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On Target June - July 2007
Planning to Succeed
Australia's ageing population means that 54% of family business CEOs will retire in the next five years. Rod Willers, Director Strategic Growth Markets, Ernst & Young examines the personal stakes at risk as these businesses transit to new ownership, and the national imperative for Australia's small business owners, of all ages, to start succession planning – now.
When the partners of a small company organised the finance to expand their business, the future looked bright. With both of them in their early fifties, they knew they had a good decade to grow the business, move themselves out of its day-to-day running, and sell it for a small fortune. They had a plan and business was booming. They thought they were on track for a well-earned and extremely comfortable retirement.
But then the unthinkable happened: the senior partner suffered a heart attack and died. It was an appalling tragedy. But it wasn't just a human tragedy; it was also an economic disaster. Left without instructions and wanting a fast resolution, the grieving widow understandably opted for a quick sale. Already highly leveraged, the other partner couldn't raise the cash to buy her out. The resulting fire-sale delivered a fraction of the company's worth. If, as seems likely, the business now collapses, it will leave employees without jobs and every company in the supply chain out of pocket.
This true story is the tip of an advancing iceberg, an iceberg that could have significantly damaging consequences for Australia's future prosperity.
The Australian economy is fuelled by some 1,276,200 private sector business, of which 96.6 per cent are classified as small businesses. In 2006, an RMIT survey put the estimated total wealth of Australia's family businesses at a staggering A$4.3 trillion. It estimated that, in the following ten years, as the baby boomer generation of small business owners approaches retirement, $3.5 trillion of business assets will be at risk unless those owners have adequate succession planning in place.1
The survey also revealed an alarming lack of adequate succession planning. Of the owners surveyed: 65% had yet to identify their successor; and just 25% had a documented succession plan in place. More worryingly, anecdotal evidence suggests that, even when an owner believes their succession plan is adequate, it often falls short of the rigorous process required to manage the risks when a small business' most valuable asset – its owner – retires.
Often, business owners believe they have succession planning covered because they have decided 'who will succeed them'. While this is certainly one element of most succession plans, it is by no means adequate.
MANAGING THE RISKS
Broadly, succession planning is about managing three major areas of risk. Specifically, the risks that the owner will not be able to:
1. leave when they want to;
2. realise the maximum value of their business when they do; or
3. keep the business running without them.
How owners should manage these risks depends entirely on their own objectives. There is no 'one size fits all' succession plan. Some owners are happy to stay involved in their business well into their 70s; others want to be able to sail their yacht to the Caribbean the day they turn 60. Some desperately want their business to remain in the family; others want to reward their loyal staff with equity. Some need to retain ownership; others are happy to hand over the responsibility and walk away free with a bag of money. It doesn't matter what they want; what matters is they have the choice.
But most business owners have little idea how complex it is to structure their business so they have that choice, or how long it will take.
ESTABLISHING A SUITABLE STRUCTURE
Regardless of whether the intention is to divest the business (ownership succession) or to retain ownership and create an income stream through a dividend (management succession), if the owner wants to leave, the company will need to be corporatised. The new management will need appropriate governance systems to keep big decisions out of family politics. The company will need: protected IP; well-documented systems and processes; and formal contracts to lock key staff, customer and supplier relationships into place.
In a management succession, the owner will need time to train and mentor the new CEO. Even if the right person is already within the business, they may only know their part of the business. It can take three to five years to get them across the whole entity. Setting aside this length of time also provides a safety net to make sure the successor is the right choice and that they are happy in the job once they're actually in the hot seat.
In an ownership succession, it will take a similar length of time to prepare the business to stand up to due diligence and to transition goodwill away from the owner. If that doesn't happen, a new buyer may only pay what the business is worth if the owner agrees to stay for at least another three years. This isn't a big deal if you're 45. But at 55 it's irritating; and at 65 it's a catastrophe. Owners should also factor in that, to get the best sale price, they may have to wait out the market. Business sales are like real estate: you don't want to have to sell at the bottom of the market.
Given that planning for both management and ownership succession takes years, when should business owners start? The answer is: now. The scenarios above are based on the assumption that the owner will be able to choose when they want to leave their business. In fact, as the tragedy at the beginning of this article illustrates, life isn't always what we expect it to be, and we need to plan ahead, and even for the worst, to protect the people we care about.
CREATING AN ONGOING LEGACY
Business owners have a responsibility to their families, staff and community to ask the question: What would happen to my business if I weren't here tomorrow? They also need to recognise that succession planning isn't just about retirement or planning for the worst. In fact, it can be empowering because it gives business owners choice. A 35 year-old owner of a successful construction business has a five-year exit strategy; he's going to make his money and have a sea change at 40. Because he has a good succession plan, while he's surfing, his business will still be going, creating employment, supporting other businesses and adding to our national wealth.
As advisers to business, we must encourage every owner to plan for the day they want to, or have to leave their company – not just for their well-being and that of their families, but for the continued health of our economy.
