As a brand new year stretches before us it is natural that our thoughts turn to planning. For the business owner, planning can seem overwhelming, as many types of plans with varying degrees of interaction jostle for attention.
There are strategic plans, business plans, marketing plans, and more, for the business, and succession plans, exit plans, retirement plans and estate plans for the owners. Together they form a complete picture; prepared individually in isolation they lack context, are likely to be contradictory and fail to take account of relevant factors contained in other plans. While those who fail to plan may indeed plan to fail; failure to plan in the right order and integrate the various plans, will usually result in the failure of all of them and a great deal of confusion and wasted resources.
Take the case of Darrell. He had a very basic succession plan which was to bring his son David into the business to allow Darrell to start winding down his day-to-day management involvement. Darrell agreed that David could prepare the business plan and this provided for a major upgrade of equipment, requiring a considerable amount of debt funding. Darrell had not made a retirement plan – he had some personal investments in his superannuation fund but had no idea whether, and for how long, those funds could sustain him in retirement – nor did he know how much he needed each year to live comfortably. His unspoken assumption was that he would continue to draw from the business as he always had. The implementation of the succession plan, involving a significant salary for David, and the business plan, involving significant debt servicing costs, when combined with Darrell's drawings resulted in cash flow becoming severely strained, as did the relationship between Darrell and David, each of whom blamed the other for creating the problem.
While this story may just seem to illustrate a lack of common sense it is an example of what can really happen when the planning process is not approached holistically.
So where do you start? For SME's, I believe you should start with the individual owners. Before you can plan for the business you must know what the owners' personal plans are, and this is particularly so for the large number of SMEs owned by baby boomers.
The order of planning is critical for these people. You can't prepare a business plan without having a succession plan and retirement plan and the succession plan devolves in many respects from the retirement plan.
Therefore the first plan that needs to be considered is the retirement plan. This will set out when the owner will wind down their management involvement and how much they will require from the business to fund their retirement. The extent and timing of the required funding will help to determine the nature of the exit. The need for a lump sum payment on retirement may mean that the business, or equity in the business, will need to be sold – whether to a family member, or management, or a third party. Having determined this you can then move on to an exit plan or a succession plan, as appropriate. An exit plan should involve a program to prepare the business for sale. This will necessarily impact the business plan, as the strategies involved in making the business sale-ready may not be the strategies that would be taken if the business was being retained.
A succession plan involves both management and equity succession. It is impossible to deal with either of these aspects in the absence of the retirement plan because you need to know the timing of management transition, the timing and consideration (if any) required for equity succession and the incumbent's on-going cash requirements from the business. In Darrell's case his “succession plan” did not take account of any of these issues and he was so desperate to have David join the business that he let David believe that the business would be his once Darrell retired. Neither the retirement timeline, nor the terms on which David would get the business had been clearly articulated or documented, and without the retirement plan Darrell was not practically able to do this. It is no wonder that the relationship became strained
The absence of a comprehensive documented retirement and succession plan meant that David's business plan did not take account of the on-going cash requirements of Darrell. A succession plan should establish the entitlements of the owners and their families from the business and how these entitlements are to be determined in the future. These entitlements should then be taken into account in determining the financial projections for the business plan, and when there are obvious tensions between the cash requirements of the business and the requirements of the owners some compromise has to be reached. It is clearly preferable to try to reach this compromise in the planning phase rather than when a cash crisis has arisen.
The sad position that Darrell and David found themselves in could largely have been avoided if Darrell had only taken the time to prepare a proper retirement plan and succession plan and then integrated these into the business plan. This would have ensured that all his plans had the best chance of being achieved.