BankwestFuture of Business Report

February 2018

Contents

Key insights

Succession planning

Case study: Willeng Engineering

Business valuation

Planning for the worst

Family businesses

Case study: Noondine Gardinerand Co

Local conditions driving business confidence

The drivers of success

Celebrating business successes

The economic future

WA businesses are focusing on growth

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Key insightsForeword

The Bankwest Future of Business Report takes a detailed look at how Western Australian businesses are planning for the future.

In this report, we find most business owners are not prepared for the future. Only one quarter have a succession plan in place for their business, and more than half feel ill prepared for the future after they retire or leave the business.

But steps can be taken to improve confidence about succession planning. Business owners say accessing information and advice to help them make informed decisions would increase their confidence.

While they may not yet have planned for it, the typical ‘ideal’ succession plan for WA business owners is sale of the business – to a third party or to existing partners or employees. The research found, however, only three quarters of those intending to sell are confident their business is a saleable asset.

Key person and customer risk are common challenges facing WA businesses, with nearly nine in 10 admitting the business is reliant on them or other key persons to run it, and more than half acknowledging the business is at least somewhat reliant on one or a few key customers.

Despite the recent and ongoing challenges brought about by the local economic environment post

mining construction boom, most WA business leaders are optimistic about the future. More than half agree the future looks bright for WA businesses in the next five years, while close to four in five are at least somewhat focused on growing their business in the next 12 months or the next five years. Of the growth-focused businesses, three quarters are targeting their efforts locally within WA.

Respondents share a degree of optimism towards the WA economy, with close to two in five saying their outlook is positive in the next 12 months and only one in five sharing a negative outlook. In line with their positive outlook for WA, close to two in five think the Australian economy will expand in the next 12 months, while less than one in four believe it will contract.

The new local economic environment has forced businesses to adapt through a stronger focus on customer satisfaction and retention, targeting new types of customers and reviewing and revising pricing.

Looking forward, key enablers for growth are perceived to include: customer satisfaction or referrals, local economic conditions and the ability to appeal to new customers. Local economic conditions also pose a potential threat to growth, as does managing cash flow and maintaining work-life balance.

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Succession planning About the reportMost WA business owners have no succession plan in place. As a result, more than half feel ill

prepared for when they retire or exit the business, with less than one quarter feeling very prepared.

The findings in this report are based on an online quantitative survey of 259 business owners, leaders and managers in Western Australia, conducted on behalf of Bankwest by CoreData between October and December 2017.

Respondents were drawn from small and medium businesses with operations in Western Australia. Small businesses had an annual turnover of up to $2 million while medium businesses had an annual turnover of between $2 million and $250 million.

The research takes a detailed look at how Western Australian businesses are planning for the future, with a strong focus on succession planning, and their outlook for the local and national economy in both the short and medium term.

Only a quarter of WA business owners have a succession plan.

Yes

No, and I will only plan this at retirement

Do you have a succession plan?

25.7%

No, but I will plan this ahead of retirement

23.8%

50.5%

25.7%

Seek professionalfinancial advice

Discuss your plans withfriends, family and colleagues

Research yourexit options

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What does the ‘ideal’ succession plan look like?More than half of WA business owners say their ‘ideal’ succession plan is to sell the business. However, only three quarters of them are confident their business is a saleable asset.

Business saleabilityWhile most WA business owners believe their business is saleable in its current form, close to one in four do not, and a further one in five are unsure.

Retirement is more than 10 years away for most WA business owners who are not fully retired. Fewer than one in seven owners plan to retire within the next five years.

20.9%Not sure

22.9%No

56.2%Yes

Other ‘ideal’ succession plans include:

Terminating the business

Passing the business to family member(s)

Other plans

Regardless of whether or not you intend to sell the business, in its current form, do you believe your business is a saleable asset?

sale to existingbusiness partnersor to employees

sale to athird party37.3% 12.5%

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Running a $3.3million business with multiple members of your family would cause many people a lot of stress, but manager Paul Willems and his two brothers Mike and Gerry, co-owners of Willeng Pty Ltd, take it all in their stride.

The Kwinana-based mechanical engineering business has grown at a sustainable pace since being established by their father Bill Willems in the 1980s out of a backyard shed. It’s this slow and steady approach that has allowed Paul, Mike and Gerry as business partners and brothers, to maintain a solid work-life balance.

