Goodbye business, hello beach
Shared article on planning your Business Exit...from the May '18 edition of NZ Business magazine.
For longer than you care to remember, you and your business have been inseparable. But now it’s time to make an exit. Before starting the all-important sale or succession process, here’s some invaluable advice from the experts to maximise the reward for all those years of hard graft.
Owning a business over a long period of time is a unique and satisfying experience. No question about it.
It delivers fabulous highs and the scariest of lows. It funds your lifestyle, provides for your family; gives employment to others; serves the local community and teaches you about people, life and commerce.
But age and circumstances eventually dictate your departure from that – dare I say it – ‘ball and chain’, which has so many emotional ties and long-lasting memories.
If you’re planning to exit your business, there are a number of ways to go about it – selling, passing it on to family members, reducing hours, and management buyouts (although the latter can be rare, especially amongst smaller businesses).
Running through those options, Tracy Hickman, director corporate advisory services at Staples Rodway, first points out that she never uses the words ‘succession planning’ as business owners don’t want to talk about it. “Just those words can shut down a conversation.”
Instead, Hickman prefers to focus on maximising the value of a business for the owner, their future aspirations and goals, and preserving as much wealth for them as possible.
Of course, the key to a successful business sale is finding the right buyer, and in a market that will increasingly see more sellers than buyers, that can be a big ask.
One person who’s well aware of this is Richard O’Brien, owner of business for sale website nzbizbuysell.
Following the market trends he believes the banks are more cautious about lending to buyers and are looking more closely at how the business proposition stacks up. Marginal businesses beware.
“In saying this, there are still active buyers out there seeking good, strong businesses. But they are being particular,” he says.
O’Brien believes the expected surge of Baby Boomers looking to sell up as they approach 65 appears to be more of a “gentle upswing”. Blame the GFC for a start, he says. Many lost a portion of their retirement savings, which has delayed their exit while they attempt to recoup lost capital.
People are also more active and living longer. “We see some owners holding onto their businesses well into their mid-to-late 70s,” says O’Brien. “However, surveys suggest the numbers of sellers will rise significantly. We’re now seeing more retirement-driven listings coming through.”
His advice is to get an exit strategy in place now, as a number of businesses will fail to sell going forward. There are many Boomers, but a lot less Gen X and Y buyers, who have less money and are particular about what they want, he says.
Hickman isn’t predicting a mass exodus either. “Instead we’ll see owners selling or transferring part of a business and reducing their hours instead of retiring. Partly to maintain lifestyles. They’ve also seen others retire and decline and don’t want that to happen to them.”
However, the numbers are hard to ignore. Dean Ruscoe, a director of North Shore-based business exit consultancy, The Business Exit Company, points to a recent Xero survey which reveals that there’s likely to be up to 90,000 Kiwi business owners looking to sell within the next ten years. To get to the front of the queue and achieve their dream selling price, their business will have to be “fully up to scratch” he says.
Have a plan.
Getting your business fully sale-ready so you can exit to greener pastures is all about having a plan.
One of the most common mistakes owners make is to have no succession plan, says Ruscoe. Or they leave the exit process far too late and don't realise how long it can take to get sale-ready.
“One of the biggest issues is that there is nothing documented,” he says. “More often than not [information] is all in the owner's head or on bits of paper. This can significantly reduce the value of the business and increase the time the exiting owner needs to spend with the incoming purchaser.
“As an example, many business still don't have written employment agreements or a health and safety system, even though these are now a Department of Labour requirement.”
A particular area of concern with many SMEs is that the sales and marketing systems are often either non-existent or ineffective and require significant development before the business can achieve its full sale potential, says Ruscoe.
Brand imagery often needs a makeover too if the business is looking tired or dated, he adds.
“All of these improvements can make a real difference to the saleability of the business and the final price the owner receives.”
His advice is to engage professional advisors who are skilled at developing exit strategies. In a recent client case study The Business Exit Company primarily focused on fully documenting systems and procedures.
“Given that this was a business with a large number of contractors, this was a major project and concluded with the development of a significant, cloud-based Business Systems Manual.
“The eventual sale price of the business increased by 70 percent over the owner’s original expectation and was sold within a few weeks.”
So what do advisors want to know from business owners to get the ball rolling on an exit strategy? According to Hickman, the questions usually include:
• Where’s the business currently positioned? Is it profitable? Is profit improving?
• How much is it currently worth and would that realise enough for the owner to implement their plans?
• If passing the business onto family – are they ready and have all family members been considered?
It’s important that owners work out what they want to do, when they want to do it, how much money they need, and take their partner/spouse into account, adds Hickman.
As for the business – is everything documented? Is there a good management team in place or is the owner willing to mentor new owners?
Business owners can also sometimes get distracted by the whole succession process, allowing the business’s performance (and subsequent value) to fall, she warns. Another potential spanner in the works is having unrealistic expectations on the business’s value, or the time it takes to find a buyer.
More on preparation:
To maximise the price you get for your business, O’Brien suggests you get the following seven key aspects right: presentation; profitability; disposal of obsolete assets and stock; ensuring plant and equipment is tidy and maintained; ‘intangible assets’ (the goodwill) is attached to the business (not you as the owner), and all IP, patents and databases are up-to-date and suitable for selling.
“Consider your key staff and if they need to be briefed and understand what part they will play in an eventual sale, and that all paperwork and systems are up to date.”
O’Brien says import, distribution, niche manufacturing, tourism and service-related businesses are popular at the moment. And if you’re in Auckland, add childcare and service stations.
“Franchises are also often popular as they offer management and bank support.
“The businesses that tend to take the longest to sell are usually where there’s an oversupply in the market and/or the activity represents too large a risk for the returns.
“Businesses need to be relevant and profitable with a future to be desirable.”
Don’t forget to consider what you’ll do after the sale either, advises O’Brien.
“We’ve had listings pulled once the business seller has started receiving enquires as it has dawned on them that the business is their life, purpose and network. There has been no thought on what’s next and, ‘how will this look’?
“Best have a plan in place, then you won’t be tempted to make rash decisions.”
Succession and boards:
Whether its staff succession, the sale of the firm, or transferring ownership for succession to future generations in a family business, there are many events that can impact on a small or medium business.
“Responding to any of these scenarios can require specialised knowledge on ownership, taxation, leadership, business structure and insurance,” explains Kirsten Patterson, CEO of the Institute of Directors.
“Having a succession plan and a board in place can help you navigate through these changes.
“At its heart, succession planning is also about ensuring there is a pipeline of talent to fill necessary roles. An effective board can help you provide support for mentoring next generation leadership.”
Some SMEs may choose to establish a full governance board, others may find appointing an advisory board is sufficient to help with succession planning, she says. “Growth is often a key driver for these decisions, as bringing on independent directors enables you to draw from their expertise.”
When thinking about who to recruit to the board, it’s important to think about board composition, as this is a major consideration in the performance and effectiveness of the board, says Patterson.
“Composition can vary depending on the size, type, strategy and constitutional requirements of the organisation and needs to extend beyond just your current business advisors and banker.”
The Institute of Directors recommends owners and directors do a strategic review of the current and future needs of the organisation.
“The results of this review can be used to produce a skills matrix, which highlights any gaps for the organisation and can guide the appointment of future directors.”
For more advice on maximising your business value visit www.businessexit.co.nz