part TWO: Succeeding with succession

Adam Bernstein continues his examination of how businesses should handle a hand-over

By Adam Bernstein | Published:  11 October, 2018

Businesses change hands for all manner of reasons, but crucially for family businesses, change has the potential to damage family harmony as well as destroy the future wealth of all concerned. But what happens should no family members want to take on the business and the business has to be sold?
    
In this instance David Emanuel, Partner at law firm VWV and head of its Family Business team, says the family should take advice on the options. He advises seeking recommendations and says to “think hard about engaging people who work principally on a success fee percentage commission-only basis – the overall cost may be higher, although you may be insulating yourself from costs if a deal doesn’t go ahead – but there can be a conflict of interest for people remunerated only if a deal goes ahead.”
    
One step that will ease the process is to undertake some financial and legal due diligence as if the seller were a buyer, to identify any gaps or issues that may affect price or saleability.

Seeking a valuation
Businesses will generally be valued on one of three bases – the value of net assets plus a valuation of goodwill; a multiple of earnings; or discounted future cash flow.
    
Nick Smith, a family business consultant with the Family Business Consultancy, sees some families seeking the next generation pay the full market value for their interest, and other situations where shares are just handed over.
    
“In between the extremes,” says Nick, “there are a raft of approaches and solutions including discounted prices and stage payments. There are also more complicated solutions such as freezer share mechanisms, where no sale takes place but the senior generation lock in the current value of their shares to be left to the wider family and the next generation family members actually working in the business receive the benefit of any growth in value during their time in charge.”
    
What of an arm's length sale? Here David says: “The family will ideally want to be paid in cash, in full, at completion, rather than risk the possibility of deferred consideration not getting paid because the business gets into difficulties under its new owners, or a dispute arises over what should be paid.” However, he says that may not be possible, and there may be many good reasons why the retiring shareholders keep an equity stake or agree to be paid over time or agree that some of what they get paid is subject to future performance. Even so, he suggests starting with the idea of the ‘clean break’ and working back from there if you have to.
    
It’s important to remember that in a succession situation, where one generation is passing the business to the next, and the retirees are expecting a payment of value to cover their retirement ambitions, deferred payment risks may be looked at differently depending on the circumstances – families will be more trusting.
 
Tax planning and family succession
As might be expected, tax planning is important and should always form part of the decision-making process but it should never be the main driver. That said, no-one wants to hand over, by way of inheritance tax, 40% of the value of what they have worked for.
    
Both Nick and David consider tax planning key. Says Smith, “the most important point is what is right for the family members and the business itself.” He believes the UK offers a fairly benign tax-planning environment for family business succession so that most family businesses can be passed on free of inheritance and capital gains tax to other family members. However, the risk of paying a bit of tax pales into insignificance if passing on the family business to the next generation means passing on a working lifetime of misery and a failing business. David points out that if Entrepreneur’s Relief is available, the effective rate of Capital Gains Tax is just 10%.

In summary
Family businesses are peculiar entities, caught by both the need to compete in the marketplace and the need to keep familial factions onside. Whatever course is taken to secure the future of the business, one thing is certain – everyone needs to keep the lines of communication open.


Related Articles

  • Part one: Succeeding with succession  

    According to the Institute for Family Business (IFB), two thirds – 4.7m in total of UK businesses are family owned. Crucially, the IFB believes that around 100,000 of these firms change hands each year.

  • Connecting to tomorrow’s lean workshop 

    In a previous article, I had written about the fourth industrial revolution, but I suspect that this may not have been the most threatening topic that you were thinking about concerning your day-to-day workshop business – the business of diagnosing and repairing cars, using a range of workshop equipment and agreeing ‘partnership’ relationships for the technical data and replacement spare parts.

    The way that you work may have evolved over the years, mainly due to the increasing vehicle technology, but the basic principle has remained the same. You have customers who choose to come to you due to the good service and competitive pricing that you provide. However, the world of vehicle repair is changing and if you do not adapt, you will die. Unlike previous industrial revolutions, the pace of change is now much faster. So how is this going to impact the aftermarket?

    Approach
    The ‘internet of things’ (IOT) will change the approach to diagnostics, service and repair of vehicles, but also the way that the workshop equipment will be connected, the way that you handle your customers’ data and the way that you exchange data outside of the workshop, both as a consumer of data, but also as a data provider in data trading eco systems. All this will change the way that you do business. This might all sound like some science fiction concept, but this is already happening today with many vehicle manufacturers and their associated main dealer workshops. If the aftermarket does not start to develop the same approach and service offers, then it will not be able to compete.
        