“That’s the beauty of the business,” Paul says. “We have the opportunity to grow and there is more expansion we can do but it will be controlled, we don’t want to get big and then lose control of the situation. We are very conservative, we all go home and sleep well at night.”

Remarkably for a business operating in the 21st century, growth has been purely through word of mouth – the company has no website and doesn’t advertise.

“It is mainly location that has given us an edge [against our competitors],” Paul says. “That we are close to our clients, and that we give good service, quality work and at a reasonable rate.”

Paul admits there have been times of stress over the years, particularly during the recent economic downturn in WA.

Until 2017, the business had been consistently growing turnover, however Paul said revenue took a 10% hit in the last financial year.

“We were quite happy with the 10% [loss], there were a lot of companies in the area that saw massive losses,” he says.

“[Business] has turned around and it looks like we are heading back to where we were in 2016 in terms of revenue.”

Paul says when business was especially quiet in August last year, the firm and its 14 employees had to make changes to adjust to the new conditions.

“We basically cut our hours,” he says. “We usually do 10 hours a day, we cut back to eight hours a day. The guys are pretty good too, if it’s quiet, the ones that are in a good financial position will say ‘I’ll take a couple of days off here and there’ and that helps. We got through that period and away we went again.”

Willeng Engineering employs eight members of the same extended family – four brothers, and

Case study: Willeng Engineering Keeping it in the family

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four sons – with one of the sons currently being groomed to take over the business in the future.

While the three business partners all have different timeframes to retirement, Paul says the succession plan involves passing the business down to the next generation.

“I’d probably like to retire within the next 10 years,” he says. “We all have different situations, so we aren’t going to retire on the one day. We sat back and looked at the business a year ago and said we would wait another five years and then sit down and look at where we are at and what we’re going to do, because there are some properties we own as well, so we need to work out our exit strategy.

“We have four of the sons working here at the moment so one of them would be picked out I would expect [to take over the business] and he’s being groomed now for that position.”

While the brothers have no plans to expand the business outside of WA, the business purchased a neighbouring site three years ago with a view to future expansion in Kwinana.

“Our location is a key thing for us and we decided we don’t want to move anywhere else so we bought the building across the road, for future expansion and we lease that out,” he says. “Because of the downturn in the last couple of years it wasn’t a good time to be expanding.”

As well as location, Paul says service is a critical part of what sets the business apart.

“Basically our motto or business principle is that you do a good job at a reasonable price, clients will keep coming back,” he says.

And his advice to other family business owners?

“You have to get on, you obviously can’t be clashing all the time,” he says.

“You have to be flexible and listen to the people and what they have got to say and always, business comes first. We look at the business as our responsibility because we have a lot of people working for us who have families and if we don’t do our job properly then they don’t have a job and they don’t get to have a good family life and the rest of it.”

“We need to work out our exit strategy. We have four of the sons working here at the moment so one of them would be picked out I would expect [to take over the business] and he’s being groomed now for that position.”

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Business valuation Future earningsOperating profit, annual turnover and assets are the key metrics used by WA business owners to

value their business.

Less importance is placed on return on capital and equity.

More than two in five WA business owners have booked/contracted forward revenue for their business.

What are the key metrics that you use to value your business, in order of importance?

Operating profit

Annual turnover

Assets

Return on capital

Equity

Other

SUM

83.6%

74.1%

54.7%

48.0%

32.1%

7.6%

45.1% 23.3% 15.2%

21.0% 28.3% 24.8%

14.6% 25.1%15.0%

11.4% 17.6% 19.0%

13.1% 15.8%

4.7%

No

Among business owners whose ‘ideal’ succession plan is sale of the business, more than half have conducted some research on the current value of their business however only 10.7% have conducted extensive research.

Do you have booked/contracted forward revenue for your business?

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Key person and customer risk real concerns for WA businesses Key person and customer dependencies could threaten the potential for a sale. The majority (88.7%) of owners say their business is at least somewhat reliant on them or other key persons to run it.

better understanding of my exit options

better understanding of my expected cost of living in retirement

a financial plan

professional financial advice

better understanding of business valuation metrics

What would give you more confidence about succession planning apart from just having more money?

20.6%

19.4%

16.7%

16.1%

12.0%

How can you future proof your business?

have no plan for their business if they were to

suddenly lose the capacity to manage it.

