When we ask our motor dealership clients about their succession plan, many of them believe that succession planning is simply passing the ownership of the business onto one or more children. However, when we delve into the detail it soon becomes clear that it’s not as simple as just letting a son or daughter take over.
According to Family Business Australia, 70% of family businesses fail during transition to the second generation, and a whopping 90% fail to transition to the third generation. The odds are not good and highlight a lack of awareness around the importance of careful and considered succession planning.
One of the problems a lot of people have with transition planning, both financially and personally, is you have to be able to contemplate your own death, or at least giving up control. Of course, both things will happen eventually, so you may as well get on with it!
Added complexity for Motor Dealerships
When it comes to succession planning for motor dealerships there is an added complication, namely the influence of the Original Equipment Manufacturer (OEM). The need to meet increasingly stringent OEM standards and guidelines is having a major impact, especially on smaller dealerships. The OEM needs to have confidence in your plan and your successor needs to begin developing the appropriate relationships as soon as possible. In cases where members of the owner’s family are not interested in taking ownership of the business, owners need to be proactive about succession planning, in particular sales opportunities.
Most Dealers have similar challenges when they start the succession process:
- Developing the next generation to manage and lead – identifying and closing gaps
- Choosing who will be in control – the OEM wants only one Dealer Principal
- Ensuring that non-participating children are fairly provided for in the planning
- Incentivising key employees to remain through an ownership and management transition
- Letting go –the thought of retiring can be a daunting process especially for those Dealers whose entire being is wrapped up in their Dealer persona
- Knowing if you have the finances necessary to maintain your lifestyle, including hobbies, activities, and daily expenses, and whether you have provided for your spouse and family.
Most motor dealerships are owned and managed by family businesses and the family name is well known in the local community. When it comes to purchasing a car, new or used, reputation and trust are key considerations in the purchasing decision and this is when the family name and the values it represents can deliver real competitive advantage. This value in the family brand reinforces the need to make formal plans to ensure that, where possible, ownership and management of the business remains within the family for generations.
Most business owners know that they need to make formal plans for a successor, but planning can easily fall into the ‘things I’ll do when I have time’ basket, and in reality the immediate needs of the business take precedent, i.e. managing people, cash flow, and daily operations. But it is of critical importance that as Dealers approach retirement, succession planning becomes priority.
Navigate your journey with five key steps
Succession planning deals with both management (who gets to run the business) and ownership (who gets to own the business) once the business is handed down either voluntarily or involuntarily. The trap that a lot of business owners fall into is letting the enormity of the task overwhelm them to the point where they don’t even start. Remember, you don’t need to decide on everything straight away – it’s a process that can take months and indeed years.
1. Have a contingency plan on day one
From the moment you become a Dealer you need to have a contingency plan – a plan for the unexpected. Ask yourself ‘if something were to happen to me today who would manage my dealership?’ You need to identify who will assume ownership and management duties in your absence and involve this person in your decision. All relevant legal documentation needs to be completed and kept up to date, including powers of attorney, a will, relevant insurances and tax planning.
Don’t wait until tomorrow to prepare a contingency plan; it may not arrive.
Knowing that you’ve done all that is possible and practical in case of an unexpected event will bring peace of mind to you and your family and go a long way towards ensuring that the business will continue without you.
2. Start planning your exit early with a positive frame of mind
Ideally, succession planning should begin in your late 40s or early 50s, and it starts by communicating with those you know and trust. Speak with family, staff, and advisors who can objectively discuss your vision for the future — for yourself for your family and for the business. The sooner you start discussing your succession with those you trust, the sooner you can feel secure about your company’s legacy and your personal future.
Advance planning will also enable you to capitalise on various mechanisms that can save you money including various types of trusts, gift giving, long term purchase and sale agreements and deferred buy outs. All of these tools are available if you start planning early and engage trusted advisors to guide the process.
