How far should we go to plan our succession and when? After years of highs and lows, who says you should hand over the reins of your business or even have a plan in place when you are busy hiring staff, exceeding customer expectations and controlling cashflow? When over 55 percent of business exits are through death, disability, bankruptcy, receivership or by simply closing the doors, perhaps it’s worthwhile considering.
Or are you starting out with an exit plan already in sight? While the old adage of “working hard over time will reap reward” could not be truer for most SME business owners, the digital age is seeing businesses make bucks fast in a non-traditional way. But whatever your strategy, the end game is significant and has a big impact on the way you operate, run and plan your day as a business owner, particularly in the light of a difficult economy and global uncertainty.
As a nation of SME owners, the decision around what you are going to do with your business is becoming more “in your face” for the majority. Statistics from the FBA a few years ago show 81 percent of SME owners are planning to retire in the next 10 years. Less than 30 percent of business owners have formal succession plans. Over 60 percent of businesses do not see themselves as succession ready.
Over 51 percent of business owners plan to use their business as the primary source of retirement and the average age of a business owner today is 56 years old.
So what’s involved in setting a good exit strategy plan? Having been through a ‘near sale’ a few times, here are some things to think about from my own experience, when planning the future of your business.
Quick succession checklist:
- Do you want to sell or need to sell? Your motivation and drivers have a big impact on the potential outcome of negotiations
- How is your physical health? Are you physically well enough to keep going – think landscaping businesses and those that have demanding conditions
- How is your emotional health? Are you near burn-out or could you keep going indefinitely
- Are there extenuating circumstances around you that will affect your decision? E.g. a dependant relative or a child that needs you more than you thought
- How is your financial health? Do you have enough money to meet your current responsibilities or have enough money saved to retire
- What do you really want and when? Sometimes what everyone is expecting of you, may not be what you really want
- How does your superannuation stack up? Do you have enough saved to have the luxury of choice?
- Economic and market external factors. What is happening with the economy that affects your decision?
- Are there major change factors affecting your industry? That could determine when exiting is best, for e.g. think of the affect on video stores with digital TV
What are your choices?
Simply put you have a handful of choices: stay the same, re-emerge, sell, handover, pass down to family, merge, IPO on the stock exchange or close the doors. All of these have a dramatic impact on how you run your company.
- Sell and work your earn out
- Pass the business to your family through a generational family transfer
- Pass the business to staff
- Pass the business to staff who earn their way in
- Management Buy Outs (MBO) when management buy their way in
- Merge with another business without a revenue or share swap
- IPO (initial public offering) on the stock exchange
- Close the doors.
The pitfalls and considerations
Not all the options are easy or promise rose coloured conclusions. Few of these options are a complete panacea to your life dreams.
The harsh reality:
- Most business owners value their business as much higher than it really is
- Although you see your hard work, this may not be monetised commercially in the eyes of others
- Once you sell, you will almost certainly have to work in the business for your “earn out” period and work hard to maintain the profit under new owners with different ideas
- Sometimes advisors are there to earn their fees, not necessarily do what is best for you so find people you can trust
- Surround yourself with good advisors and people who have been through a similar sale before.
Meanwhile, what can you do to improve the value of your business?
The value of a business depends on a number of factors. These usually include the following:
- Current profit
- Projected profit
- EBIT – Earnings before interest and tax
- The existence of good systems and processes
- The amount of intellectual property, patents and trademarks
- A strong, up-to-date database
- A brand name that is new or an industry segment that is new
- It presents a threat to your competitors.
For most business owners, the business is about them. It takes a while for most to get the full realisation of this – understanding it and acknowledging this is a good first step, towards constructive succession planning.