Over the next 10 years tens of thousands of baby boomer business owners will be looking to exit their businesses and potentially put them up for sale.
If you are thinking about selling your business over the next 5-10 years, do you think you will achieve the sale price you need to fund your ideal future in such a potentially crowded marketplace? Of those business owners who intend to exit their business in the next 10 years, 70% intend the sale to fund their retirement, but 87% have no formal plan on how they will do this. (Centre for Small Enterprises – Massey University)
The message of planning a successful exit from business has not yet been taken to heart by the majority of business owners and this may result in a lot of unfulfilled dreams of a long and happy retirement. The general attitude of: “I’ll get round to it when I have to,” is all too prevalent and the point of early planning to maximise value at exit is lost on many.
To a lot of people, exit planning is viewed in a similar way as painting a house before it is put on the market i.e. something done close to the point of sale. Yet good exit planning should start much earlier. The benefits will be a wider range of exit options and a bigger pay cheque for the owner on handover day.
What are the recommended steps to exit planning?
The most important is to make a decision to put a formal exit plan in place and include it in the general, long term planning of the business. What are the owner’s long term objectives for the business and how are these aligned to the exit goal? Is the current business structure the right one to help achieve the exit goal or should this be reviewed and changed? Many businesses start out as a simple sole trader structure and some stay that way for many years. When a second investor comes into the business (perhaps another family member) it is done by way of a loose partnership arrangement. While cheap and flexible, such structures can lead to difficulties at a later stage, such as in valuing a company for partial sale or attracting outside investment.
Attention can then be directed to some of the strategic and tactical decisions that are required to progress the plan. As part of the structural review one should look at business continuity planning, looking at risk factors that could knock an exit plan off its course, and covers areas such as shareholders’ agreements, share types, wills and shareholders’ insurance.
Next, look at all the exit options available and draw up a short list of the most preferred. Generally the earlier in a business’s life cycle this is done, the more options available, and typically a higher value achieved at point of exit.
Exit planning for the owner as well as the business.
About now the exit planning process needs to split into two parallel tracks: the exit plan for the business and a personal plan for the owner. The goal of one track is to maximise business value and the goal of the other is to make sure as much of this value ends up with the owner, with the least tax paid and a long term retirement plan in place. Advice from a good tax lawyer/accountant and personal financial planner would be of benefit here.
Focusing on the business side of the plan, the next stages are concerned with identifying and dealing with possible impediments to exit. These could be: structural, operational, personal – or a combination of all three. The most common hindrance is the business is too reliant on the owner, and systems are not well documented. Focusing on this issue is a good way to add significant value to a business, relatively easily. Continue to knock off other impediments that are identified and also start to groom the potential successor, if this is part of the plan.
If nothing else, following this process will result in a business that is running better, with higher profits and less reliance on the owner. At best it will result in the type of comfortable retirement that the owner wants and enable him or her to really enjoy the fruits of their labour. Not following it could result in the owner standing in line with lots of other business owners with similar offerings, hoping for a quick trade sale while facing retirement not as well off as hoped. The choice is yours.
“The best time to start planning your exit is from start-up. The next best time is now!”
Get in touch to book a review for your business and what are the possible exit options available to you.
Andy Burrows