A New Way of Thinking for SME Succession
For John and Judy Small, their business was their identity.
John had started the business 30 years ago in his garage at the back of their suburban home. He had an idea, researched the market and discovered that the automotive industry was lacking in a certain product (product and business fictional). He talked to the car manufacturers and the new and used car dealers and soon had several orders that were going to be difficult to fill.
As his business grew, he moved the business to new premises and hired staff to take care of production, sales, accounts etc. The business grew steadily, and John and Judy enjoyed a good lifestyle and the ability to fit the kids’ lives around the business. Once the kids were off their hands, Judy came into the business and worked part-time and then full-time as the Accounts person. They managed to pay off the house and purchase a couple of rental properties as well as a Bach which was used extensively throughout the summer months.
John was approaching 60 and hadn’t really thought about what he was going to do with the business. He always thought that he would sell it eventually and retire, but how? And when?
He went online and came across a website for a company called Platform 1. “We help owners exit their business through a well structured, gradual ownership transition”. That sounded interesting, so he called Platform 1 to find out more.
Platform 1 finds a talented leader from outside the business who agrees to buy into the business as part of a gradual transition. Based on an agreed plan the person typically starts as a GM and purchases 25% after 6 months. Their job is to learn the business and use their energy and skill set to grow the business, eventually buying the owner out over a 3-5 year period, tailored to the owner’s wishes.
The benefit of a gradual ownership transition for an existing owner is that they can improve their lifestyle and wealth by stepping back and focusing on the parts of the business they enjoy and are good at or simply free up time for leisure. They are also able to benefit greater financially from the dividends in the growing business as they sell down equity as well as getting the benefit of high capital payments as the business grows.
John and Judy were sold on the idea. They started the process and Platform 1 secured a talented individual for the business. He learnt the ropes from John and in within 6 months was contributing strongly. Alex purchased his first tranche of equity at that point and John and Judy went on the three-month tour of Europe that they had been thinking about for years.
Alex purchased his second tranche of equity after 18 months in the business and was able to pay John and Judy 30% more as the business had grown.
The plan is for John and Judy to be bought out completely in about three years’ time.
John and Judy’s lives have changed considerably. They don’t work in the business full-time anymore as Alex is now a 50% shareholder and runs the business more efficiently and has increased sales by 40%.
John and Judy are obviously very pleased with how this business has turned out. They are so happy they didn’t sell their business outright as their return would have been a lot less Still being shareholders in their business but not working full-time has given them both a new lease on life. John is able to contribute to the strategy of the business without having to implement it. John sits on the Advisory Board and has an Independent Director who is the Chair.
John admits that the business would not have reached the size or success it currently enjoys if he was still at the helm.
About the Author
Rob Young is a Director of Platform 1 NZ Ltd who specialises in using executive search techniques to find people with capability and equity for SME business owners wanting to transition.