Key person risk Key customer risk Earnings risk

are reliant on one or a few key customers

say their annual earnings are volatile in terms of changes that

occur year-to-year

maintain the majority of key relationships with customers, suppliers

and employees

Steps can be taken to improve confidence about succession planning. Business owners say accessing information and advice to help them make informed decisions would increase their confidence.

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Planning for the worst The three in 10 WA business owners who have a plan for their business if they were to suddenly lose the capacity to manage it have taken proactive steps to ensure the business continues without them.

(Female, 62 years old, Owner of an agriculture, forestry, fishing and hunting business)

(Male, 65 years old, Owner of a retail trade business)

(Female, 63 years old, Owner of a retail trade business)

(Male, 63 years old, Owner of a rental, hiring and real estate services business)

(Male, 59 years old, Owner of an accommodation and food services business)

(Female, 51 years old, Owner of an accommodation and food services business)

(Male, 55 years old, Owner of an administrative and support services business)

(Male, 59 years old, Owner of a health care and social assistance business)

“As it is a partnership, the other partner could manage it.”

“I have family members more than capable along with an accountant with whom most situations have been discussed.”

“My daughter and I are partners in the business, she would take over the day to day running that I now do.”

“I have educated my team to be able to operate at the level about their position.”

“If I was incapacitated, my children would inherit the company and keep it running.”

“Insurance and a saleable asset that is high demand.”

“Our plan is to hand the physical side over to a casual employee and the business side to the other partner.”

“Staff are completely trained and can perform all duties without my contribution.”

“Have my daughter takeover supported by my wife.”

(Male, 45 years old, Owner of a finance and insurance business)

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Family businessesMore than half of WA business owners work in a family-owned business. However, many are relying on trust and relationships over formal governance.

18.3% 11.3% 35.1% 49.0%

have a documented charter that governs the

business

have set out clear expectations

and roles for all family and non-family members

in writing

believe it’s possible their adult children will take over the business

with adult children have not discussed

succession planning with

their kids

If forced to decide, three in four would pick family unity over profit.

Profit

25.1%Family unity

74.9%

9.7%

documented risks of family conflict in future plans

for the business and mitigation

strategy in place

not familyowned

family owned55.2% 44.8%

“Licenses and permits are in the business name and not personal names. All on-book processes and projects are documented. We also have an up-to-date list of trained and qualified internal personnel as well as external personnel required to operate machinery.”(Male, 41 years old, Owner ofa construction business)

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Daniel and Julian Gardiner are fifth generation farmers on the family’s $1.1 million Moora farm business, established by their great, great grandfather in 1906. A traditional mixed enterprise, Noondine Gardiner and Co runs up to 13,000 sheep and crops 1200 to 1300 hectares of wheat, barley, oats, canola and lupin.

Daniel Gardiner, one of four business partners along with his twin Julian, father Colin and mother Roberta, says a strong focus on cost control and ‘share farming’ – an alternative to leasing – have helped drive consistent positive results in recent years despite higher input costs.

“We own 5,000 acres and we share farm another 5,000 acres with our next-door neighbour, who is also our uncle,” he says.

“Since we started share farming in 2014, we haven’t taken a step backwards. The share farmer owns the land, we do most of the work with our gear and we split the income and the costs. It works pretty well.”

Gardiner acknowledges that family businesses run the risk of conflict that, if unresolved, could threaten the company’s future viability.

“When it’s good it’s really good, and you can lean on family members a lot more than you can lean on employees. Everyone is putting in and everyone is sharing in the reward,” he says.

“And when it’s bad, it’s awful. Like any other family situation, there is always emotion involved so that makes conflicts seem bigger than they should be at times. It’s about finding a happy balance between resolving conflict and keeping people happy and people need to give and take.”

He says compromise is a major factor in ensuring conflicts are resolved, as well as seeking advice from people outside the farm, such as business consultants or fellow farmers.

“We’ve all learnt to go with the flow a bit more,” he says. “Conflict is good in business, but you’ve got to manage that conflict to get a productive outcome not a negative outcome. We do have a business consultant we use, and on a few occasions when we’ve been at loggerheads and haven’t been able to resolve what the best way forward is, having that objective point of view really helps.”

