For too many, including family businesses, the reality of what happens once they reach retirement age hasn’t dawned and the thought of selling or handing over control is daunting. And some, unable to find a buyer or successor, believe they have no option but to sell-off plant or stock at fire sale prices or simply close the doors.
Let’s face it, within a decade, close to a quarter of Hawke’s Bay’s population will be of retirement age, up to 10% higher than the national average. We have to start thinking about what that means in terms of an ageing workforce; and, harsh as it may sound, as more business owners approach their use-by date.
The Icehouse has mentored around 270 mainly medium-sized Hawke’s Bay businesses on how to grow their output and influence, including advice on succession planning.
Hawke’s Bay regional manager, Michaela Vodanovich, is concerned many smaller businesses may not have an appetite for growth, or even keeping the doors open past retirement age.
If an attempt to sell hasn’t worked out they might take it off the market, work another year and shut down, or offer their plant, building and customer base to a competitor for whatever they can get, often leaving their employees “high and dry without a job”.
Unprepared for a proposal
And it’s not just retirement that can trigger an ownership crisis. Illness can strike at any time, and waiting until you get a gold card and pension at 65 years is dangerously late in the game to start thinking about whether the business has a future without you, cautions former Brebner Print director, Neville Smith.
Generally, he says, you need five years to introduce new management and get the books looking good so you can ease yourself out, rather than simply closing the doors or cashing up.
From the 1980s, while the printing industry was going through massive upheaval in the shift to digital, Smith and his partner Mark Brebner created Napier-based Brebner Print, which grew by acquisition over 25 years.
Brebner Print purchased printing companies in Palmerston North, Tauranga, Wellington and Auckland which were in receivership, heading that way or with owners about to retire or facing ill health, none of whom had an exit strategy or had prepared their business for sale.
As they watched their print empire grow, Smith and Brebner agreed that they would start planning their own exit before they reached 50 years of age. Ensuring they had the right technology, staff and market positioning meant semi-regular restructuring and “turning things upside down,” says Smith.
Aware of the need for stronger administrative skills, they hired an accountant who worked in the business for a decade and became CEO when they sold to an Australian private equity company in 2005. Although Smith stayed on for seven years after the sale, he quit well before the guano hit the fan through a series of receiverships.
Looking ahead
Kevin Atkinson was hoping to hand over the reins of his successful human resources and payroll business Information Management Services (IMS) in 2013 when the investor dropped a bombshell in the final week of negotiations.
A clause was added requiring him to quit his prominent directorships with Unison Group and the Hawke’s Bay Health Board and stay on for three years as chief executive.
“That was a shock to me … Had we been made aware of this condition earlier on, both parties could have saved around $100,000 in costs and six months in time.”
Atkinson had reduced his hands-on time down to three days a week, but the purchaser feared future profitability could be compromised without his full-time involvement, so the deal fell through.
In retrospect he concedes he failed to sufficiently prepare IMS for the change and should have appointed a CEO at least three years before putting it on the market.
“The biggest difficulty as owner and CEO for 30 years is you build up an incredible amount of institutional knowledge about how a business works and is run.”
Atkinson remedied that situation in November last year, bringing in a shareholding CEO, Doug Jopling, to front the company, which has a client base of 10,000. “He’s got skin in the game and he’ll likely acquire a further shareholding which could be an incentive for a third party to take me out.”
The 67 year old say he doesn’t have much choice but to hand over the reins. “When you’re approaching retirement you don’t know what your health is going to be like or what other options might be offered. I turned down some good opportunities because I couldn’t do justice to them.”
As part of succession planning you need someone who’s as motivated as you are with the right skillsets, although it does means giving away a chunk of profit, says Atkinson.
“If you have an investor with no knowledge of the business, the first thing they’ll want to know is how will it be managed.”
And that includes picking up the personal relationships the owner has within the community, with clients, suppliers and staff and being aware of how that relates to the business culture and branding.
Atkinson and his business have a long track record of contributing to Hawke’s Bay charities and sport, and there’s no way he would just cash up or walk away from those commitments or the loyalty he has to his staff.
“I can’t just close the doors and tell them they’ve got to find a new job. There are no other payroll companies in Hawke’s Bay and few in New Zealand.”
Keeping it in the family
A large number of Hawke’s Bay businesses are privately owned or family affairs. Most family businesses have a natural process of grooming sons and/or daughters to take over.
It’s often not as simple as it sounds. Familial politics can inhibit fresh thinking. And in some cases the next generation has little or no interest in taking over the manufacturing, retail, farm or orchard business.
In large families, internal power struggles can arise around inheritance and performance, particularly if dividends are reduced or a cash injection is needed. Outside advice is often needed, perhaps engageing skilled independent directors or managers.
Numerous Hawke’s Bay family businesses are in the midst of generational handover. Ray McKimm of Big Save is passing the mantle on to his son Tom and daughter Alison; the sons of Te Mata Estate Winery founders John Buck and Michael Morris have now taken over management and senior executive roles, and Graeme Avery of Sileni Estate is passing the mantle to his son Nigel.
The pioneering Paynter family moved their apple and stonefruit business from Stoke in the South Island to Havelock North in the early 1900s, and it’s now moving into fifth generation ownership.
John Paynter who worked in partnership with his father from the 1960s until he died in 1981, grew the Johnny Appleseed Group of companies by adding new stonefuit and apple varieties and developing the nationally-known Yummyfruit brand.
Today the company employs 550 people at the height of the season and delivers produce across the country daily with its own fleet of trucks.
Letting go not easy
Paynter says small to medium-sized businesses are the future of the country and succession planning is a huge issue and particularly relevant for family-owned farming and fruit growing enterprises in Hawke’s Bay.
