For proud, hard-working business owners, selling a business or handing it to successors can seem like a distant prospect. But that time eventually comes, bringing difficult decisions and a sudden change to one’s lifestyle and goals.
It is sure to be an exhausting and emotional journey, but those who are prepared and know what to expect stand a much better chance of being satisfied with the outcome.
ANZ Private Advisory has extensive experience and know-how in helping business owners transition into the next phase of their lives. Here we offer seven suggestions for business owners to help make the journey easier.
1. You are more than your business
Entrepreneurs invest more than time and money into their businesses. Their business carries their hopes for the future, and often their passion for a particular field of interest. It can comprise their social network, involve their family members and become a key part of their identity.
This is natural, but it can become unhealthy when the business owner is unable to imagine a life without the business – a phenomenon known as role-identity fusion.
Experts say having a long-running stake in interests and communities outside the business can help the business owner find new motivational drivers when the time comes to start delegating responsibility and stepping back.
Building business systems that can function without the owner can also be a gradual process of letting go, and help them move on from their business with real purpose.
2. Don’t lock yourself into ill-considered investments
Business owners can be prone to rash investment decisions when they receive a cash windfall from a successful exit.
“They’ve been very skilled and equipped at running that business, but it’s very different to running passive wealth, understanding investment markets and what the risks are out there,” says Luke McCann, national director at ANZ Private Advisory.
After exiting a business, consider taking time to decompress before facing the challenge of personal planning for the next stage of your life. Good advisers can help you earn as much as possible on your cash in the meantime.
That said, some aspects of financial planning need to be started early. Building up a self-managed superannuation fund is important for tax efficiency when the business is sold or passed on, and if the owner has an interest in philanthropy, planning ahead ensures corresponding tax benefits are fully received.
3. Think seriously about hidden risks
It would be inconceivable for owners of expensive cars, artworks, boats or houses to leave these items uninsured. Yet so often business owners turn a blind eye to risks that could impact or overturn their plans for the future.
De-risking a business is crucial to locking in its value as a saleable asset. Is the business insured or properly insured? Could litigation, a cyber attack or an unintended regulatory breach erode its value? Is the business reliant on undocumented knowledge, processes or skills that are understood by a few key employees?
Conducting an internal due-diligence process and getting the business valued are foundational to any future plans.
4. Get serious about family succession
Succession planning can seem unnecessary when everything is running smoothly, until suddenly it is forced upon the family due to death or illness of an ageing owner who refuses to let go.
Family members need time to be trained into their roles as employees, board members or shareholders who stand behind management through challenging times. Building a sound family governance structure – with policies for big decisions, and hiring or promotion within the family – can keep stakeholders focused on what is best for the business and prevent relationships descending into acrimony.
Conversations about stakes, roles and responsibilities are best started early. “What I say is, it’s like trying yoga for the first time,” says Robert Powell, partner in private advisory at Grant Thornton and a Family Business Australia adviser. “If it doesn’t make you uncomfortable you’re probably doing it wrong.”
5. Plan for the worst
A mix of apathy and squeamishness towards talking about death has made it a great liability for the majority of Australian businesses. Ten million adult Australians – more than half – don’t have a will, according to comparison site finder.com.au. For business owners in particular, a will is not enough.
Separate arrangements should be in place for the passage of ‘non-estate assets’ such as jointly held property, superannuation, life insurance or assets in a company or family trust. A buy-sell or shareholders’ agreement should be drawn up in addition to the will to govern what happens in the event of incapacity, death or if a business owner wants out.
Estate planning should also assign an Enduring Power of Attorney, an Enduring Guardian and put in place an Advanced Care Directive to guide decision making if the business owner becomes unable to make them himself.
6. Go into the process with good advisers
Selling a business can be a drawn out and overwhelming process, and it is easy for business owners to feel steamrolled when the suits show up. Prospective buyers or investors will bring their own advisers, trawl through the books and ask hard questions.
Early-stage advisers connected to the owner and business several years before sale can help the owner clarify what they want out of a business exit or succession and feel more empowered through the process, ending up more satisfied with the outcome.
“If they don’t have an adviser that’s walked them through the exploratory phase before they get to that strategic part where all these advisers are in their business, they really struggle with the exit,” says Allie Taylor, a business psychologist and senior partner with US-based consultancy Orange Kiwi.
A good adviser will help the business owner feel like the captain of their team, Taylor says. “We have to help them own the plan instead of any adviser owning the plan,” she says.
7. Expect your transition plan to change
Goals and wishes often change when business owners step out of their long-held routines and take a new direction, and an overly prescriptive financial plan might end up getting in the way.
When drawing up financial road maps for transitioning out of a business, ANZ Private banker Sandy Basten says he bluntly asks clients if they are going to have a mid-life crisis and buy a massive boat.
The reasoning behind this facetious question is simple: it is common for clients who have recently had a cash windfall to lock up their funds to maximise returns only to later decide that after decades of hard work it makes sense they should spend some on their dreams.
“Liquidity is often just not considered [in post-business financial planning],” Basten says. “We don’t want to see clients liquidating portfolios to a tax disadvantage, we want that built in upfront so a change in circumstances can be factored in.”
Transition plans should also ensure there is enough regular income to avoid cash flow problems, he says.