    However, to understand this better, let’s start with today’s ‘classical business model’ and then see what will change. Today it all starts with your ability to directly communicate with both your customer and with their vehicle and (for the more difficult jobs once that vehicle is in the workshop) your ability to offer a competitive quotation.
        
    Once the vehicle is in your workshop, the diagnostic work or the replacement parts are identified, the parts ordered and the ‘complete repair process’ is conducted. However, there are three fundamental aspects to ensure that this process can be fulfilled – firstly, being in direct contact with the customer, secondly, being able to directly access their vehicle via the OBD plug and subsequently its data and thirdly, using that information to conduct
    the complete repair process in the workshop.

    Internet of things
    So, what is changing and how will the ‘IOT’ help to implement new and ‘lean’ business models to remain competitive? It will still all start with the ‘repair process’, but this will no longer be with the customer initially calling you or coming into the workshop with a question of ‘can you fix my car?’, but it will be through remote monitoring of the ‘thing’ – the vehicle (via OBD plug-in devices or in-vehicle telematics platforms) to conduct remote diagnostics, prognostics and predictive maintenance services. This will inform you when the vehicle needs work and should lead into being able to contact the customer and offer a competitive quotation for the work needed that ultimately should still result in the vehicle coming into the workshop.
        
    When the vehicle does arrive, you will already know the details of the vehicle and the necessary work, so can configure the workshop resources (which ramp, what workshop equipment, what technical data, what replacement parts etc.), before the vehicle arrives.
        
    You can also ensure that the various ‘external data’ that may be needed for the job is pre-arranged and can be downloaded into the specific workshop equipment which is needed as part of the repair process. This can be a ‘just in time’ download of the technical data, the diagnostic test routine, the replacement part fitment method and so on. All this can easily reduce the workshop time needed to complete the repair process by 50%.

    Captured
    This may already sound like a great move forward to be lean, more profitable and more competitive, but there is even more! You also now have new ways to use the data that you have captured. Not only will you know the faults of the specific make and model of vehicle, which in turn, you will store in your database (non-personal, machine generated data), but you will also be able to use this data to exchange or trade data with your existing suppliers or other (new) partners to reduce both your costs and theirs. Welcome to the world of data trading – and get used to it, because it will be your future.  The internet of things, means linking to the ‘thing’ (e.g. the vehicle and workshop equipment) and then handling the data created, by using it in new ways to make the whole workshop and vehicle repair process more efficient, as well as supporting new business models beyond just what you can do today in the workshop. However, let’s also take a step back and look at workshop equipment as part of ‘the internet of things’. It already starts with a new range of ‘connected’ workshop equipment that will not only be able to be remotely monitored by the equipment manufacturer to ensure better reliability, together with faster and cheaper repairs, but will also be the basis for ensuring that the technical information you require for the job ‘in hand’ is supplied not only ‘just in time’, but also charged for on a new competitive bidding basis from a range of suppliers and charged on an individual job basis. Going a stage further, you may be able to exchange data with your equipment suppliers so that they can collect ‘big data’ from all their customers and use it for their own new data trading business models and in turn, use this to offset supplying data or services to you at
    a lower cost. This may also apply with your parts suppliers to provide them with better forecasting and trend analysis.

    Data centric
    The classic business model of today that is ‘customer centric’ will change to become ‘data centric’ that creates added value to the consumer’s experience, but also to the service provider – you!

    This change of accessing the vehicle, your customer and use of the vehicle-generated data is a disruptive evolution that will drive (no pun intended) a revolution in the aftermarket. However, the key issue will be the ability to access the vehicle, its data and in-vehicle displays to offer your services when the vehicle needs work and that is likely to be a legislative issue as the vehicle manufacturers try to use their technological advantage to dominate and control tomorrow’s repair and maintenance business. It’s up to you to fight not only for your ‘right to do business’, but for your ability to evolve your current business models into those of tomorrow.

  • Skills, bills and jaw-aches  

    I knew starting a business would never prove easy but we don’t get anywhere in life without taking a risk or two. Having been in the industry for a few years now I have learnt that the two main attributes a successful car repair workshop needs is the skill to diagnose and repair and the ability to communicate with their customers.
        
    Modern car repair facilities have seen a dramatic change in recent years with the huge advancements in computer-related faults. The main tool of repair has seen the demise of the hammer and the growth of the diagnostics fault reader. I am a hands-on mechanic and much prefer older vehicles where I don’t need to locate the OBD port before the bonnet release, but I have to move with the times if I am to succeed as a business and that is why I am looking at hybrid servicing and trying to tap into that market. It is tough for me to admit that as I love working on classics and I will still have a part of the workshop for the golden oldies but it is hard to ignore the impact hybrid and electric vehicles are starting to have on the repair market.

