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Thinking of selling your business? Know your exit goal first

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Thinking of selling your business? Know your exit goal first

By , February 16, 2022
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The New Year is a time of reflection, re-evaluation and resetting, both in our personal lives and at work. If you own a business, it’s often a time for reviewing the strategy that saw you through the last 12 months and making changes for the year ahead. And after the torrid couple of years we’ve all just experienced, some business owners may be asking themselves whether now is the right time to sell.

If you’re in that situation, you’re not alone. Baby boomers are reaching age 65 at a rate of over 5000 per week. When you get to the retirement stage of business ownership, the questions around selling become more urgent. Who will take over? What will happen to my staff? What will happen to the legacy I’ve created?

These are all questions that should be asked as part of a long-term succession planning process, not at the eleventh hour. However according to Family Business Australia’s 2021 Family Business Survey, most family-owned businesses have no documented and agreed succession plans in place.

Then there is the question of value. How much is the business worth? Business valuation uses detailed risk analysis tools that consider macro-economic factors, industry drivers and business risk to determine an accurate risk score with an appropriate multiple. Unfortunately many business owners don’t understand this or fail to get it right.

Where to start?

The first question I ask SME owners when they come to us for exit planning advice is: what is your exit goal?

For some, it’s about selling the business for maximum dollars. For others — and this proportion is growing — financial outcome is but one of their priorities, and sometimes not even the first. Many baby boomers, already independently wealthy, are looking for legacy stewardship exits. This means looking after their employees, customers and key suppliers and making sure the business continues after they leave.

Therefore, a successful exit can be defined as one that meets the owner’s individual needs and desires.

Ask yourself, what do you want to achieve from selling? You have built the business over many years and have taken personal risk. What do you want the business to deliver after you’ve gone?

Understand that and you’ll be in a better position to determine whether now is the right time to sell or if you should be taking another path to exiting.

Your exit options

There are multiple options available:

As we go up and to the right, the options become more expensive, riskier and require more time and effort, but they do maximise business value. Not all options are suitable or right for every business either. If you are a small business, listing is unlikely an option. Sometimes family members don’t want or can’t take over the family business, so a family-based succession plan could be out too.

But often the biggest problem is simply a lack of preparation — the business is not sale ready. The four biggest issues are often:

  • The business can’t operate without the owner because they make all the decisions or bring in all the sales;
  • Sales and marketing are not effective. Ideally, the business would be generating regular new sales in a scalable way, such as online, rather than because they have a single great salesperson;
  • Key people are not locked in. Staff turnover greatly increases risk for a buyer; and
  • Financial instability. The business lacks a predictable, stable and reliable financial model.

How to prepare your business for your exit

  1. The business needs to be sale or exit ready. This means processes that are well documented, business success that is not dependent on the owner, and ongoing sales and marketing channels for securing new work.
  2. The owners need to think about life after business. I’ve seen it happen many times. Some business owners profoundly regret selling after they exit, simply due to boredom. They are used to working 40 or 50 hours a week and that suddenly stops. What’s the plan for life after the business and how will you separate from it to ensure the new owners have a better chance at success?
  3. The financials of the business, the family, the owner’s investments etc all need to be tidied up and prepared for a fairly dramatic change in financial circumstances. For exit or retirement, there are several key questions: which assets do they want to keep? Which need to be transferred to new ownership? Do you have funds to retire?
  4. Getting all three right at the same time is often difficult and owners nearly always underestimate the amount of time required to prepare properly.

When is the best time to start thinking about your exit goal?

Yesterday. Or even better — when you first set up the business. The number one piece of advice I give business owners is to begin with the end in mind. That means an extended timeline for planning and strategy. Having a goal that is five or 10 years out, not 90 days.

It takes time to build and increase value. The difference between equity (or long-term value that can be extracted when you exit) versus income is time frame. So start early, know what your business is worth and map out what needs to be done to drive value higher and make the business more attractive for when you are ready to realise that value

Craig West

Craig West

Executive Chairman | Succession Plus

Craig West is a strategic accountant who has over 20 years’ experience advising business owners. His background as a CPA in public practice, provided invaluable experience in the key issues of concern to business owners. Following 6 years of study to gain two masters degrees, Craig focused on Capital Gains Tax (CGT) for business sales advising on strategic management of tax issues. This experience formed a very strong view that business owners (and often their advisers) were unprepared and unaware of the steps required to prepare a business for exit.

Craig now acts as a strategic mentor for mid-market business owners and has written four critically acclaimed books on employee incentives, succession planning, asset protection and exit strategies. Craig has conducted numerous seminars and keynote presentations throughout Australia & internationally, including adviser education programs for the Institute of Chartered Accountants and CPA Australia.