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  Ideas and Advice

'When one door closes,
another opens'.

That kind of down-home wisdom your granddad dished out might have been good advice when you were young. A bad job interview, a failed exam-it all seemed so important at the time. But as Pops predicted, it all worked out for the good.

When bad things happen in business, euphemisms and helpful pats on the head are not very, well, helpful. When a mega-competitor moves into your patch, when debts turn bad, when illness strikes you or senior staff, or when fire destroys stock, it's far better to turn to a pre-planned strategy. Rather than wait, you should choose which door opens.

It's a lesson even the wisest and most experienced of us need to remember. Japanese temple builder Kongo Gumi was the world's oldest continuously operating family business, having started in 578AD. In modern times demand for temples fell and by 2006 the company succumbed to excess debt. No matter how solid, stable or optimistic a business and its market appear to be, it pays to be thinking ahead.

Of the many threats to your business, we've chosen four to highlight, not just because they're common, but because they're difficult to anticipate and hard to prepare for.

1. Industry obsolescence

Change is the one constant we can rely on, and major changes to an industry through advances in technology or corporatisation can create enormous pressure for business owners, sometimes overnight.

When the mega-stores found a way to bundle their buying power into one handy location near you, mainstreet New Zealand pretty much became obsolete. The response from many retailers has been to slowly dwindle into closure. Whatever happened to the local hardware or haberdashery?

But it's not just competition that can make you yesterday's news. Government legislation, such as the threat of carbon taxes or the withdrawal of government assistance, such as farmers' subsidies in the 1980s, can wreak havoc with whole industries. New technology can quickly render lines of business redundant- anyone remember the telex machine, or its manufacturer? The fax is going the same way. A recent study revealed that the average age of companies in the USA has shortened from 15-20 years to 10-15 years. It's harder to stay in business longer.

The response to this kind of threat varies. Technology change is hard to predict but not impossible to diagnose. A quick test is this: if someone invented an electric blanket, would you be found making warm beds or hot water bottles? In other words, does your business fulfil a need or simply flog a product? If it's the latter, you're vulnerable to sudden change in technology.

Sometimes the answer is, 'if you can't beat 'em, join 'em'. When Mary Shields started her own travel business, she made a crucial decision upfront: join the big guys. The day that she bought her business in Milford, she also joined the House of Travel group and avoided being muscled out by a large, efficient corporate machine. (See Mary's profile on page seven.)

She did the right thing for her business but clearly this approach is not necessarily right for all businesses. According to the Franchise Association of New Zealand, franchise units have a survival rate of 94 percent in the first three years-more comforting than the overall SME survival rate of 47 percent over the same period.

The most important factor is to realise obsolescence is inevitable. How willing are you to reinvent your business to meet the market?

2. Ill Health

Everybody likes to think they're invincible and most people shy away from thinking about accidents and ill health, but the consequences of 'avoidance thinking' can be far more devastating.

Consider that sometime during their lifetime two out of five people will be unable to work for six months or more because of sickness or an accident (ACC BERL Report, November 1996). One in six males over the age of 30 will die before they reach 65 and one in nine females over the age of 30 will die before they reach 65 (General Cologne Life Re Australia, 2002).

Those are some nasty numbers so setting up systems now that ensure that the business owner is freed from day-to-day management means staff can be as effective, or better, than the business owner. It also builds continuity and value in the business.

Hayes Knight says reducing reliance on the owner is fundamental to realising a maximum return on your business-and to protecting yourself from disaster. Your business should run like a conveyor belt, not a treadmill. It should work for you, rather than you working for it.

Part of that conveyor belt planning is anticipating and planning for risks, before they happen. Some key questions regarding health are:

  • are your staff trained and equipped to run things by themselves?
  • do you have key man and other insurances to cover costs in an emergency?
  • are your financial and management systems transparent and understood?
  • Come to think of it, do you have any systems?
  • And of course, how's your health (are you fit, dealing with stress, eating well and drinking less)?

As Michael Gerber says in the bestselling book E-Myth, "you will know if the system you create works if it works without you to work it". You may not be Superman or Wonder Woman but you can be super-prepared.

3. Ageing

Findings by Hayes Knight point to the fact that 50 percent of New Zealand SME owners will rely on the proceeds of the sale of their business to assist retirement, yet 62 percent don't have a succession plan. And only 38 percent have any semblance of planning in place to turn their business into retirement dollars.