3. Take a philosophical approach to refine your goals
Having spoken to close family, staff and advisors, the Dealer Principal must decide who or what comes first. Balancing personal needs with the expectations of the family and the demands of the business is an almost impossible mission. Therefore, a focus needs to be defined. Are you going to approach succession with a ‘me first’ mindset, a ‘family first’ mindset, or a ‘business first’ mindset?
One particular Dealer we worked with chose a ‘me first’ mindset simply because his original wish of having the kids take over didn’t pan out the way he’d hoped. The children had all forged their own paths in life and his dream of building a family legacy had to change to finding the best outcome for himself in retirement. In this case the successor was an outside buyer who needed to be vetted by the OEM before the deal was sealed.
Most Dealers we come across tend to lean towards a ‘family first’ focus, whereby the health of the family unit is the key priority and all decisions around future management and ownership revolve around being fair and equal to all family members. This philosophy defines success as keeping the family together. This can be a challenging yet very rewarding path.
In a ‘business first’ approach, decisions are made with a focus on what is best for the business regardless of the impact on the family. This approach brings with it the obvious challenge of dealing with potential fall-outs when difficult decisions around employment impact family relationships.
The important point regarding identifying your philosophical approach towards succession planning is that no one approach is better than the other. The key is to decide which philosophy you are embracing for the immediate future, noting of course that your decision may change over time as circumstances change.
4. Choose the next leader
When approaching management succession you need to carefully consider the needs of the business, even when you’re adopting a ‘family first’ philosophy. In choosing a successor you must rely on the same rigorous evaluation process as you would adopt hiring a stranger. Starting with a profile of the ideal candidate is a good start (as opposed to starting with a person already in mind).
Once you have a list of required skills you need to assess your family members’ capabilities and select the best fit – the candidate most likely to succeed. Beware of innate biases that may unknowingly influence your decision as well as a potential lack of candor from your existing employees.
From here there should be a clear understanding as to who is going to be groomed to assume control, and this needs to be shared with the OEM. Once identified, the successor needs to be trained and exposed to the OEM so that relationships can be built and stakeholders can gain confidence in the next leader. A mentoring plan needs to be developed and the transition timeline agreed and communicated.
A structured process that engages the whole family with independent facilitation and effective communication will be critical to ensuring that the decision as to who will succeed as the Dealer Principle is accepted and embraced by the family.
5. Decide who gets the keys
At some point, either during your lifetime or at the time of your death someone else is going to be holding the keys to your dealership. Transfer of ownership generally consists of either a family transfer or a sale to an external purchaser.
There are several ownership possibilities:
• Transfer or sell to immediate family or extended family
• Sell to another Dealer or other external party
• Management buy-out
• Going public.
A carefully planned family governance process with a family constitution, family meetings and a family council are all critical ingredients that will help the family resolve the myriad of issues they are presented with. How do we protect the asset? How do we solve conflict? How do we be fair but at the same time acknowledge the different roles played and contributions made by individuals?
All shareholders may be asked to enter into a shareholders agreement and make arrangements to protect the family assets in accordance with the rules agreed in the family constitution.
The biggest mistake we see with ownership transition is when the management successor and his or her team are not given enough authority or control to successfully manage the dealership. The influence or interference from sideline owners derails the best efforts of the successor, making the experience not worth the reward. In this case the best play can sometimes be to let the difficult personalities go along with their share of the money.
As with management transition, ownership transition is not a straightforward process. The issues overlap to the point where they converge, but with a clear process and effective communication the family unit and the family business can grow stronger as a result.
Plan, communicate and plan some more
An effective succession plan can be more about ‘growing’ than ‘going’. With clear communication and agreed timelines, a succession plan can and should be integral to the long term growth strategy of the dealership.
KPMG have been working with motor dealerships for over 100 years and have successfully developed and executed succession plans for their clients. Proactive succession planning can mean the difference between leaving a long lasting legacy for the benefit of the family and employees versus a legacy of litigation and failed business and family relationships.
For further information and assistance, please contact Bill Noye on 07 3233 3253 or Aaron Street on 07 5577 7545.
Partner – KPMG
Partner – KPMG