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Succession planning about knowing key indicators

In order to formulate an effective succession plan, SMSF strategists and other practitioners need to know the key drivers of revenue in their businesses, especially those elements that will come into play in the future, according to an industry expert.

“You need to know how the business makes money and to look at leading indicators in this area,” Succession Plus chief executive Craig West told delegates at last week’s NowInfinity Conference 2013 in Hawaii.

“And it’s important to know how will the business make money in the years to come.”

However, West was quick to point out a focus on revenue was only a short-term strategy, whereas examining the equity structure of the business and how that element would take shape reflected a more long-term perspective.

He emphasised succession planning was a twofold opportunity for financial advisers because putting the right processes in place would help create certainty in their own businesses as they moved into the future, and succession planning was likely to be a subject a number of financial planning clients were struggling with as well.

Highlighting the point, he said: “Seventy-five per cent of businesses do not have any agreement at all on a proposed succession plan.

“But 33 per cent are relying on the sale of their business for cash to fund their retirement.

“How many times do you hear someone say: ‘I don’t have a lot of money in super, my business is my super.’ I hear it every weekend, but the facts tell you that’s not going to happen.”

On the basis of industry statistics, he said the area of succession planning presented a $3 trillion opportunity for practitioners.

“In Australia there is about $3 trillion in equity value in privately held businesses that will transact [in regard to succession] in the next 15 years. Three trillion dollars is a hell of a lot of money,” he said.

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