Get the answers: Small firms passing baton to next generation

Stephen Layburn corporate and commercial partner at Hesketh Henry. Photo / Supplied

The greying of SME owners has knock-on impacts, writes Stephen Layburn, corporate and commercial partner at Hesketh Henry.

Much has been written about the need for owners of New Zealand businesses to undertake succession planning. Small-to-medium enterprises (SMEs) make a very significant contribution to GDP, employment and other measures of economic activity. However, the greying of SME owners and its knock-on impact for questions such as business valuations, is an issue for many.

What do family businesses do where the next generation is not interested in taking over?

The options available to the existing owners will hinge on passing the baton to new owners. The range of options to be explored to achieve this outcome often starts close to home with an examination of whether anyone currently involved in the business is interested in acquiring it.

There may be scope for buyers involved in the same industry or sector - including competitors - looking to grow by acquiring the business and build market share rather than organic growth.

Also, while constraints on funding continue to be a factor affecting demand and value expectations, there may be a need to explore ways of bridging the gap between what the business may be worth to the seller and what the buyer can fund.

At what point should the owners think about succession planning?

There are often a variety of triggers for the decision to pass the baton. In a family-owned and operated SME, these might be matters affecting the owner's personal needs and those of their wider family and possibly their business aspirations.

Other catalysts for change may be events affecting the business itself such as the pending expiry of a lease or an opportunity that is beyond the resources or energy of the current owners. Plan ahead. Even the very best advice about the merits of selling a business ahead of the curve in advance of a much-anticipated up-tick in business activity, hinges on planning and preparation. An important element of that planning process is the need to get sound advice on the value of the business and the best ways to market it. Also, there is the need to be ready for a detailed pre-purchase inspection (due diligence) by a would-be buyer and their advisers.

Making sure that business relationships are in place with the owners is key, and ensuring that the financial and other records give a buyer the necessary confidence that the business provides a platform for them to maintain and grow the levels of performance that the current owners have achieved.

Will the business lose value as the loyalty of customers leaves when the family members do?

Some business owners take supplier/customer relationships very personally. While a number of great examples endure of businesses that have continued through generations of the same family, often the issue for customers and suppliers is still the impact on service levels that affect their business.

Whether those concerns are issues about personalities and values that may have characterised the relationship is a matter that may require investigation and careful handling.

Maintaining the business and its value while the owners have one eye on the future is no easy task. For many, the new normal seems to involve working a lot harder to earn similar returns as a result of changing technologies, other competitive threats as well as market conditions.

Another continuity issue not to be lost sight of when planning for succession, is the need to manage the risk of loss of talent in the form of key employees who are uncertain about their futures or see better opportunities elsewhere.