    Communication
    The car repair industry has a pretty bad reputation – lets be honest. My female friends and family dread having to buy a car or go to a garage. Communication for me is so important, as with any business it is crucial that you are able to talk to customers and listen to their concerns without belittling them. The issue with car repairs is that it is a complicated process that is difficult to explain in layman’s terms and which can alienate an individual if they don’t understand. There is also the problem of distrust. If a customer doesn’t understand the problem and how you are able to fix it you risk confusion and doubt. There are so many horror stories of people being fleeced and conned as they don’t understand how a car works that every customer feels like you are going to do the same, it takes a long time to earn a good reputation and just one bad experience to send your business crashing down.

    I always like to explain as simply as possible with the work I am doing, I keep the broken part so that I can show the customer what I have replaced and what their hard earned cash has been spent on, I also take pictures and probably over explain everything. It is important for my business that I gain a good reputation as word of mouth is my main advertisement. As busy as a car workshop is always make time to have a friendly chat with your customers, especially if they have a trade, you never know when you might need a plumber!

    So, this month has been busy, productive, stressful and hot (I am writing this in July) but the world of car repair stands still for no-one.

  • Do you have a business or a profitable job? 

    It’s a favourite of mine, and one we ask of all garage owners that join the Auto iQ business development programme...
      
    “Do you have a business or a profitable job?” Not sure which one you’ve got? Carry on reading.
        
    That question is a doozie and is often met with a few seconds of silence followed by a mixed range of answers whilst the questionee arranges their thoughts. The question is designed to be thought-provoking and entice the garage owner to work through the differences between the options.

    Different sides of the coin
    What’s the difference between a profitable job and a business? It’s a fine line with a BIG difference.
        
    Quite simply if you have a profitable job the income from your work (where you spend your hours in the day) reduces when you’re not doing that work. You might be able to get away from the business for a week or two but longer than that will have you sweating, you’ll wonder if your techs are efficient without you in the building, concerned that your numbers are going south.
        
    A business on the other hand will run without you being there for a significant length of time. Which one do you have?
        
    I can feel the tension elevating as some of you may be rising from you chair ready to give me a good talking-to. Hang fire though and hear me out. In no way am I saying that having a profitable job is wrong. Quite to the contrary. If that’s what you set out to achieve then who am I to say any different? Here’s the deal though. Most garage owners don’t embark on this amazing journey to be ‘self employed,’ they do it to build a bigger and better future for their families. They did it to have more time with their loved ones, the funds to allow this and probably have early retirement thrown in with the business providing the income. Can a profitable job do this or do you need a business that’ll run without you? I think you know the answer.

    What’s the difference?
    So you’ve decided that a business is preferable to a profitable job. But is there really that much of a difference? Let’s take a look. It often comes down to nothing more than a state of mind that separates these different sides of the same coin.
        
    Let’s compare the owner with a profitable job and the business owner. At first glance I’d challenge you to notice the difference. They’ll both have a business that they’re proud of and rightly so, they’ve worked hard to build it. More often than not they’re both skilled technicians, have the respect of their team as well as their customers. Then how can it be that one earns significantly more than the next. One word, focus.
        
    Our owner with the profitable job will be very focused. He’s focused on his own ability to fix the vehicles in his workshop often working shoulder to shoulder with the technicians. The technicians respect him because of his technical ability and work hard alongside him. All admirable qualities.
        
    Our business owner also has a laser-like focus, his target is a little different though. His gaze is firmly fixed on a vision of the business he’s building and knows that long term success requires not only focus but patience. He’s acutely aware of the one thing that will bring freedom and the time with his family (the reason he started this venture) is the team he builds and trains.
        
    This isn’t to say that he doesn’t roll up his sleeves and lead from the front when required, it’s just that his daily focus is on the strategic functions of the business that drive success, rather than the day-to-day tasks that so many owners get caught up in. There’s a huge benefit to this as well. You get to keep the skin on your knuckles.

    Dominant thoughts
    It’s a proven fact that we all move through our day in the direction of most dominant thoughts. What does your typical business owner ponder?. Now I can’t read minds (how cool would that be?) but I do know that these are the questions that need to be answered:

  • The Parts Alliance continue 'Big Drive' to win customers 

    The Parts Alliance is rolling out ‘The Big Drive’ as the latest in a series of national promotions. Billed as the ‘Luxury Edition’ and running until the end of November, the promotion gives garage customers the chance to win a Jaguar XE in either the Portfolio or R-Sport models.


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