One source of conflict in recent years has been the issue of succession planning. Gardiner says having four people with different goals and

Case study: Noondine Gardiner and CoCollaboration and compromise the key to success

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plans for the future can make it difficult to find common ground.

“[Succession planning] has been the hardest issue we’ve had to deal with in the last four years,” he says.

“There’s still lots of work to do but I’d like to think my brother and dad would agree we’ve cracked the nut. We’re on the right path.”

What that path looks like is still up for debate, however Gardiner says there is alignment around the concept of keeping the farm in the family.

“We all believe in a hereditary-based system where what you’re trying to do in your work life is build up something so that you can give your kids the same opportunities that you had,” he says.

“From my view point that doesn’t involve buying a farm from your parents, it involves supporting them in the way they want to be supported in retirement. You’re not really an asset owner you’re a custodian, is how I see it. We’re just lucky mum and dad have given us the opportunity, they’ve done it tough to give us the opportunity, and you hope that you can do a similar job and give your kids the same opportunity.”

Navigating a way forward despite their differences has involved strong communication and a willingness to collaborate to find a solution.

“What the agri professionals outside the farm gate say is true,” Gardiner says.

“They talk about having really good communication; treating everyone fairly but understanding that fair doesn’t mean equal; thinking outside the box and being willing to find solutions - looking for win-wins - and treating it as a collaborative problem to solve instead of a competitive problem to solve.

“Also getting someone with an outside point of view to help you nut it out. Quite often they’ll come up with a solution that you haven’t even thought of.”

In the short term, the business is seeking to expand by purchasing or leasing more land, however Gardiner says land prices in the area are decoupled from earning capacity.

“That’s driven by corporate agriculture and foreign investment,” he says.

“That’s investment that’s not relying on that farm to make its pay, so you’ve got to go a lot harder and put yourself deeper into debt and run a leaner ship to be able to expand your farm than the previous generation had to.”

“We all believe in a hereditary-based system where what you’re trying to do in your work life is build up something so that you can give your kids the same opportunities that you had.”

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The future of WA businessThe majority of WA business owners expect their revenue or profit to increase in the next 12 months, while two in three believe revenue will rise over the next five years.

Top 10 answersMultiple answers allowed

The optimism is primarily being driven by expectations of an uptick in mining activity in the short term.

WA business outlook

Which industries do you believe will fare best in WA in the next 12 months?

expect profit to increase in next 12 months

expect profit to increase in next 5 years

say the future looks bright for WA businesses in the next 5 years

Local conditions driving business confidence

39.4%

26.4%

23.6%

36.4%

25.0%

20.6%

19.5%

20.5%

17.4%

17.0%

% Yes

of leaders believe WA businesses are more resilient post the mining construction boom. 42.1%

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The drivers of success

*Business leaders ranked the top 5 factors. Chart shows top 8 answers only.

WA business owners commonly cite ‘doing something they are passionate about’, ‘having a realistic business plan’ and ‘recruiting the right people to help’ as the most critical aspects for a business owner to focus on to ensure success.

Which of the following, in your opinion, are the most critical aspects for business owners to focus on to ensure success?

Lessons from past mistakesRelationships

Continuous improvement

“Never underestimate the relationships that you build with your customers. Word of mouth advertising is very powerful (both positive and negative).” (Female, 65 years old, Owner of a construction business)

“Need to try new things and innovate. Sometimes they pay off, sometimes they don’t. If you stay doing the same thing you will fall behind.”(Male, 44 years old, Owner of an agriculture, forestry, fishing and hunting business)

“Always look for learning in all interactions with clients, marketing and business decisions whether the result is good or bad.”(Male, 35 years old, Owner of a finance and insurance business)

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MatureStable year-on-year sales and profit but facing fierce competition - focusing on retention rather than growth

Most WA businesses are growing or established

0.7%

21.7%

10.0%

4.1%

9.3%

34.4%

19.8%

ConceptJust a thought or idea

Start upExists legally and is offering product or services to customers

GrowthRevenue and customers are increasing with many new opportunities and issues

EstablishedCarved out a niche in the market with a loyal customer base

ExpansionA new period of growth into new markets and distribution channels in a bid to increasemarket share

ExitCashing out or shutting down

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Celebrating business successesOne of the hallmarks of resilience is the ability to adapt to adverse market conditions and learn to celebrate your achievements, rather than dwell on your losses.

