Succession planning – are you up to the challenges?

By Peter Cox February 07, 2017 Industry news

Looking out there, as the moon follows the sun, along the timeline of every privately owned store there will come a time when the business needs to proceed “under new management”.

Store succession would rate as one of the top five most important decisions made in business.

There are two ways to approach this conundrum: in a rational, professional way; or in a panicky, disorderly way.

 

CAN YOU BE TOO SUCCESSFUL?

It is interesting that the more successful the store is in sales, margin, cash cycles and net profit – four of the key indicators – the more difficult it can be to sell the business.

Why? Because the purchase price can be too high…

In relation to family-owned stores, it is the usual motivation of the family to keep the business in the family. But there are two problems with this.

Firstly family members may not want to. Why? Over the years gripes voiced by the owners may have led to a negative view setting in among the kids – and why would they want to go through the same thing themselves?

Secondly, if the parents scrimped and saved to send their children to University, the kids’ career prospects or aspirations simply may not be compatible with running a store!

To counter this you could encourage the kids to spend some time working for someone else, during which time they could pick up new ideas.

Sometimes, however, even if one of the children does wish to take over, the owner may not be able to let go or will not let new things be introduced into the business

However, if you have made the decision to sell, don’t just sit there hoping that a buyer will walk through the door – although it has been known to very occasionally occur.

So – if the kids are not interested, there are several options.

 

DO YOU KNOW WHAT IT’S WORTH?

Because many retailers substantially underestimate their profit numbers for tax purposes, the records may not actually reflect the true financial performance of the store.

Therefore use a Chartered Accountant to put together a “Special Purpose Financial Report”.

Next step: set a timetable!

If the business isn’t going to stay in the family, another option is to offer it to a trusted employee or employees.

This sort of succession plan is becoming more common and employees may well sacrifice salary to pay in advance against a set value. Of course the value needs to be of a fair and calculable nature just not a number picked out of the air…

It’s worth injecting into all this that many vendors may not sell the actual building with the business, if they own it.

First, adding bricks & mortar into the equation may make the cost of the deal prohibitive to the purchasers (particularly if they are vendor-financed) and second because the building often serves as the vendor’s superannuation policy!

The final step in the process once the sale price has been agreed to is for the seller to offer to a new purchaser their services in a transition period.

They may need to show how the computer system works, introduce the new owner to the important customers and cover off the important day by day transactions.

As you can see, there is more to succession planning than just putting an advertisement in the paper saying: “Business for sale – multi-million dollar profits – no financial information available!”

 


Peter Cox is a senior consultant for Macquarie Advisory Partnership based in Sydney. He has over a decade of experience training and consulting in the retail hardware industry. He conducts key-note addresses, and management and sales workshops, which are aimed at improving profitability and liquidity in one of Australasia’s most competitive retail environments. Phone 0061 438 712 200 or visit www.petermcox.com.au

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