Your future begins today. Are you ready?

Your future begins today. Are you ready? Succession planning. Readying your business for tomorrow. www.succeed.net.nz 56629 9694 0911 Succession Planning Handbook v3.indd 1 20/09/11 3:38 PM

Contents Section 1 What is a succession plan? 4 Section 2 How do I start my succession plan? 6 Section 3 Seeking professional help 7 Section 4 Your plan to succeed a four step guide 8 Section 5 The succession planning checklist 9 Section 6 Conclusion and notes 15 2 Your future begins today. Are you ready?

Are you ready to take a step up? If you don t have a plan in place you might not be able to Running a successful business can be a rewarding experience both financially and emotionally. But what would happen to your business if you or a close family member fell seriously ill? Or what if you just wanted to take life a bit easier? Moving on or stepping away from your business is something that we all should consider. Are you hoping the sale of your business will provide the means to move on to the next step in your life? Having a succession plan is simply good business practice. It can: Create options and choice. Improve profitability and the sale price. Enable you to exit on your own terms and not someone else s. Ensure that your business stands out amongst others. Help you analyse strengths, weaknesses and threats. Help you plan for unexpected events, (i.e. sickness or death). Make your business deal ready. Getting advice from experts should be a key part of your business so that you create options and maximise your personal profits. ASB and accountants Hayes Knight have recognised the need for strong succession planning advice and support in the New Zealand market. In 2005, the firms jointly launched Succeed, a magazine and website - www.succeed.net - that aims to inform and educate business owners around the country about the need to have a clearly defined succession strategy. We continue to encourage even more business owners to take the right steps towards planning for a successful future. We hope you enjoy using this workbook to plan the next stage in your business life. Succession planning. Readying your business for tomorrow. 3

Section 1 What is a succession plan? Succession planning is making your business ready for the transfer of control and ownership to others. Whether you decide to hand your business over to a family member or senior level management, to sell all or part of your business, or to bring in new investors and managers, you need to have a plan in place to ensure the business continues to operate as successfully as it was under your full control. Like any good plan, succession is a step-by-step process which can take several years to complete. So the best time to think about it is now. Why do I need a succession plan? It s easy to see why planning for the longer-term can fall to the bottom of the pile. But having a plan in place could mean the difference between selling your business when you want to, for the price you want, or just taking whatever you can get. New Zealand data researched by ASB, has shown an increasing trend in the number of small and medium sized businesses that will be put on the market for sale over the next five years. Approximately 40% of business owners expect to sell their business within five years. This could mean up to 120,000 enterprises up for sale in the short-term future. If you conservatively assume that the average price paid for a business is $150,000, more than 120,000 sales would equate to a cool $18bn in the next five years - an amount, which is unlikely to see enough available buyers. The research also revealed only 21% of business owners are completely prepared in the event that they need to exit their business in the short term. This means 79% may not get the result they wish for. What are you doing to make your business stand out from the crowd? 4 Your future begins today. Are you ready?

Here are some questions to consider. Take five minutes to write down your answers. What would happen if your personal circumstances changed and you wanted to exit your business? What would happen to your business if you passed away suddenly? Do you have a family member capable of taking over your business and would they actually want to run it? Have you prepared them for it? Who in your management team could buy you out? Would you consider outside investment to enable you to take a step back from the business to free up some of your time and capital? If you were buying your business would you pay the price you expect to achieve if you sold the business now? Succession planning. Readying your business for tomorrow. 5

Section 2 How do I start my succession plan? Research shows that for many people, planning for succession is seen as a technically daunting and often emotionally difficult process. It needn t be. Collectively, ASB and Hayes Knight have been involved in hundreds of business sales, management buyouts, initial public offerings and other forms of succession. Our experience shows that all good succession plans share three essential actions: Start now. The longer you have to plan and make changes the better shape your business will be in when you come to make the transition. Think of it as a journey. Thinking of succession as simply a sale misses the point. The sale (if indeed sale is the right option) is just one step in the journey. Succession planning may well involve bringing capital into the business to achieve your business plan and better position the business for its future. Involve your advisors. You don t need to do this alone. Get help from professionals, such as accountants and lawyers and your bank. But also talk to your trusted friends and colleagues. It s amazing how many people have gone through a similar process. Q How does your business compare strategically with other businesses? What are your competitors doing in respect of their operations and their own succession plans? How is your industry placed for the next 10 years? What are the threats and weaknesses of your business? Are employees difficult to find, and what would be the major deterrent for someone investing in your business today? 6 Your future begins today. Are you ready?

