The management and control of every business will one day inevitably be transferred.
Whether a business owner plans to sell immediately or relinquish responsibilities over time, there are many possibilities to consider.
Owners can exercise options through the assistance of a business broker or dealer group, sell directly to a complementary business or potentially someone from within the company.
To maximise the value of the business and ensure the transition is smooth for all parties involved, a succession plan is critical.
"Succession planning is about assessing the weaknesses in your business and putting measures in place to maximise efficiencies and ensure the business will run as usual, with or without the business owner," independent consultancy Business Health partner Terry Bell says.
There are a multitude of benefits that come with being prepared, Bell says.
An effective succession plan means a business can reduce risk, sustain leadership, preserve knowledge, maintain staff morale and ensure an owner's legacy lives on, he says.
The average age of Australian practice owners is 57, according to data gathered by Business Health, and with more businesses now on the market, competition has reached new heights, with succession planning fast becoming the new industry buzz word.
"Our statistics reveal a regularly reviewed succession plan ensures there's minimal disruption to operations when an owner leaves," Bell says.
"Figures also show that effective planning can significantly increase the value of the business."
Principals with effective succession plans in place earn a profit almost four times that of those without a proper plan in place, according to Business Health.
"Businesses that have done nothing in terms of devising a succession plan report an average profit per principal of $123,367, compared to those businesses that have put a succession plan in place, which report an average profit per principal of $447,197," Bell says.
Despite the clear monetary benefits, Business Health estimates less than one in four businesses are really prepared for succession.
"It's important businesses consider whether they want to sell all or part of the business and, if they have a nominated successor, how the sale will be funded and what lending options are available," Bell says.
"Internal successors may be able to acquire equity or be given greater salary and bonus options as a way to transition over a longer period of time."
Almost 70 per cent of business owners who have a succession plan in place have identified and arranged a formal agreement with their successor, and 71 per cent have a structured funding plan arranged, something that is great to see, he says.
For businesses thinking about selling to an external buyer, Centurion Market Makers, a division of Centurion Partners Group, is one of many licensed business brokers operating in the Australian market that can manage the transaction between businesses wanting to buy and those wanting to sell.
"Our job is to facilitate the role between the buyer and seller through negotiation, due diligence, contracts and timely settlement, and we offer taxation and legal advice too," Centurion Partners director Wayne Marsh says.
"We work with the seller to help them prepare and define what they want from a financial perspective, a business outcome perspective and finally a personal perspective."
Owners need to consider whether they want to be paid up front or over a longer period of time, Marsh says.
"Succession planning requires hard work, but whether you plan for someone to buy you out from within or outside the business, you need to groom the business if you want to maximise its value," he says.
With many owners currently reaching retirement age, a larger number of businesses are being put on the market, he says.
"If you want to remain competitive in today's market, you must plan ahead and assess all areas of your business and its operations," he says.
Some of the key things which determine the value of a business include its size, the net worth of its clients, the status of business relationships, the company's prospects for growth and the expenses versus profitability, he says.
"While many owners consider the best price the key driver for a successful sale, it's not the be all and end all," he says.
More than 78 per cent of owners have identified other factors, such as a good cultural fit, just as, or even more, important, according to a recent Centurion Partners survey.
"Sellers want to ensure the buyer will continue to deliver a similar standard of advice and service to clients," Marsh says.
"An incorrect cultural fit can often be the cause behind many failed business sales."
Macquarie Bank's business investment services (MBIS) division offers, among other things, a broking service as well as succession planning advice, MBIS associate director John Collins says.
Being part of a bank means MBIS understands the funding arrangements available, plus it enables the division access to a broad range of industry expertise and know-how.
Unlike pure industry brokers, MBIS does not advertise.
"We're engaged by the vendors and as part of the process will sit down with them so that we understand what the personal, financial and business objectives are," Collins says.
MBIS will then try to locate potential purchasers within its network that suit the vendor's needs.
