IMPLEMENTING an effective succession plan is a perennial issue facing business owners.
There are about 11,000 companies in Australia turning over more than $10 million a year. Of these, about two-thirds are owned by baby boomers and many have no succession plan.
As they approach retirement, many business owners face a difficult decision. How do they monetise their investment in a business they have spent a lifetime building? To do this while balancing the best interests of family and loyal staff can present quite a problem.
Transfer to family
While this is often a dream for many family business owners, it can be difficult to implement. Family members are frequently not in a position to pay you what the business is worth. Children may not be ready or willing to run the business. Family Business Australia figures show that only one-third of family businesses survive to the second generation, and 13 per cent successfully transfer to a third generation.
Sell the business to employees
This is also often problematic, with neither a natural leader or the financial wherewithal among employees to buy the business. The use of employee share ownership schemes can provide a mechanism for transferring ownership but this can take up to a decade to complete.
Sell the business to another company
Of all the options, this one can be the most confronting. Frequently, the list of potentially interested buyers will be the same list of competitors that you've spent years challenging in the market.
Public listing of the company
A public float, or Initial Public Offering (IPO), will not necessarily provide an exit. The new investors may expect the management team to stay engaged for a period and to take their rewards out of the business slowly. In addition, at present, the IPO market is closed to all but the most attractive and large companies.
Private equity as an alternative
Private equity is a term for pools of capital, managed by professional fund management teams, specifically to invest in unlisted companies. Investment criteria differ across private equity funds but the main focus is on holding equity investments with a view to adding value over a three to five-year period.
Private equity funds have readily available capital and are buyers of businesses throughout the business cycle. They may also bring more flexibility in the array of solutions available. For example, private equity firms can invest in minority shareholdings through to 100 per cent purchase of a business.
Private equity can also bring a deep network of executive talent and experience. The owner may take some money off the table while retaining an ongoing stake and an active involvement in the business.
Andrew Petering is managing director at Wolseley Private Equity and Katherine Woodthorpe is CEO of AVCAL.