How your business succession plan can unlock wealth

Bill Heestand says property investors can unlock more cash to fuel their investments and create wealth by building and selling a business. And you won’t be the only beneficiary.

In a special interview which celebrated Property Hub’s 300th episode on the Get Invested podcast, KnowHow’s Bushy Martin was joined by Bill Heestand to discuss how property investors can supercharge their investments and set up for retirement through creating and selling a businesses.

The author of The Ultimate Career Path – How A Smart Employee Can Buy Out The Boss revealed insights and advice from his 32 years in business, during which time he successfully bought and sold four small businesses to create ongoing regular retirement income.

With 2.5 million small business owners in Australia, and 8 million small business employees, your small business could be the key to unlocking wealth. That’s for the business owner, but also a savvy employee who could take over and ‘become the boss’.

Growing your compound wealth

Before selling your business, maximising the cashflow, and therefore business worth, will ensure investors are better set up for retirement.

“So compound wealth is the cash flow of the business that continues to circulate. The business has wealth only because it has cash flow, and as the cash grows, it creates a more and more valuable business in itself,” Bill said.

“Now, most of our businesses sell for some multiple of cash flow. So if the multiple is 3x, then if your cash flow is $200,000, your business is worth $600,000. If it’s a million, well, it’s worth three million. And so it’s that cash flow that I call compound wealth, because as you grow the business, you are compounding the wealth of the business, and then it’s that same cash flow that is the funding vehicle for your retirement.”

Don’t rush into the process

Bill dived into key takeaways and actions that aspiring business owners and successors need to take on board in order to best fuel their investments.

“A key takeaway is to not get in too much of a hurry and to see it as a process and to understand that there are multiple ways to become a business owner. Some people can have an idea, start up a business and become mega wealthy … but most people can’t. So view it as a process, because most young men or women are not going to be able to start up a business from scratch and have it really turn into a major life sustaining lifetime income kind of program,” he said.

“Similarly, with the older business owners, if they think somebody is coming along for their small business that wants to give them $2 million or $5 million and have a job, they’re also fooling themselves. And so in between those two is where this internal succession really comes into play.”

Finding the right successor

Bill recommended that when investors create a succession strategy, they should look for an unrelated successor for their business as opposed to a family member or friend.

“It’s not impossible to have a family member be that person, but it is not that common. If you look at the statistics, it’s pretty miserable the number of family successions that actually work,” he said.

“But the number of external successions has a much greater potential because the interests are much more diverse. The person who’s buying it needs their own lifestyle income program. They need a career for life. And you want to have an exit from the business where you get cheques and you don’t have to be bothered with that day-to-day operations anymore.

“So the right successor should have a goal, passion and purpose. It’s a triangle. Up at the top is goals, and then passion and then purpose. And that’s where motivation comes from. So if they’re motivated because they just want to be rich, hat’s probably a good indicator that something’s not quite right. But if if they have a goal and a passion and a purpose and that’s what creates the motivation, then you can tell that person is somebody who has the internal goods to really carry forward and make the thing a success.”

Setting up your succession plan

Investors also need to ensure a successful transition when bringing in a successor.

“The statistics are that most small businesses die. Why do they die? Because the owner tries to stay in the saddle long after they’re actually capable of making the business continue to function, and a functioning business is happy clientele. And happy clientele means that they call you up for some reason, they want your stuff. And let’s just say you’re off in your vacation home for a month, but you really haven’t put the pieces in place so that when that client calls they get their needs met. Well they’re going to call somebody else and they’re going to be the customer that never came back,” Bill said.

“So it depends on the business, but in a lot of small businesses it’s about the personal relationships. And so it’s really important to start introducing the successor, bringing them along in the meeting, including them in the program and letting them talk, letting them have a role and sending them there by themselves without you. So just letting them get the experience of knowing how it really works. And that’s how you create a succession.”

Ensuring the succession plan is sustainable

Investors and business owners need to be realistic and question what the business can sustain.

“Give the young person an opportunity and an income that’s going to be decent, because the person who’s going to get the job that you had, they got to have a good income. So if you’re taking too much out of the business and they can’t have a good income without selling double what you ever sold, why don’t they just go start their own business and sell half of what you ever sold and they’ll be happier and you won’t have a successor. So your income program has to fit in to the business’ financials,” Bill explained.

“It has to make the the new owner really happy, because a really happy new owner is not going to want to blow that up. They’re going to want to make it so that they’re happier, and the way they can be happier is to keep paying you what will ultimately, hopefully turn out to be a relatively small amount of money to them. So you as the business owner, your goal should be the person you’re growing is actually better at the business than you ever were. Because if they are, you’re successful doing nothing, or whatever you choose to be doing, and they’re really happy.”

Listen to the full interview here.

Want to Know How you can build wealth and optimise your property finance with the help of leading, qualified experts? Check us out and talk to the team, now.

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