Trevor (55) and Gail (50) run Shiny New Things, which imports and distributes commercial and high-end residential lighting.
Shiny New Things has a great reputation for high service levels, and top-end products. Architects often ask Trevor and Gail for their help in putting together house or office plans.
Despite having nine full-time and three part-time staff, Shiny New Things strongly depends on the expertise of Trevor and Gail, with Trevor’s background in electrical engineering and Gail’s qualifications in interior design, architecture and art history.
The couple founded the business in 1990, and in 2003 purchased a small lighting retail business, a former customer that had fallen on hard times. The retail outlet contributes a small part of the overall operating profit of Shiny New Things. If pressed, Trevor and Gail will tell you they bought the retail outlet to preserve outstanding debts for goods supplied, which would have been lost otherwise.
Both businesses are operated by a company jointly owned 50/50 by Trevor and Gail. The company also owns its own warehouse, while the retail outlet operates from leased premises. The lease expires in a year, and Shiny New Things has right of renewal for a final term of two years after that.
Trevor and Gail have two children, Nigel (27) and Peter (24). Nigel is active in the import side of Shiny New Things, and Trevor reckons he might be able to run the business -in a few years. However, Nigel hasn’t shown any actual interest in doing so.
Peter, meanwhile, lives in Queenstown -some of the time. The rest of the time, he’s in Whistler. Peter’s a ski instructor, and doesn’t have anything to do with the family business.
Times have been good for Shiny New Things, particularly for the import business. The high dollar, booming commercial and residential property markets, and high demand for top end products has made for busy, prosperous times.
In the past year, Shiny New Things received $3.2 million in revenue, with a gross profit of $900,000, and EBIT (Earnings Before Interest and Tax) after shareholders salaries of $385,000.
Questions:
Aaron Wallace: Succession is a journey not an event. Is the business in a saleable position that will generate maximum price? If not, it may be worth delaying a sale to get these things right.
John Kirkwood: Trevor and Gail are relatively young. They’re probably not ready to sell now. There’s also a lot of work to be done before they can achieve a successful exit.
While Nigel’s involved in the business, it’s not clear if he has the necessary attributes to take the business over. Nor is it clear whether this is an option that Trevor and Gail are actively pursuing.
Kevin Reilly: Before they think about selling, Trevor and Gail need to decide what it is that they want to do after “Shiny new things” and in what time frame. What resources will they need to achieve what is next, whether it be another business or a comfortable retirement from business ownership and management?
This will determine whether they can consider selling now and moving on, or putting in place a succession and transition plan to improve the business and obtain a better value when the time’s right.
John: The first step is to get together with advisers to discuss the various available options. Options mean choice.
John: Trevor and Gail need to think about the structure of the business, even if they may not sell. Succession planning is not just about selling. It’s just plain good business sense.
Kevin: They should do a SWOT (Strengths, Weaknesses, Opportunities, Threats) analysis of the business. That’ll help them pinpoint key things to address before the business is attractive to a potential buyer. For example, they’ll see that they and their expertise are critical to the business. What is it worth without them?
Aaron: That’s right. Trevor and Gail need to divorce themselves from the business and reduce the reliance on them as working owners. This will lessen risk and ultimately increase value or attractiveness to the market. They need to ensure they have a business to sell, not a secured job.
I’d recommend they undergo an internal due diligence and find out what makes the business tick, and what makes it sick. This involves dissecting the business model, operations, financials, marketing, opportunities - all the parts of the business.
It’ll provide action points on how to increase the value and saleability. It’s essentially a business ‘warrant of fitness’ and any potential buyer will undergo the same process at offer time. Do it first and address any issues beforehand to ensure any offer turns into an acceptance.
John: They need to assess whether Nigel (or for that matter Peter) have any interest in taking over the business, whether this is an option mid-to long-term, and just as importantly, whether either son has the necessary skills -or is capable of developing the skills necessary to run the business. They also need to consider the downstream effects of their decisions for both sons.
Family succession isn’t just a matter of fixing a date and handing the business over. It involves some quite complex accounting, taxation and legal issues which need to be addressed to transition the business.
Kevin: From a banking perspective, Trevor and Gail need to review their businesses funding structures. Is the type of debt in the business now appropriate? Are personal and business aspects separated as they should be? Have they recognised and addressed the critical risks, like keyperson insurance, life-cover, foreign exchange risk, interest rate risk? Have they put in place programmes to keep other key staff loyal and engaged? Things like retirement savings plans, work/life balance, longterm incentive schemes?
John: There’s also the warehouse and retail business to consider separately.
At the moment, a single operating company owns the warehouse, undertakes the significant distribution business and also holds the retail business. As part of any restructure, they may wish to think about whether they should sell the warehouse into another entity or family trust. This effectively separates it from the business and will give them the option later to either hold on to the warehouse property or to on-sell it as a separate transaction.
The retail business contributes a small amount to the bottom line. Again, they may want to consider whether this should be hived off into a new company. With only a short period to run on the initial lease period, they may need to think about whether the time is right to sell that part of the business or to wind this down.
If they decide they want to sell the business, they should seek an extension of the lease (preferably by way of a number of rights of renewal) so that any incoming purchaser has a reasonable lease period within which to continue the business. If they decide to wind it down, they may want to do that before extending the lease period, thereby getting rid of any potential liability under the lease. Remember, most leases to companies require personal guarantees from the primary directors and/or shareholders.
Kevin: All of these processes shouldn’t just be about getting it ready for sale, but simply making it a better business.
Aaron: My immediate reflection is that they don’t, they get an independent who’s not emotionally attached to the business to do it for them. This independent should have experience in business valuations. Often the owner will not be realistic on what the market would pay
- a bit like how people often overvalue their family home.
A good question for Trevor and Gail would be what they would pay for the business, not what they would expect. There are various ways to value a business; they should select the appropriate one and compare it against another for reasonableness. The business valuation could be based on an asset-based valuation method (where there are low or no returns) or an earnings-based valuation method where perhaps a premium may be paid for the extra cashflow generated from a good profit return. A risk profile of the business will help determine this premium, so it’s essential that Trevor and Gail attempt to minimise as much risk as possible -including reliance on them.
Kevin: Determine what their personal goals are, check-in with their key advisors and formulate a plan to take them to where they want to get to and beyond.
This could include the appropriate funding and ownership structures for the business, assessing and covering key risks, and looking to grow a portfolio of assets outside the business, in such areas as superannuation, shares, or managed funds.
Aaron: Be proactive and take some action rather than sitting around waiting for something else to happen for them. Engage some professional advisors who regularly act in this space. Separate the warehouse out of the business. Determine how long their succession timetable is.
John: Trevor and Gail should get good legal and accounting advice straight away, and get their advisers in the same room, so everyone’s on the same page.
While business has been booming for the past few years, the year ahead may be more difficult. This is an excellent time for Trevor and Gail to step back from the business and to focus their energies on ensuring that they have good systems, procedures and planning in place to ensure a sustainable business for when they ultimately determine to exit.
Kevin Reilly is National Manager, Key accounts at ASB.
Aaron Wallace is a Business improvement Director at accounting firm Hayes Knight.
John Kirkwood is a corporate and commercial partner at law firm Hesketh Henry.