Passing the Baton

"Planning for the Transfer of Family Business Ownership"

Many New Zealand family business owners are running out of time to ‘pass the baton of business ownership’
ensuring that value is maximised and family relationships are preserved.

To ‘Pass the Baton’

‘Passing the Baton’ is an ancient Greek tradition when a fire torch was lit and competitors would run a distance and pass the lit torch to the next competitor who would carry on the race.

In 1936, Dr Carl Diem created the first competitive relay, when he lit a torch at Olympia which was then raced to Berlin for the 1936 Olympic Games.  Covering 3,075 km, taking 12 days and travelling through the seven participating countries, the relay became an integral part of the opening ceremony for the 1936 Berlin Olympics.

Relays are now an integral part of any athletic event with strict rules determining when the runners will pass the baton within the defined relay ‘exchange zone’.  Runners will spend much time practicing their baton passes, knowing exactly from whom, and to who the baton will be passed. 

The Relay of Business Ownership

New Zealand has a high incidence of family business ownership with many businesses owned by ‘baby boomers’ who have much of their wealth invested in these businesses. 

As these ‘baby boomer business owners’ approach their mid-60’s and the ‘exchange zone’ rapidly comes into sight, many owners have little idea when, to whom and how they will pass the baton of business ownership. 

Pick a Coach

While general athletic coaches have knowledge, competitive relay runners seek coaches with specific relay experience to assist them with their training.

It is similarly important for business owners to seek advice from experts, not just with a broad understanding of the principles of business succession, but with a depth of relevant experience successfully working with families to prepare for and manage the family business succession process.  The family business dynamic is unique and managing the individual requirements of all family members, including both those working in the business and those external to the business can be complex.

Be Prepared

Like athletes prepare for a relay race, it is important that business owners also prepare for the transfer of their business to a new owner. 

Financial systems must be independent from the owners so that the financial accounts only reflect the revenues and expenses of the business and are not intertwined with personal expenditure.

Employment and remuneration terms for key personnel, required for a successful transition of the business, should be modified well in advance before the process commences, so that they do not hold the process to ransom.

Some businesses have exclusive supplier relationships while others rely upon services provided by external firms. 

Supply contracts and terms of trade must provide for  the transfer of both exclusive supply arrangements and service contracts, at the option of the new business owner, without costly break costs to exiting owners if these services not needed going forward.

Select a Likely Owner and Develop a Plan

The current owners are the best informed to identify who is the likely new owner of their business, however this can often require a workshop style process to brainstorm and select the prospective new owners.

Once the prospective owners have been identified, the preparation required to effect a sale process or ownership transfer can be determined.  Different types of buyers will require different types of preparation. 

If a business is to be retained by family members and transitioned through a ‘buy out’, the exiting family members may opt to recapitalise the business with debt funding, reducing the level of equity necessary for the acquiring family members to purchase the business, while at the same time providing exiting owners with some cash flow for retirement. 

Maintaining harmony between family members is often cited as the ‘number one’ objective for family business owners.  Families may need to implement ‘sibling parity strategies’, ensuring family members who may not be involved in the transition of the business feel they have been treated in an equal way to family members remaining in the business. 

A business sold to a ‘private equity’ investor, may require the exiting owner and senior management to remain with the business following the transaction for a period of time.  Senior management must be supportive of the sale process and often need to provide a commitment to support a new owner.  Exiting owners may opt to financially reward senior management with ‘one off bonuses’ to reflect their role in a successful ownership transition.

If a business is sold to a competitor, it is less likely the retention of the senior management team will be critical, with the purchaser often looking to integrate parts of the business as soon as possible to start extracting synergies and cost savings. 

It can be beneficial to have flexible employment agreements with limited redundancy provisions as new business owners may not need all existing staff.  Terminating employees with redundancy provisions at the time of a business sale can be costly and reduce net sale proceeds due to the owners.  Owners, with redundancy provisions in contracts, may consider selectively negotiating new contracts for one off lesser payments, to reduce a future potential liability at the time of a business sale.

Target a Timeframe

Competitive athletes will have a time that they would like to achieve.

Business owners must also adopt a timeframe that they would like to achieve and that they will work to.  

A successful transition of business ownership can take many months, or even a year or two, from the time that the decision is made to start the process.

Business owners who do not establish a plan with achievable milestones, will find that the end date is a moving target.

Many industries have cycles.  While it is relatively straight forward after planning to delay a decision to commence a business succession process, it is higher risk to accelerate a process without adequate planning to take advantage of timely business cycles.

Select the Relay Team

Competitive relay runners select team members who will help them win.

Business owners must also select a team of trusted advisors to help them successfully pass the baton of business ownership.  In most cases, specialists and existing advisers play an integral role in the development of a business succession strategy.

Advisory Boards, consisting of industry experts and others who have successfully navigated the business succession process can add significant value.

Life After Business Ownership

For many, simply the thought of passing the baton of business ownership can create anxiety.

Some transactions may see existing business owners passing the baton immediately and exit the business.  Other transactions may see exiting owners required to remain in the business for a period of time, without the level of control that they previously had. 

This can be difficult as new owners may wish to take the business in a new direction while the exiting owners are ‘still in the building’.  This can be compounded when the new owners are family members wishing to implement radical change.

During the succession planning process, business owners need to reflect upon their reasons for exiting, consider a wide range of eventual outcomes and develop a plan to manage these when they eventually occur.  Planning for the change will help minimise the impact when it occurs.

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Families and Business Series, by
Ocean Partners