Succeed - Summertime Dues

Martin Hawes loves nothing more than trekking up steep cliffs, picking his way across an ice face and conquering the world’s alpine heights. But two years ago, when he turned 50, he realised the challenge was not how many mountains were left to climb, but the number of summers left to climb them. “I had to make the next 20 summers count!” he says.

Hawes is one of New Zealand’s most successful personal investment writers and advisors and the mountain-top experience gave him an idea for his next book: Twenty Good Summers – Work less, live more and make the most of your money. The book has plenty of good ideas and advice for SME owners considering the problem of exit, retirement or even just succession planning in general. We asked Martin the biggest challenges his business clients face in dealing with the difficult question of succession.

Hawes: By far the biggest challenge is emotional. And there are two main areas of emotion. The first is to do with disclosing what they’ve held close to their chests for decades: the numbers. For the average SME owner, the process of selling their business is a bit like taking their clothes off and walking down Main Street. For years they’ve run their business privately. They talk in code, even to their friends: they’ll say ‘oh trading was up 3% on last year’, but they’ll never reveal what the actual number was.

They also have to show all the bad things about their business: the customers that they lost and why; who’s really spending the money and what the actual losses in some areas might be. Sometimes it exposes problems in the business that they have not acknowledged or dealt with. So there is some real sensitivity around disclosure, even for good companies.

Succeed: And many of the people who see this for the first time will be tyre kickers and competitors, right?

Hawes: Yes, so you need a procedure to deal with enquiries. I’m doing this at the moment with a client who’s selling or looking for investors. We won’t let just anyone see the books. They have to show genuine interest and then, if they want to see the accounts, they can come into the office and have two hours alone. But nothing leaves the premises. You need to control the process.

Succeed: But if you were the buyer ...

Hawes: Oh, if I was buying I’d want to know everything. I’d want the last three years’ accounts and probably more. I’d want to see forward projections including cashflows. I’d talk to suppliers and customers. I’d be saying ‘let’s develop a plan that manages the owner’s transition to ensure continuity.’ And I’d have expectations about the ongoing performance of the company, which is then tied back to the price. Overall, I’d want to know that I wasn’t going to take a bath on this investment.

Succeed: What’s the second area of emotion for SME owners?

Hawes: Well, for many of them this is all they have known. What else will they do with their time? You often hear of people getting sick after they’ve stopped working. And in some cases their partner will say ‘I don’t really want him or her at home doing nothing!’ There’s a real fear that selling the business will mean the end of everything.

So I’m a big fan of selling down in stages. You identify someone you want to buy the business and sell it in two or three portions and move towards taking a title like “executive chairman.”

Succeed: That seems like a dream scenario. Does it actually happen?

Hawes: Yes, in fact I’ve got a client who is working through this right now. His business had nine offices in different cities. He had built it up over 30 years and was thoroughly sick of running it. So he found a way to sell down to the nine area managers and took on the role of executive chairman. The result has been incredibly satisfying to him and to me as his advisor. The business has actually grown, because those managers are now entrepreneurs (and importantly not his competitors) and he has got his golf handicap down from 22 to 12.

Succeed: Every case is different – what were the common lessons others could apply?

Hawes: He had time and he planned it well. He recognised early enough that he was tired and ready to move on to the next stage of life. He also recognised – and this is crucial – that there is a need to take on a different role. You have to be prepared to take a step up to a mentoring role. That means letting other people make decisions and sometimes make mistakes. He’s still involved – they like to use him to solve problems and meet important clients. But you can’t keep control and sell your business, there has to be a compromise.

SEVEN REASONS TO SELL DOWN
In contemplating a sale, SME owners should first look at selling down their share, rather than exiting altogether, suggest Hawes. He lists seven good reasons why.