Exit, Stage Right – Do you need to sell your Business to Retire?

Many business owners who had been looking towards retirement placed these plans on hold as they focused on surviving the GFC. As business and the economy recovers, we spoke to Noel Johnson of Johnsons Corporate about how they are finding the market for the business sales.

The market for the sale of businesses stopped practically dead with the GFC according to Noel, essentially as though someone had turned off a light switch. Most buyers retreated to protect their existing assets, while those who remained in the market were looking to take advantage of distressed vendors and obtain a bargain. Most vendors throughout this period saw the GFC as being merely a blip, and so still placed a pre-crisis value on their business. The end result was that the gulf between buyers and sellers expectations was too large to bridge and no transactions occurred.

Both sides have now become more realistic. Vendors have realized that the GFC is not just a hiccough but a longer term issue, and that valuations have been and will continue to be impacted. Potential purchasers in most cases haven’t been able to get the bargains they thought they could, and so have realized they will need to pay up. As a result, more transactions are occurring.

The process is still a long one though. Noel’s firm deals with businesses valued at between $1 Million and $20 Million, and these are taking 4 to 12 months with an average time of 8 months from first discussion to settlement.

The profile of buyers has changed over the past 5 years. Prior to the GFC, 20% to 25% of businesses would sell to first time buyers including new entrants, private equity firms and businessmen looking at moving in a new direction. These buyers are no longer present, and sales are now solely to businesses in similar or associated industries. These buyers are looking for add on and synergistic purchases, where they have an opportunity for growth without excessive levels of risk. These buyers are able to obtain funding from their bank, whereas he is not seeing any bank support for new market entrants. Banks appear to be trying to look after their own clients, but they are being selective. Noel’s information is that it is difficult to obtain funding without a good relationship with your bank.

Most good businesses are much stronger financially than before the GFC. In a pattern we have seen replicated across the big end of town, businesses have paid down their debt and have adjusted their capital position. For those looking to grow by acquisition, this places them in an ideal position.

For businesses looking to grow, now might be an ideal time to expand. While the economy is improving, it is more likely that we will see gradual growth rather than a sudden acceleration over the next few years. In this in case, acquisitions might be one of the few ways to achieve significant growth. Worth considering is that it might be easier to put the right team together now as people’s expectations around earnings are much more realistic than a few years ago.

Many businesses have realized this, and as a result we are seeing greater levels of consolidation. One result of this is that the strong are getting stronger while the weak are declining, and competition is reducing as a result.

For business owners looking towards their retirement, Noel’s advice is to consider whether you have the energy and enthusiasm to grow the business over the next few years. The GFC has taken its toll on many people and if you don’t have the energy to grow the business, you may at best be marking time until you sell. In this instance, you might be better advised to sell and retire and move onto the next stage of your life.

Unfortunately most businesses aren’t geared for sale. If you are considering selling your business in the next few years, a valuable investment could be conducting a health check on it. The results should help you pinpoint the areas a potential buyer will view as a risk, and will allow you to take steps to mitigate these risks. This should help improve the saleability of your business, and hopefully also increase the value.

Business Succession Planning

One day you will have to leave your business – whether its because you retire, you pass the business on to your family, you sell it to an interested party, or because of health circumstances.

Whatever those circumstances are, you always should have a plan to deal with what happens when that day comes. A failure to do so will likely result in your business suddenly coming to an end if something happens to you.

A succession, or exit, plan outlines who will take over your business when you leave or if something happens to you.

A good succession plan puts into place a process that will enable a smooth transition from you to your successor, that minimises disruptions to your business resulting from that transition. A good succession plan also gives potential purchasers peace of mind that the business will not fail the moment you leave. Putting a succession plan in place can maximise the value of your business and enable it to meet future needs or deal with unexpected issues.

What an appropriate plan is will depend on the nature of your business as well as the structure of your business. Some of the questions that you will have to ask are:

  • How long do I want to be in business?
  • Do I want to sell the business eventually or do I want to hand it down to my children?
  • What business structure does my business operate in?
  • What are the assets and liabilities in my business? Who owns them?
  • What is the goodwill and intellectual property in my business? Who owns them?
  • How big is my business?
  • Who can run my business if I am not around?
  • Do I have any processes or procedures for my employees to follow, so that if something happens they can act “automatically”?
  • If I were to sell my business, do I have a handover strategy?

If anything, see your business coach, accountant, or lawyer – they can certainly help you out in relation to identifying these issues and assisting you with your business succession plan.

A good succession plan enables a smooth transition with less likelihood of disruption to operations. By planning your exit well in advance you can maximise the value of your business and enable it to meet future needs.