The hugely successful TV series Succession shows that the topic of business succession is one area of life where there is great potential for drama.

This is, of course, not a new observation as Shakespeare’s Hamlet grappled with similar issues over four centuries ago.

In recent months I have seen an upsurge in the number of referrals that relate to the planned or actual sale of a business. This increase could be as a result of the personal learning gained through Covid, or the much-anticipated wave of baby boomers starting to think seriously about life beyond their all-consuming business enterprises.

Whatever the reason, it is certainly a trend. My observation is that there are a wide range of potential outcomes. Sadly, in some cases I have seen businesses close with very little or no value realised. In others, the process has released sufficient capital to allow the retiring owners to comfortably fund the next phase of their lives while enabling a highly viable business to transfer to the next generation of owners.

The topic of business valuation sits firmly as a subset in the chartered accountants’ domain. But like so many areas in business, it always seems to sit somewhere between an art and a science. I see these events from a generalist perspective with the successes having some common traits.

Seek specialist advice and employ a team approach. In much the same way as I wouldn’t ask my GP to perform neuro-surgery, you need to be using the right specialists. An accountant with valuation experience in your industry, a lawyer, business broker and financial adviser, should be part of that team. Sometimes I get push-back on this suggestion, because of the potential costs associated with multiple advisers, or the possibility of offending their existing providers.

These are considerations, but (in most cases) you only have one business to sell, and you can’t afford to get it wrong. If the team is well briefed and there is good communication between all parties, there is unlikely to be a duplication of cost.

Start early. At its best I have seen owners incorporate succession thinking from their very first day of operation. For most of us this is a big ask, but if you are going to extract the best value for your business, the process can easily take a number of years.

What price do you need to achieve? Most business owners initially reply to this question with; “as much as possible!” The work I do in this area is often in the presale phase.

Through the preparation of capital and cash-flow models, we work with clients to see what sale price needs to be achieved to meet their retirement income needs and potentially fund any intergenerational goals.

Together, we establish how much money you may need through your retirement, build in the returns you can expect along the way and work back from there. This provides helpful guidance for business owners. It’s fair to say in this area not all financial advisers are the same. There is a lot more to the process than just compiling a set of static investment recommendations.

By establishing a price target, it often leads to a discussion about how to get the business “sale ready”, including what needs to change within the business to achieve a target price. In other cases, the price target can be less than initially anticipated. This can help owners avoid holding out for a price which just might not be possible, nor is it necessary.

Don’t ignore the psychological aspects of the business sale process. This issue should probably be higher on this list. For most of us, change is difficult. In the case of business owners, the situation is often doubly difficult as their identity can be closely entwined with the business. Probably the most successful strategy I have seen work in this area is to spend time in the company of others who have been through this process, or to continue in some form of voluntary business mentoring role.

Educate the next generation. With clients who are in the fortunate position to be considering intergenerational wealth there is sometimes nervousness about whether the next generation is ready for the responsibility. History abounds with stories of family wealth built by one generation, maintained by the second and squandered by the third.

Structures such as trusts can help protect and grow wealth through multiple generations. However, from my observation, the most effective “vaccine” against this risk is financial literacy and an overt discussion about the family’s values as they relate to money. For many business owners the equity in their business is their most significant financial asset. Its value is a result of the owners’ continuous reinvestment of time, effort and money, all concentrated in one industry and compounded over the years. Considerable thought, care and advice is required at the point of sale if a drama is to be avoided.

— Peter Ashworth is a principal of New Zealand Funds Management Ltd, and is a Dunedin-based financial adviser. The opinions expressed in this column are his own and not necessarily that of his employer. His disclosure statements are available on request and free of charge.