"With more principals looking to retire and more businesses being put on the market, a greater number of vendors are seeing the value in succession planning and seeking professional advice," Collins says.
If it's an internal successor who has been selected, owners need to assess how that person will fund the business from an early stage.
The non-dollar objectives should not be overlooked either.
"The cultural fit and the outcomes vendors want to achieve for staff, family and clients are of great importance and many vendors would trade the final dollar amount to see that the company's legacy lives on for these stakeholders," Collins says.
Principals need to implement a plan and pick the right time to involve staff.
"Sometimes the presumed successor might have other plans, while another may presume they will be the chosen one, so it's important to have these conversations early on," Collins says.
Another group that puts a lot of emphasis into the ways planning can impact stakeholders is financial planning firm ipac.
"We're one of the largest acquirers of financial planning firms and have done more than 30 acquisitions in the last five years," ipac regional manager Greg Quinn says.
"Principals can come to us direct or otherwise might come through a business broker."
Ipac partners with like-minded advisers who have a need to exit their business now or in the future and offers succession planning workshops too, Quinn says.
"Ipac might buy a firm and merge clients into its business over a six to 12-month period or it could be a longer process, particularly if it's a case of there being multiple shareholders who wish to exit at different points in time," he says.
Clients need to trust the new owner and be confident service will remain consistent.
"At the end of the day we're the buyer, so it's crucial to our business that we help the principal plan and that the transition is as smooth as possible for clients," Quinn says.
"Acquisitions are part of ipac's growth strategy, so it's vital we ensure quality service no matter what stage of planning a practice is at."
MLC also commits a lot of resources to helping principals devise their succession plans.
"We offer advice to both MLC and non-MLC practices," MLC adviser business centre national manager Bob Neill says.
MLC offers a buyer-of-last-resort facility, which means it will buy a practice if there is no buyer or nominated successor.
"The majority of dealer groups would prefer people to work out their own succession plans but dealer groups can be a buyer of last resort for owners who want, or need, to exit quickly," Neill says.
"Rather than selling to a dealer group, however, if a business does have a nominated successor, owners will have a lot more control over the transaction and the business's future."
For those principals who do have a succession plan in place, one of the big things on MLC's agenda is ensuring principals devise a proper development plan for their future successor so they have the right skill set to effectively manage the business.
"It's very important that principals realise that even the most fantastic employee doesn't necessarily make for a good business owner," Neill says.
"If you don't ensure the person is the right one for the job it can be messy and stressful, and financially very damaging to the company.
"The cost of getting it wrong can be emotionally draining on all stakeholders involved."
To avoid this, Neill says it's important owners establish a criteria as to what qualities and characteristics a successor needs to lead the company into the future.
"Owners need to put a development plan in place for their successor to better prepare them for when they finally take over," he says.
"When the right successor has been chosen they need to be made part of the wider planning process and arrange how they will acquire equity in the business."
By creating a development plan for the company's successor, that person then knows what is expected of them and what they need to do, he says.
Staff and shareholders will gain confidence in the business's direction, he says.
The certainty around how a business will operate often plays a big part in determining the value of a business.
"The greater the risk a business has in meeting its objectives, the less valuable the business will be," Neill says.
AMP, similarly to MLC, offers succession planning advice and a buyer-of-last-resort option.
"We see a lot of family succession within our practices, where younger family members . may take a shareholding in a practice, progressively growing their stake as they transition . into a practice principal," AMP financial planning managing director Michael Guggenheimer says.
"Succession planning enhances our value proposition and supports planner recruitment and retention, providing opportunities for planners joining an AMP Financial Planning practice, or currently employed in a practice, to become business owners.
"It's one of the factors we may consider in career development discussions with new planners joining . or planners already in one of our practices."
A well thought out plan does require work, but the positives far outweigh the negatives, he says.
Implementing a succession plan not only maximises the value of a business and improves its financial performance, it helps retain staff and ensures customers' ongoing advice needs are met during the transition from one practice owner to the next.