Section 3 Seeking professional help Professional advisors will greatly assist you to develop your succession plan. Here s what you should ask them to help with. Your accountant can help you establish an initial plan by giving you an idea of how much your business is currently worth, forecasting future returns and identifying any potential changes you could make to increase its value. Your lawyer can ensure that you have the right contracts signed up with trading partners, address any lease or employment issues which may put off buyers and ensure your succession is structured to help avoid tax issues. Both professionals can also help you ensure your business is meeting current compliance requirements. It is also important to ensure you have a good relationship with your banker. Your bank can help you to protect your current business assets should something go wrong, fund further growth to make your business more attractive to buyers or investors, streamline your banking systems, and give advice on where to invest the proceeds of your business s sale to help you on the next step, whether you are considering investment in another business or planning for and managing your retirement. The best succession plans begin with input and communication with all your advisors - and even better, ensuring that they talk to each other! Having ASB and Hayes Knight on your team will mean you have experienced professionals supporting you through every step of the process to ensure your succession plan meets your needs and helps you get the most out of passing the business on to someone else. The next section of this workbook will take you through a series of general questions to get you thinking about your business, how it is performing, what your goals are for it and what you aim to do afterwards. Q management, Highly sought after businesses are not reliant on the owner being there 24/7. Does your business have systems in place, and an infrastructure that allows for strategic planning, effective line reporting, and ongoing marketing initiatives? Succession planning. Readying your business for tomorrow. 7

Section 4 Your plan to succeed - a four step guide The following succession process is based around a business sale, the most common form of business succession. Generational succession planning or management buyouts will require some modifications being made to the process. This approach also assumes that there is a reasonable timeframe to build and implement a succession plan - preferably three to five years. Step 1 - Determine the state of your business Review succession options. Undertake a business diagnostic: What shape is the business in and where are the gaps? Do you have the right management, insurance, funding or financial and legal structures? Complete a valuation. What is the business currently worth? Step 2 - Developing a succession plan that meets your needs Determine a timeframe for the succession plan to be implemented. Undertake a business improvement programme. Balance sheet review. Taxation review and its impact on the sale or transition of the business. Review the business s financial reporting structure. Step 3 - Readying your business for succession Pre-sale internal due diligence. Establish sale\transition terms. Valuation test review current valuation against sale price expectations. Establish the marketing plan for the business sale\transition. Preparation of information memorandum. Step 4 - Moving on from the business Putting the business on the market. Enquiry management and assessment. Contract and due diligence. Settlement. Post settlement issues and opportunities. 8 Your future begins today. Are you ready?

Section 5 The succession planning checklist So we ve seen why it s a good idea to create a succession plan. And we touched on where to start and who you can turn to for help. The next step is to actually begin the process. The next three pages contain a series of questions that will help you assess your succession readiness. We recommend that you complete this in consultation with a trusted advisor such as an accountant, lawyer or bank manager. You may wish to involve some of your trusted colleagues and certainly your fellow shareholders. Add up your answers and then turn to page 14 to see how you rate. Remember this is a guide only and you should use it to give yourself a succession planning kickstart! Q Do you fully understand the transition of ownership process? That is, do you know what should be in a S&P Agreement, what you should be warranting, and what you can expect to encounter during a due diligence review? Are you prepared to work in the business post sale, particularly if you have sold to a family member or if there has been a management buy-out? Are you aware of the post settlement issues such as final tax payments, winding up the old company including payment of creditors, release of loans, and investment opportunities? Succession planning. Readying your business for tomorrow. 9

The Likely Suitors Yes No Don t know 1 Have you identified likely purchasers of your business? 2 Do those purchasers need assistance with funding? 3 If you sold the business to family members, employees, or other close relationships, would it affect those relationships? Total Exploring Your Industry Yes No Don t know 1 2 3 4 Is your industry subject to potential dramatic change in the next five years? Are changes in population mix and impending regulation changes likely to affect your business? Are you expecting your key customers and/or suppliers to experience their own business succession in the short term? Are there larger businesses buying up and consolidating businesses of your type at present or is this happening in your industry overseas? Total 10 Your future begins today. Are you ready?

The Big Picture Yes No Don t know 1 Have you considered your succession completion date? i.e. the date you will be out of your business with it transferred to new ownership. 2 Do you have a written succession plan? 3 Do you know what succession options are available to you? 4 5 Do you know the processes involved in transferring your business to new ownership? Have you dared to dream what your ideal post-business scenario would be? Have you written this down? 6 Have you ranked these in order of likelihood? 7 Is the continuity of the business important to you? 8 9 10 Do you have another business partner(s) who needs to be involved in your succession plan? If need be, would you be prepared to continue working in the business post sale? Are your current business advisors in tune with the business succession process? Total Succession planning. Readying your business for tomorrow. 11

All About The Dollars Yes No Don t know 1 Do you have a current indicative valuation of your business? 2 Do you believe that the business has any goodwill value? 3 Do you know what your goodwill consists of? i.e. reputation, branding, existing contracts. 4 Are your personal financial affairs separate from your business? 5 Is your remuneration from the business totally transparent, or is it in the form of a number of different means, such as various business funded benefits in addition to your remuneration? 6 Is your business currently funded by personal or external debt? 7 8 9 Are other family members current income streams dependent on the business? Are you primarily dependent on the maximisation of value from your business in order to fund your post succession lifestyle? Do you need some tax planning prior to the transfer of ownership or after the transfer has taken place? 10 Are your banking arrangements efficient and cost effective? Total 12 Your future begins today. Are you ready?

