The majority of business owners do not have an exit plan and as a result are risking the value and future success of their business, says Simon James, corporate advisory partner at HLB Mann Judd Sydney.
“Less than one in ten business owners have an exit plan, usually because they claim they are too busy to think about it.
“The result is that they don’t start planning for their business exit until it is actually time to exit, which is far too late.
“Leaving succession planning to the last minute means the business is at risk of slumping growth, unhappy and confused employees, and clients and customers who are caught by surprise at the news of a change of ownership. All this can significant decrease the value of the business to potential acquirers.
“It may not be time to exit the business yet, but it is still time to plan,” Mr James says.
He suggests eight ways to achieve the best results from a business exit:
Mr James says that most business owners think first of competitors as potential purchasers of their business, but this is unlikely to be the only option.
“Seek out unknown potential purchasers such as international corporate buyers, equity institutions, existing management or long-term employees.
“All these potential acquirers may value the business differently – and more advantageously – than competitors, suppliers or customer,” Mr James says.
“One common theme I’ve seen over the years is that most business owners are unprepared for the amount of work and necessary documentation to support the due diligence process demanded by purchasers,” Mr James says.
“This documentation is required to verify the performance and profitability of a business.
“It can be extremely time consuming to bring together the historical data needed to provide confidence and show the business in the best possible light, so leaving it to the last minute is not a good idea.”
Maintain focus on the business
It can be tempting for business owners to start winding down before they exit the business, but this is a mistake.
“As retirement approaches, business owners may take their foot off the accelerator. This can damage the business by allowing competitors to gain market share.
“It’s important to keep running the business to its fullest capacity, or else speed up the succession plan so value is not eroded.”
Consider a staged exit
It’s not always necessary to sell 100 percent of the business immediately.
“Many purchasers see an advantage in a ‘staged exit’ because it retains customer goodwill and gives new owners time to learn how the business operates.
“For sellers, there is the advantage of keeping an interest in the business, demonstrating its worth, and staying busy while reducing the level of responsibility with a clear endpoint.”
Understand tax implications
“I’ve known business sales to be cancelled because the business owner didn’t understand the implications of their current personal tax structure,” Mr James says.
“Making sure the right structure is in place early on is vital to a smooth and successful sale process, taking into account considerations such as capital gains, trusts, small business and superannuation exemptions, and tax-effective distribution strategies.”
Keep personal expenses out of the business
The purchase price of a business is usually linked to a multiple of annual earnings, including personal “non-business” expenditure in the cashflow. Therefore excluding such expenses can have a significant impact on the sale price.
Reduce risk for purchasers
Provide a clear business forecast and an ongoing business model that is proven, robust and realistic. This will reduce the purchaser’s perceived risk and help increase sale price.
Reassess new capital expenditure
It is a good idea to be competitive on technology and plant, but at the same time not to over capitalise immediately prior to a business sale, says Mr James.
“Any new equipment purchased must be adding value to business processes and efficiency, and bottom line. The return on investment should be considered over the exit timeline,” Mr James says.
HLB Mann Judd Sydney is a firm of accountants and business and financial advisers, and part of the HLB Mann Judd Australasian Association.
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Phone: 02 9020 4212