We asked WA business leaders to share one or more of the wins or successes their business experienced in the last 12 months, of which they were proud. Here, we share some of their stories.

“We came up against a major competitor. The competitor is perceived as a much larger company with significant financial resources we cannot match. In addition they have an internal instruction to win all jobs at any cost. By thinking differently we came up with an alternative approach they couldn’t match. End result is a contract that near doubled the business overnight.”(Male, 55 years old, Principal of an administrative and support services business)

“We have coped with the advent of Airbnb fairly well. Our occupancy rates have perhaps improved but the average rate per night has decreased and the net position is a decrease in income. We have a large number of repeat corporate customers and, happily, we can sit and wait for the overall situation to stabilise.” (Male, 81 years old, Partner of an accommodation and food services business)

“We have been rapidly able to adapt to meet new markets.” (Female, 50 years old, Partner of a manufacturing business)

“Whilst many businesses (in my area) have either closed or suffered severe downturns in sales, I have managed to hold our sales and expect to continue albeit under extreme conditions.” (Male, 65 years old, Owner of a retail trade business)

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“Securing contract work that will pay for all the business start up in the first year of trading.” (Female, 58 years old, Director of a transport and trading business)

“In an area with virtually no buildings suitable for business and unoccupied, we were able to recover from an eviction (necessitated by the unsafe condition of our offices) and secure a new and ultimately better site, assisted by a great deal of free labour and materials from the local business community.” (Male, 55 years old, Chief Executive Officer of an arts and recreation services business)

“Building good customer relations to ensure that I grow my reputation and brand locally with my clients.” (Female, 44 years old, Owner of a professional, scientific and technical services business)

“We have recently been awarded a long term contract with [a WA mining company] and are developing as their go-to company for sourcing laboratory equipment and instrument servicing. This is a major achievement for a small company and shows the commitment by them to the WA business sector.” (Male, 57 years old, Director of a professional, scientific and technical services business)

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The economic future WA businesses are mildly optimistic about the WA and national economy in the next 12 months.

Two in five business leaders believe the WA economy has bottomed out.

WA economic outlook

Australia economic outlook

“Labour has reduced dramatically, we have also completely stopped purchasing plant & equipment, and major IT projects have been on hold.”

(Male, 45 years old, Chief Financial Officer of a manufacturing business)

The softening of the WA economy has had a polarising impact on the input costs of WA businesses.

Has the softening in the WA economy impacted your input costs (e.g. labour, rent) in the last 12 months?

Changes in input costs

4.6%

16.7%

59.3%

15.8%

economy will expand economy will contract no change not sure

share a positive outlook share a neutral outlook share a negative outlook

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WA businesses are focusing on growthBuoyed by optimism about the future of the local economy, four in five WA business leaders are at least somewhat focused on growing their business in the next 12 months. However, less than half are very focused on business growth in the short term.

targeting growth in next 12 months

targeting growth in next 5 years

targeting growth in WA

targeting growth locally and nationally or internationally

Three quarters of growth-focused businesses are targeting their efforts locally within WA.

targeting new types of customers

46.4%

42.5%

36.2%

customer satisfaction

economic conditions in WA

maintaining work/life balance

50.2%

44.2%

38.6%

uncertain economic conditions in WA

managing cashflow

Key enablers Key barriers

Growth barriers and enablers

WA businesses have adapted to the new local environment

stronger focus on customer satisfaction and retention

targeting new types of customers

reviewed their pricing

introduced new products and services

switched to cheaper suppliers

reduced headcount

invested more in marketing and sales

greater reliance on contractors and casuals

insourced functions that were previously outsourced

36.1%

25.8%

24.4%

20.6%

18.7%

16.4%

15.4%

12.7%

8.7% 20

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Speak to one of our Business Banking Specialists today. Call us on 13 7000.

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The information contained in this report is of a general nature and is not intended to be nor should be considered as professional advice. You should not act on the basis of anything contained in this report without first obtaining specific professional advice. To the extent permitted by law, Bankwest, a division of Commonwealth Bank of Australia ABN 48 123 123 124 AFSL/Australian credit licence 234945, its related bodies corporate, employees and contractors accepts no liability or responsibility to any persons for any loss which may be incurred or suffered as a result of acting on or refraining from acting as a result of anything contained in this report.