Getting your house in order Yes No Don t know 1 Are you taking regular holidays from your work? 2 Can you completely leave your business and have it run without you, in no worse position and performance for two months, four months, six months? 3 Would your business pass a business Warrant of Fitness? 4 Are your business s regulatory requirements fully up-to-date? 5 Are there any warranties, contingencies or commitments currently outstanding in your business? 6 Are leases and major supplier/customer contracts assignable? 7 Do you have detailed systems in place to operate your business, instead of this information being held mainly by the people in your business? 8 Are all your customer, supplier and contacts databases up-to-date? 9 10 11 12 13 14 If you are not in the business tomorrow - would certain skills be missing? Are there weaknesses in the organisational structure of your business or the roles of each employee? Do you have commitments to your employees regarding the future of your business? Do you have annual financial statements for your business, prepared in accordance with generally accepted accounting practice, for the past five years? Are business plans, strategic plans, financial budgets, cash flow forecasts, breakeven analysis and asset replacement plans readily available to showcase your business? Do you expect to see an increase in business succession within your industry in the short term? Total Succession planning. Readying your business for tomorrow. 13

Are you succession ready? 30 41 (Yes s) Succession Savvy Congratulations! You are the minority. You appear to be well aware of the topic and the issues surrounding the succession process. You appear to be currently moving along a well structured succession path. If you continue to plan for your succession and use your advisers where needed you will achieve a successful succession result. 20 29 (Yes s) Succession Aware You at least appear to have started thinking about the succession issue and about your long term goals for that ideal succession transfer. Perhaps there is more to the succession issue than you anticipated. So you could benefit from a more formalised process. 0 19 (Yes s) Succession Challenged Time to start investing a little time thinking about the longer term. Take a leave day (Ok so you can t afford to take leave so take a sick day) and use it to plan for your business s future. Remember if you don t plan now then you will probably be taking some real sick days. 20 40 (Don t Know s) Get informed As the saying goes, you don t know what you don t know. If you have answered any of the questions with a don t know take the opportunity to call one of the experts listed at the back of this booklet to find out more about succession planning. 14 Your future begins today. Are you ready?

Section 6 Conclusion and notes Congratulations, you have just completed the first step towards the next part of your business and personal life. Succession planning can seem daunting, but when it s done well it s a stepping stone towards unlocking the wealth you have created. We look forward to helping you complete the journey. Use this page to scribble your thoughts and questions for when you meet with your succession advisors. And good luck! DISCLAIMER: This workbook is provided for information purposes only. The appropriateness or otherwise of this workbook for you is dependent on your own circumstances and accordingly you should not take any action in reliance on this workbook without considering your particular circumstances and, if necessary, taking appropriate professional advice. No right of action shall arise against ASB Bank Limited and Hayes Knight NZ Limited or their related entities or companies or any of their respective directors, officers, partners or employees either directly or indirectly as a result of the information contained in this workbook or any discussions relating to this workbook. Succession planning. Readying your business for tomorrow. 15

Contacts. Start the journey today with Hayes Knight and ASB. At ASB we specialise in providing banking services to business customers of all sizes, from sole trader s right through to large Commercial and Corporate organisations. Our team of Business Managers can provide you with a full range of products and services including financial solutions for short-term finance and day-to-day business requirements, longer term lending for expansion and growth, and investment options for your surplus funds. We also have comprehensive insurance policies and other risk mitigating products that can help reduce some risk involved with being in business. To find out more about our Succession products and services contact ASB: 0800 338 272 Chartered Accountants, Hayes Knight, have a team of experts ready to help you with all your succession planning needs. They are recognised leaders in this field, having educated other accountants on how to assist clients through the succession process. Hayes Knight offer business improvement services, business valuations, cash flow forecasting and modelling, strategic planning, due diligence, internal health checks and compliance accounting as well as audit or limited reviews. Contact: Aaron Wallace, Director, Business Improvement & Succession. Phone: (09) 379 7013 Email: aaron.wallace@hayesknight.co.nz www.succeed.net.nz ASB Bank Limited 56629 9694 0911