The statistics belie another fact: succession planning is an emotional issue. Retirement for many business owners is an insult- admittance that age is getting the better of them and a business that they worked so hard to create. Graham Mountfort, former owner of Auckland manufacturing business Papercoaters, admits that giving up his 'baby' was terribly hard. But he managed it well and the business continues to grow (see the case study on page eight). Graham, meanwhile, has become a business mentor and investor.

"Many business owners have created significant wealth from putting their heart and soul into the business," says Nicholas Stanhope, general manager of corporate banking for ASB. "The question is, where does this wealth go, and what changes need to be put in place to maximise the wealth created?"

While it may seem natural to pass the business on to the family, sometimes the family lacks the skills or desire to take the business over. "A good option here is to engage a management consultant specialising in succession transition to search for 'the person or persons' who will not only add value as employees or managers, but also be the eventual buyer-all parties are typically incentivised to make this work," says Stanhope.

John Kirkwood, partner at Hesketh Henry, says it's essential to clearly map the path to ownership, rather than simply giving a percentage of the company away. "With a clear strategy and path to ownership it can work, but it needs to be properly documented with a good shareholders agreement that details the right exit strategy for both parties if it doesn't work. Many business owners think that key employees will jump at the chance to become stakeholders in the business. But this isn't necessarily the case, and commonly isn't. You need to question your motives for offering a stake in the business. If it is just trying to put 'handcuffs' on an employee rather than as part of a long-term succession strategy it just won't work. In my experience, if the deal isn't right they just walk anyway."

A well-written shareholders agreement can also keep a business owner's options open. "If you set it up correctly at the start you can retain control by using what we call 'drag-along' provisions in the shareholder agreement. This means the majority shareholder can require the minority shareholder to come along for the ride if a sale or other opportunity too good to miss presents itself," says Kirkwood. "There are also 'tag along' provisions, which give the minority shareholder the right to have their shares or interest in the business bought at the same price as the majority shareholder, thus offering a potential upside to the minority shareholder."

4. Investment

A lack of capital can be a major threat to a business, especially when a large acquisition or capital expenditure is needed to simply stay competitive.

According to Statistics New Zealand, lack of capital is stated by owners as the most common inhibiter to business growth and a key contributor to business failure. But there's capital and capital. What owners usually mean is cashflow and the 'cash cycle'-the time between invoicing and payment. Cashflow management is the bane of small business and there are plenty of solutions from simple tricks such as invoicing sooner, shortening the terms and securing cash upfront to more sophisticated answers like integrated billing systems and factoring.

Hayes Knight says profit is like food, cash flow is like oxygen. You can survive a short period without food, but not very long without oxygen. Growth in sales and profit is critical to on-going success and is good bait for attracting potential buyers. However, those buyers are also looking for a cash return. The risk in preparing a business for sale is that attention to cash flow is often not given the consideration it deserves. Growth will suck cash from the business to fund debtors, stock and capital expansion as required, sometimes leading to the downfall of a successful company.

Capital also means the money you need to really grow and reach your potential, whether it's for machinery, R&D, new product development, market development or business acquisitions. For many businesses capital is not just nice to have, but a key to survival.

When TradeMe started in Sam Morgan's spare room, it could survive on his own sweat and inspiration. As it grew, Morgan faced critical moments where cashflow would not have secured its future. Investments from friends, family and angel investors meant the company could survive and grow with equipment, software and staff acquisitions.

Investors in TradeMe benefited more than usual but it's important to remember that at the time there was no guarantee and without their capital there would be no TradeMe.

A good succession strategy recognises the threat that a lack of capital poses and starts to plan for it.

There are as many ways to source capital in New Zealand as there are ways to get to the beach. Essentially there are two broad approaches: debt and equity. David Verry from ASB has written a handy summary on page 18 of this magazine.

And there are some simple rules of thumb: ask yourself why would anyone invest, really? Most investors will consider a company that is already established with a good track record of profits and revenue growth. They'll be looking for a 'franchise' by which we mean the thing that separates your company from the rest and gives you protection from competition.

Which all suggests planning for investment and succession. Chris Cook, founder of Profile Limited, says every dollar invested in your business now, equates to four dollars at the end when a sale is concluded. (see his profile on this page). In other words it pays to invest now for benefit that comes later.

As author of The Seven Habits of Highly Successful People Stephen Covey says, "begin with the end in mind".

ASB creating futures.