing reading.
Remarkably given their size nearly one in three of these firms have no board of directors at all and only just over half have one or more independent (non-executive) directors. The proportion might be even lower if trusted accountants or family members were excluded.
Independent directors with the right experience and expertise can add real value, not least when it comes to identifying and appraising strategic opportunities.
An air of caution prevails when it comes to respondents' views on expansion - a reliance on organic growth rather than acquisition.
Only 17 per cent envisaged growing by acquisition in the short term, rising to 32 per cent on a five-year view.
That is despite only 36 per cent seeing capital, or the lack of it, as a constraint to growth.
On the face of it that conflicts with nearly half of the respondents saying they would expand or acquire another business if finance were more readily available.
The disconnect between those two answers suggests expansion through acquisition is not something they think about much nor therefore how it might be financed.
Which leads us to the most troubling questions raised - but not answered - by the ANZ survey.
Is the growth potential of these firms being held back because their controlling shareholders have an aversion to risk or because they are reaching a time of life when they are looking to take things easy?
Much depends on the answer to those questions.
New Zealand's largest businesses are with few exceptions either outposts of multinationals, farmer-owned co-operatives or state-owned enterprises.
All three models can pose limits to their adventurousness and growth.
As for listed companies, the stock exchange's puny market capitalisation, relative to GDP, attests to how little of the country's commercial life it intercepts these days.
It is striking that the survey, most of whose respondents have turnovers over $20 million a year, found only 6 per cent contemplating a public float as an exit strategy or source of funding for business growth.
So the top end of the SME sector - these tightly held private companies - are key to the economy's vitality and growth rate.
Let's hope they don't sag in line with their owners' chins.
