Five Tips for Succession Planning
Danny Chung, National Head of the Built Environment with Macquarie Business Banking, offers valuable succession planning advice, outlining five factors that will ensure you receive full value for your practice when the time comes to sell.
One of the main challenges business owners in the architecture industry face is getting a fair price for their practice when it’s time to move on. In fact, when they retire, many industry professionals simply close the doors, without receiving any compensation at all.
But if you plan for your future, you can ensure you will receive full and fair value for your business when the time comes.
Spread your growth and your risk
A lot of business owners base their price expectations on how they’re performing in a rising market, such as the current one. However, the most valuable businesses can make money in any market. They often do this by operating across different geographies and working across diverse, even counter-cyclical markets.
Spreading your risk also means not relying on one staff member, or one client, to bring in most of your work.
To mitigate risk, you should also aim to have a diverse fee base of clients and referral sources. As a consultant, you also want to minimise having significant credit risk with one key counter-party.
If you’re readying your business for sale and want to maximise value, the minimum period you need is five years.
For this reason, the first step in maximising value should be to sit down and analyse your client base, including finding out who your clients are and how and why they came to you.
Think at least five years ahead
Successfully growing any kind of business requires planning. But in the built environment, planning is even more important than in most industries. Many consultants get stuck doing the work and let business growth take care of itself. That means the business grows organically. It also means the consultant owner usually ends up “owning a job” rather than a business and when it’s time to move on they have nothing – or at least very little – to sell.
The only way around this is to actively plan for the future. And the first step in that is to imagine what you want to be doing in five or 10 years from now.
Rather than focusing all your energy on an external acquirer you should spend time looking internally too.
Given the built environment is so closely tied to the construction cycle, another aspect of long-term planning is analysing where you expect the economy to be. Once you have done this, you can orient your business development efforts towards where you think opportunities may arise and plan for an eventual downturn in the parts of your practice you expect to wane.
When it comes to selling a business many, if not most, business owners think of a scenario where an external company eventually acquires them. That happens sometimes, especially if you have a specialty that a larger player wants to add to their arsenal. However, even then, it often comes with the proviso that you, as the owner, will stay on for a period of time to “earn out” any payment you receive by onboarding clients and continuing to service them.
If you’re trying to make your business attractive to an external firm, you need to honestly assess why they would purchase you. What specific skills do you have that they can’t simply acquire in the marketplace by attracting staff with the same skillset?
Make sure you spend time looking internally. After all, for small to medium-sized consultancies it is far more likely that the person or people most interested in paying for your business will be your existing staff.
It can take up to 10 years to build a good business and just one year to unwind much of that good work.
It’s important to identify the buyer as early as possible, so that you can work gradually towards them taking over the reins. That way you will have the best chance of a seamless transition, including the time to properly prepare clients for the change in owner.
Get your structure right
When most people think of structuring their business, they think of the legal structure. However, getting your business structure right isn’t simply a matter of working out whether you will opt to be a partnership or a company. Instead, it’s about analysing the day-to-day running of the business to make sure people are engaged and satisfied, and that the people who you’ve identified to take over the business see doing so as part of their natural career progression.
That includes involving them in the direction of the business, making them responsible for bringing in work, and also helping them begin to share in directly in its successes.
It’s like building a successful sports team. You can’t pay all the money to the guy who kicks six goals a game and neglect your defenders. Everyone has a contribution to make and should be compensated directly for how they perform.
Get your infrastructure right too
Preparing for the day you depart doesn’t mean simply priming your staff or looking for your successor. It also means making sure the business intangibles, such as its processes, intellectual property and confidential information don’t just reside in your head but are written down, systematised, widely understood and form part of the property you will pass on.
After all, this is where the real worth in your business lies – in the ability of someone to step in and run your practice without needing any involvement at all from you.
And if you fail to enact these steps?
For consultants in the industry who fail to get it right, there is little chance they will be able to realise the value in their business.
That’s because if all the work only comes through you and your reputation, if you are still responsible for doing much of the work, if you depend only on one relationship or source of work, or if you have no repeatable work, you have nothing to sell.
Your checklist for making your business valuable
To ascertain whether your business has any value, you should ask yourself these five questions:
- How many sources of work do you have?
- How many markets do you play in?
- How many specialties do you have?
- Who holds the relationships with your clients?
- Who will take over your business when you move on?
Danny Chung is the National Head of the Built Environment Segment for Macquarie Business Banking. With 20 years’ experience in the banking and financial services sector, he is driven by continual opportunities to learn more about the industries he serves, and his team’s ability to build a banking partnership with their clients.
Since 2016, Danny leads the team in charge of business strategy for the Built Environment, delivering specialist solutions tailored for the industry, providing market insights and helping clients achieve their growth aspirations.
Macquarie Bank provides tailored services to businesses within the built environment, including working capital facilities, funding for internal succession or acquisition finance, as well as transactional banking.
This information is issued by Macquarie Business Banking, a division of Macquarie Bank Limited ABN 46 008 583 542 AFSL and Australian Credit Licence 237502. It doesn’t take into account your objectives, financial situation or needs, nor is it intended as a substitute for any accounting, tax or other professional advice, consultation or service – please consider whether it’s right for you.