“With a revenue line business you can start afresh with a new entity and shareholders, but you can’t do that with a capital intensive family business where money needs to be left in for it to survive.”
Paynter, now 74, knows he needs to change his lifestyle, but is excited about the next 20 years as the company brings on dozens of new varieties. “People ask when I’m going to retire but I feel like I’m just getting going. I’ll never not come to work; this is my life and hobby.”
At the same time he concedes he should be having more conversations around succession with his sons, although the speed of growth and constant long-term planning hasn’t left much room for that.
Regardless, Paynter has implicit trust in sons Paul, who has horticultural and business degrees, and Jonathan who manages one of the nine orchards. “While growth is outstripping resources it’s pretty hard to step aside…there’s always a work load vacuum and someone needs to fill it.”
As he slowly hands over the reins he’s trying not to insist things be done his way. The buffer is a strong senior management structure which is separate from the family ownership.
John’s sons will face a more challenging business environment than he did when he took over Johnny Appleseed 40 years ago; the business was smaller and the banking environment more friendly and forgiving.
There are a raft of compliance and accountability issues to deal with, a changing risk profile and the need to keep adding value. “If you want to stand still you will get run over.”
While many Hawke’s Bay businesses that started as ‘one man bands’ now have large corporate-style structures, Paynter asks why the majority of family-based farming, manufacturing and Heretaunga St retailers who dominated the region in the 1950s are mostly gone?
He points the finger at strong fathers who won’t let go and poor professional advice to protect “businesses as they are” rather than growth strategies with incentives for the next generation.
Part of the problem has been the creation of family trusts which discourage innovation and growth because the next generation simply sees themselves as “working for the trust”.
Facing tough realities
Preparing to sell Brebner Print a decade ago meant facing harsh realities for director Neville Smith, who says today it’s even more complex, particularly if you’re in the $3 million plus bracket and looking for private equity or a corporate buy-out.
Excuses like “it’s a tough market”, “times are hard” and “next year will be better” just don’t cut it. An investor will want to take a three year “weighted average” from spreadsheets to see whether profitability is sustainable.
Yesteryear financial models won’t stack up either. Investors or purchasers want to see EBITDA (earnings before interest, tax, depreciation and amortisation) to confirm your ability to generate cash.
And you’ll most likely need to provide monthly reports to private equity people who typically do not understand your industry, says Smith.
Many business owners may have to adjust their expectations when liabilities are shown to be greater than assets, and recognise that any performance and profit promises must be backed by personal guarantees for the next few years.
It’s also likely you’ll be required to stay with the business for three years to satisfy the bank. “They’re investing in you and your business relationships,” says Smith.
You’ll need to factor in retirement packages for long-term workers, and ensure landlords agree to a change of name on building leases; they may object to the new owner.
Staff must have the right industry qualifications, and it helps to have enough younger people who know the technology, and that you meet all health and safety and other ever-changing compliance considerations.
Smith can’t emphasise enough the need to get young people involved in industry to counter the ageing workforce, a situation often highlighted by a refusal to take on apprentices.
Even a management buyout can be fraught with risk, as owners are expected to leave capital in the business and manager-buyers must provide personal guarantees that could result in losing their homes if things go pear-shaped.
Cashing up may not be as simple as it sounds either. Some equipment have less value on the spreadsheet than some imagine, particularly where it’s been superseded by digital systems. If the second hand market is weak, as it is for older printing systems, it’s hard to cash up. That, says Smith, is why many owners have to keep going or sell for what they can get.
Challenging our thinking
Rachael Cornwall of Red Consulting in Havelock North is confident more people are thinking about succession planning, although the timing remains a “challenging business function”.
While there are plenty of qualified people ready to step up to senior management, it’s a highly competitive area with a limited pool of opportunities, with successful candidates in Hawke’s Bay tending to have longer tenure than those in other cities.
That can limit the openings for younger people. Consequently many skilled people in their late 30s to early 50s end up “splintering off” to start small businesses in engineering, financial services, technology or thought leadership, where much of Hawke’s Bay’s future growth will come from.
Cornwall says the greatest threat to jobs in the region is not small businesses closing but big operators rethinking their position because of foreign exchange, Treasury implications or wholesale market changes.
“Why do high employing companies come here? We’re just a village really to Watties or Silver Fern. I’d be more worried about losing them. We have to continue demonstrating ways of adding value.”
Maintaining continuity
Business Hawke’s Bay CEO Susan White urges ageing business owners to seriously consider how they’ll step back, who will step up and how continuity will be maintained.
Decisions need to be made about whether this is a quick transaction to get out and take what they can; a tactical exit with the least worries, or whether they’ll want some ongoing role in the business, perhaps as a mentor?
“There are risks involved in cutting the umbilical cord…and it needs planning and thinking about the ramifications and opportunities for all the parties involved,” says White.
Some owner-operators may have strong expectation around the right fit for a successor. “If it’s your baby and has taken blood, sweat and tears get to this point, that person is taking over a brand that has been carefully crafted and invested-in, and no one wants to see it underperform.”
There’s much to pass on, including seasonal variations, how systems operate and other intellectual property that makes the business different or successful.
White says it’s worthwhile calling in advisors to help value the business, prepare it for sale and market it to maximise the opportunities for other stakeholders, including employees, customers and the supply chain.
Agreeing on the need to let go and putting some clear strategic thinking around succession planning can make all the difference between shutting shop and preparing for growth, investment or sale.
Resetting the business for the future might mean developing younger people with the right skills to fill leadership roles, modernising technology, listening to fresh ideas, and preparing a new business and marketing plan.
With more working age people leaving the region than coming in, retiring business leaders ought to at least seek professional advice on an exit strategy, otherwise they may end up contributing to Hawke’s Bay’s default setting as New Zealand’s retirement capital.