Rod Willers is a Director at Ernst & Young Australia
Email: Grant.Burgess@au.ey.com
GOVERNMENT BACKS PLANNING SEMINARS
In June 2006, Ernst & Young Australia was successful in its application under the Building Entrepreneurship in Small Business program for funds to deliver succession planning knowledge to small business Australia. A national program of seminars to lift awareness of the key issues of business succession planning will launch on 4th July 2007, with an invitation to both business owners and business advisors to register for their nearest event. For intermediate enquiries please contact the Ernst & Young project office on 02 9248 5597 or by email to: tina.gould@au.ey.com
This is an Australian Government funded service under the Building Entrepreneurship in Small Business program.
Executive Spotlight
 Dharma Sutedja, CMA
Finance Director, Abbott Laboratories (Singapore)
Tell us briefly about your overall background and how you got to where you are today.
I have more than 20 years of work experience. I started my career as accountant from 1987 to 1990 and as chief accountant from 1991 to 1992 and served as Financial Controller from 1993 to 1998 in Australian and American multinational companies. I am currently Finance Director with Abbott Laboratories Singapore Pte Ltd, a Fortune 500 Company based in Singapore.
By applying finance best practices, teamwork, integrity, my business acumen, highly interpersonal and leadership skills as well as strategic thinking capabilities, I have achieved my current position.
How important is to have a good relationship with your CEO in your job?
I devote the bulk of my time to relationships with my CEO in running our business and I see myself more as business partner than controller and accountant in my job.
I must know the business and promote value creating strategies and helping my CEO to be highly effective. Working with my CEO, I must set the longer-term course for the business.
What are the key skill sets Finance Directors should look for when hiring a management accountants?
I usually look at their in-depth accounting and finance, high analytical, communication, strategic thinking and people management skills.
What are the characteristics of a good management accountant?
Management accountants look to the future rather than the past. They analyse the performance of a business and advise on how it can improve its value.
They must proactively focus on value creation and shareholders value growth and act as business advisor on how to take their companies to higher level.
They must also be hands-on, team player, results-oriented, possess business acumen and act as business partners with other departments.
Bookshelf
The mention of corporate social responsibility can still provoke discussion on how and why business, shareholders and society interact. Although winning the McKinsey award for best article for 2006 in the Harvard Business Review Michael Porter's and Mark Kramer's article “Strategy and society: The link between competitive advantage and corporate social responsibility” (December 2006 issue) prompted a letter to the editor (and their response) in the May 2007 issue. Porter and Kramer argued that most CSR reports are no more than public relations exercises. More importantly, however, they argue that the ideas of moral obligations, reputation and sustainability highlight a tension between business and society rather than an interdependence. They conclude that firms must analyse linkages between business and society so that decisions can benefit both.
Discussion of CSR often encompasses sustainability and climate change, and their implications for strategy. A review article in the March 2007 issue of HBR by Bronwyn Fryer suggests that Getting Ahead of the Curve: Corporate Strategies That Address Climate Change by Andrew J. Hoffman (University of Michigan, 2006) “warrants a considered look”. Prepared with help from the Pew Center on Global Climate Change, Hoffman surveyed 31 companies to produce a practical report providing 8 steps that can be used to address climate change. The report can be downloaded for free at www.pewclimate.org.
Other articles from recent issues of HBR that I found interesting include “Leading Clever People” by Rob Goffee and Gareth Jones (May 2007) on how to effectively lead creative people (e.g. don't expect them to sit through corporate meetings) and “To Thine Own Staff Be Agreeable” by Gary Davies and Rosa Chun (June 2007) which considers how employee attitudes about a business influence the customers' view of the business (which prompted me to remember the Seers model for understanding performance).
Bill Richardson
What’s On?
June 11 - 19, 2007 Colombo, Sri Lanka
11th CMA Symposium on Advanced Management Accounting and Advanced Strategic Management Accounting conducted by the Institute of Chartered Accountants of Sri Lanka.
July 2-4, 2007, Toronto, Canada
Strategic Cost Management symposium conducted by the Academy of Finance and Management (AFMA Global).
July 7-10, 2007, Toronto, Canada
Strategic Business Analysis symposium conducted by the Academy of Finance and Management (AFMA Global).
July 28, 2007, Manila, Philippines
CMA Management Accounting Summit
September 2-9, 2007, Mumbai, India
CMA Symposium on Advanced Management Accounting and Advanced Strategic Management Accounting conducted by CMA India
November 23-25, 2007, Melbourne, Australia
Advanced Management Accounting Seminar conducted by the Australian Institute of Finance and Management (AIFM)
November 23-25, 2007, Melbourne, Australia
Advanced Management Accounting Seminar conducted by the Australian Institute of Finance and Management (AIFM)
November 29- December 1, 2007, Melbourne, Australia
Advanced Strategic Management Accounting Seminar conducted by the Australian Institute of Finance and Management (AIFM)
December 6 - 16 2007, Shanghai, China
First CMA Program, China
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