Many small business owners will be relying on the proceeds from selling their business to support themselves in retirement, but this may not work out as well as they hope, says Charlotte Sandell, corporate advisory supervisor at HLB Mann Judd Sydney.
“With no superannuation requirement for the self-employed, a common plan for business owners is to sell their business as they approach retirement age, and put the funds into their superannuation.
“While this is good in theory, the reality may not be as rosy as anticipated.
“The reason for this is that many business owners do not have an exit plan in place to ensure they maximise their business’s sale value and hence their finances for retirement.
“It is vital to plan ahead for the sale of the business if owners are to achieve the best price possible.
“Any business owner who plans to sell the business within the next 10 years should be taking action now – it takes time to implement the measures that will maximise the value of the business when it is time to sell.
“Even those who have no intention to sell or retire from their business in the short term should consider getting “exit ready”. There is no such thing as being too prepared when it comes to selling a business.”
Ms Sandell said that there are a number of factors that contribute to exit readiness.
“There are four key areas that business owners need to look at before selling their business, because these are the areas that potential purchasers will assess.
“The most valuable businesses are those that are profitable, transferable, sustainable and visible,” she says.
It stands to reason that any prospective buyer wants a business that is profitable, but it is often the case that, as business owners approach retirement, their focus on business performance and profitability can waver.
“The process of selling the business can be a distraction for business owners, which causes sales and profit to decline. Or else business owners start to think more about life after the business sale and take their foot off the accelerator, causing the business to slow down.
“The best way to prevent this is to have a strategic plan for the business – this ensures that focus remains on the core business operations.
“Also, consider engaging a transaction adviser to help manage the sale and maintain the focus on driving business operations.”
Only a business that is fully transferable is able to maximise sale price when the owner decides to sell.
“Any leases, customer contracts, etc, should be reviewed to ensure they have a clause that allows them to be transferred to another entity.
“If not, potential purchasers are likely to be put off so action needs to be taken early to adjust any non-transferable formal and legal arrangements.”
A major consideration for would-be purchasers is the sustainability of a business once the original owner has left.
“A business that is heavily reliant on its founder is much less attractive than one with and independent and experienced management team.
“Business owners should consider the commitment of key staff to the business and how to retain them after any sale,” Ms Sandell said.
Prospective purchasers will want to see complete financial information and reliable reporting systems before moving ahead with an acquisition.
“Poor financial information can frustrate the due diligence process and harm negotiations with a potential purchaser, and even put completion of the transaction at risk.
“Quality monthly management reports and forecasts supported by detailed assumptions provide visibility over performance and the overall operations to potential purchasers, and give them confidence in the ongoing viability and success of the business.”
2 MAY 2017