Why do so many SMEs lack a succession plan?
Owners are busy running the business. Succession feels distant, emotional and complicated, so it gets deferred. The result is often a rushed exit forced by health, burnout or a partner dispute, which is the worst time to negotiate a price or arrange funding.
Small businesses make up the overwhelming majority of New Zealand firms. MBIE’s 2025 small business factsheet records that 97.2% of all New Zealand enterprises are small businesses. Many of the established ones were built by owners now approaching retirement, which means a large number of handovers are coming.
The four common succession routes
| Route | Who takes over | Typical funding challenge |
|---|---|---|
| Family succession | A son, daughter or relative | Successor has little capital; other siblings may expect fairness |
| Management buyout | One or more existing managers | Managers have skills but limited security |
| Partner buyout | An existing co-owner | Paying a large sum without starving the business |
| Third-party sale | An external buyer | Finding a buyer and agreeing price |
Each route can work well. What they share is a funding gap: the business is worth far more than the successor can pay upfront.
Step 1: agree how the business will be valued
Disagreement about value derails more successions than funding. If there is a shareholders’ or partnership agreement, check whether it sets out a valuation method or formula. If not, consider commissioning an independent valuation. Our guide on how to value a small business explains the common methods.
In family successions, a discount to market value is sometimes agreed. That can be generous, but it can create tension with other family members. Transparency and advice help.
Step 2: prepare the business
A business that runs without its owner is worth more and is easier to fund. In the years before handover:
- Document systems and processes.
- Transfer key relationships gradually from the owner to the successor.
- Clean up the balance sheet: clear IRD arrears, collect old debtors, dispose of unused assets.
- Separate personal and business expenses so the true profit is clear.
- Produce regular management accounts that a lender can rely on. See management accounts lenders like.
Step 3: design the funding structure
Most successions combine several sources:
- The successor’s own contribution, even if modest.
- Lender finance for a lump sum at handover. When the successor or a family member owns property, a property-secured loan is often the most practical route. It can be a first or second mortgage, and no financials are needed for the initial assessment.
- Deferred payments to the retiring owner over an agreed period.
- An earn-out, where part of the price depends on future results. See earn-outs and deferred consideration.
- Company cash, used carefully so the business keeps enough working capital.
The combined repayments must be affordable from the business’s maintainable earnings after paying the successor a fair wage.
Step 4: protect the business during the handover
- Keep working capital intact. Paying the outgoing owner from the trading account can leave the business short at exactly the wrong moment.
- Plan the communication. Staff, customers and suppliers should hear a consistent, confident message.
- Release guarantees. The outgoing owner will want to be released from personal guarantees to banks, landlords and suppliers. Plan how that will happen.
- Agree the outgoing owner’s role. A defined transition period, perhaps part-time for a few months, helps. Open-ended involvement usually does not.
Step 5: take tax and legal advice
Succession involves share transfers, possibly trust changes, and sometimes the sale of property alongside the business. The tax and legal consequences can be significant. Engage your accountant and lawyer early.
What if the owner leaves suddenly?
Illness, death or a breakdown in a partnership can force an unplanned exit. Owners can prepare by:
- having an up-to-date shareholders’ agreement that covers death, disability and departure
- considering buy-sell arrangements funded by insurance
- keeping management accounts current so value can be established quickly
When an unplanned exit happens, partner buyout and succession funding can help the continuing owner pay out the departing party or their estate without disrupting the business.
A generic example
Example scenario, generic and for illustration only. The founder of a Southland engineering firm plans to retire in three years. His daughter has worked in the business for eight years. Over three years they document processes, move key client relationships to her and produce monthly management accounts. At handover, she funds part of the agreed price through a property-secured loan over her home, and the balance is paid to her father over two years. The business’s own facilities are left in place for trading.
Where to start
Begin with a conversation with your accountant about value and structure. When funding becomes part of the plan, a 60-second enquiry will connect you with a lending specialist who can outline the options.
Quick answers
When should I start succession planning?
Ideally three to five years before you plan to step back. That gives time to develop a successor, tidy up the business, agree a value and arrange funding without pressure.
Can my children buy the business if they have no money?
Often, yes. Many family successions are funded by a combination of a loan, sometimes secured on family property, and deferred payments to the parents over several years.
Should the business pay out the retiring owner?
Sometimes the company buys back shares, but this must be done carefully so the company remains solvent and keeps enough working capital. Your accountant and lawyer should advise.
What if the owner dies before a plan is in place?
The shares pass to the estate, and the surviving owners may be obliged or want to buy them. Buy-sell agreements backed by insurance are one way owners plan for this. Get advice from a lawyer and insurance adviser.