Small Business: Succession planning - ageing SME owners

Shamubeel Eaqub Principal Economist for NZIER. Photo / Marty Melville

Shamubeel Eaqub, NZIER principal economist recently started a discussion on ageing and SMEs on the New Zealand SME Business Network's LinkedIn group. He talks to Gill South.

The NZ Institute Economic Research recently wrote about the business implications of ageing. We have been blown away by the response and engagement on this from our members and clients.

The question we are asking is, are SMEs prepared for succession, the potential impact on asset prices, the changing labour mix and changing consumer preferences? I am surprised this conversation is taking so long to take off given the age of many SME owners I meet. We keep hearing: "I will sell the business for retirement," but there is no formal succession plan or exit strategy.

Long term planning

There appears to be a general lack of long term planning by SMEs. Traditionally there has been a lot of discussion in New Zealand on the future of farms. Quite often now the children no longer wanting to take them over wanting to pursue their own careers. This is happening in market gardening too.

What does succession planning mean?

Succession planning can mean selling the business, turning it over to corporate or partial ownership or giving it to the children. It's a fact that people are living a lot longer but they are not going to live forever. You have to plan for the future.

Succession is not about one particular route or option. It comes down to planning for the future whatever that might be. But many people aren't thinking about it and that's a mistake.

SMEs have to prepare their businesses for succession. This planning process will mean having a "sale ready" business, for instance having good documentation on business processes, making sure the books are all in order.

All of these things are very very important. It might lead to other improvements in your business, it's about becoming more strategic. For instance it may be you find you should be outsourcing a division or starting a new business line.

Perhaps SMEs should act more like private equity firms. they figure out at the beginning, how and when they are going to exit the business.

Business owners are not ready for sale or other options

It was clear from my discussion with New Zealand SME Business Network members that when many SMEs are not ready for sale. Quite often the SMEs don't have the expertise to do these things, so they need to ask for help. It is important that they do this right.

The babyboomers (and their imminent retirement) are still a big force in the way business is done. It's going to be a sea change when they start to move out of the business community. The next generation is going to be different.

Succession in family businesses

Sometimes in family businesses, when the children succeed their fathers or mothers, they might take the business in a different direction, or set up new divisions. Other times it might be a mature, sustainable business that they can just take over and continue running.

Mature, well run businesses are the life blood to the economy's stability. While new businesses create new jobs, the existing ones maintain them, people can overestimate the importance of start-ups. Let's see some more well run established businesses continue for the benefit of the country.