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Now Is A Good Time to Plan Your Business Succession Strategy

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Now Is A Good Time to Plan Your Business Succession Strategy

By , May 19, 2019
Strategy-Takes-Time (4)

As any financial planner will tell you, the average amount needed to fund retirement in the UK is at least £500,000. We are living longer than ever before, and life expectancy is constantly improving, so we need more money to fund retirement — unless of course we wish to rely on a government pension. The average British male that lives beyond 65 can expect to live until he is over 83 years old and females to 86 years. That’s potentially around 20 years to fund in retirement.

According to the PWC9th UK Family Business Survey 2016 43% of business did not have a succession plan. As baby boomers retire we are about to see the biggest inter-generational transfer of wealth in history which makes it even more important to get succession planning right. The average age of business owners in the UK is 49 years. Many business owners see themselves working in the business beyond 65 years of age.

An astounding 64% relying solely on the sale of their business to fund their retirement.

The baby boomer generation began turning 65 in 2011, and from now until 2030 over 10,000 Brits will hit retirement age each week. It is estimated that over the next decade the retirement of family business owners will see the transfer of approximately £5.5 trillion in wealth, which surely must make succession planning one of the most significant issues facing small to medium enterprise (SME) owners. The majority of business owners don’t have a full understanding of what takes place in the selling of a business, with 75 percent of owners who believe they can sell their business in a year or less.

This is on top of the 58 percent who have never had their business formally appraised.

The GFC and the more recent European crisis has had a negative impact on market sentiment around the globe. Cash is harder to access, and potential buyers drive a harder bargain, putting pressure on valuation multiples (more about this later). Many baby boomers are delaying retirement because the value of their nest egg has diminished, whether that is in the share market, pensions provision, real estate or the value of their business. With estimates of over 50,000 businesses for sale each year for the foreseeable future, the small business market may become flooded, which will put further pressure on business values.

Many business owners will simply close the door.

 

Labour Force Survey 1998 to 2018 by Office for National Statistics

 

At Succession Plus we are finding that there are some cashed up buyers and companies out there, with smaller companies improving the way they manage their working capital, freeing up cash to fund growth through acquisition, making acquisitions of much smaller businesses than they might have ten years ago. But the competition in the market can mean that buyers are a little more particular about the businesses they buy, so the businesses need to be better prepared if they are to find the right buyer and the right price.

With the uncertainty of Brexit hanging over the UK for over 3 years, businesses have been stock and cash hoarding to prepare a buffer against deteriorating conditions or a stash for opportunities as they arise.

According to Bank of England economists Katie Farrant and Magda Rutkowska, over the last decade, private non-financial companies in the UK have been accumulating a higher proportion of cash on their balance sheets than before, and the estimated total at the end of 2014 was about £500bn. As a share of GDP, corporate cash has risen from about 20 percent in 1987 to about 30 percent in 2016.

 

The graph below shows that the volume of acquisitions is increasing again after decades of downward trends.

M&A Outward Number of Acquisitions

 

According to the Office of National Statistics Quarter 4 (Oct to Dec) 2018, the total value of inward mergers and acquisitions (M&A) was £33.3 billion, the highest value since Quarter 4 2016 (£85.2 billion). Yet the total value of inward M&A for the whole of 2018 (Jan to Dec) was £71.1 billion and is broadly explained by the acquisition of Sky Plc by Comcast for just over £30 billion. This was a sizeable increase on the value reported in 2017 (£35.2 billion), yet considerably lower than the value recorded in 2016 (£190.0 billion).

Domestic M&A (UK companies acquiring other UK companies) was valued at £5.0 billion in Quarter 4 2018 and was similar to the value (£5.2 billion) reported in the same quarter of the previous year. The total value for domestic M&A during 2018 was £26.5 billion, the highest value recorded since 2008 (£36.5 billion).

As a responsible business owner, it makes sense to start your exit strategy when you are ‘at your peak’ — ideally when the business is doing well and you have the energy and enthusiasm to make the appropriate changes. Many business owners are finding it hard to keep up with technology and the new competitive environment that brings. If you feel defeated and lose market share your business value will diminish, so start the process when you still have some fight and passion for your business. You may need to grow your business to make it more attractive to a buyer, or you may need to transition client relationships gradually to a general manager.

In the current market the best chance of success is to be prepared and plan ahead. If you always “Begin with the end in mind”, you are much better prepared for making the right decisions along the way, following the steps towards your long-term vision. If you start preparation early, you will get a deeper understanding of the potential value of your business and have the time to make positive changes to increase your chances of a good sale.

On a financial level, a well-planned business exit will not only enable you to attract a higher sell price, it will also let you minimise tax on the proceeds, using staged payments, superannuation contributions and taking full advantage of tax concessions. If you put your business up for sale suddenly, you may be met with a tax bill just when you don’t need it.

According to the 2018 December House of Commons briefing, there are 5.7 million active businesses in the UK. Only 8,000 (less than 1%) of these businesses are classified as Large. The following bar graphs highlight businesses based on turnover as well as by the number of employees.

About 88% of privately-owned businesses in the UK are owned by families. Family firms turnover an estimated £1.4 trillion annually, some 35% of total private sector turnover. In the UK, family firms pay £149 billion in tax each year – 21% of government revenues.

 

Share of Business in The UK 2018

 

Finally, if you do have to exit from your business unexpectedly due to poor health or other issues, the further you are down your exit plan, the better the outcome is likely to be for you and your loved ones. A poorly planned or poorly executed succession will often lead to dispute, poor customer experiences, business decline and financial pressure.

Is that what you have worked all these years for?

As business owners approach retirement, most will cease to own their businesses, however, over 42% have no defined or documented business succession or exit plan. The PWC report on family business states that 43% of family businesses intend to professionalise their companies in the next five years and further a significant number expect to have some transfer of ownership in the next five years. This represents a large number of transitions over the next ten years and the largest inter-generational transfer of wealth in history. The transfer of ownership represents a significant stage in entrepreneurial activity. It is through this transition that the founders remove themselves from the business they own. This relates to ownership, decision making and generating a capital surplus for their efforts.

This is not a do it yourself process.

You will need to get some help and advice along the way. But the better you understand the process, the more you can get involved, take on the tasks that you can do, and have clear expectations of the people who advise you on the rest. Once you are clear about where you are trying to head and why, getting there is a whole lot easier.

Darryl Bates-Brownsword

Darryl Bates-Brownsword

CEO | Succession Plus UK

Darryl is a dynamic, driven Business Mentor and Coach with over 20 years of experience and passion for creating successful outcomes for founder-led businesses. He is a great connector, team builder, problem solver, and inspirer – showing the way through complexity to simplicity.

He has built 2 international multi-million turnover businesses; one now operating in 16 countries. His quick and analytical approach cuts through to the core issues quickly and identifying the context. He challenges the status quo and gets consistent, repeatable and reliable business results.

Originating in Australia, Darryl’s first career was as an Engineer in the Power Industry. Building businesses bought him to the UK in 2003 where he quickly developed a reputation for combining systems thinking with great creativity to get results in challenging situations.

A keen competitive cyclist, he also has a B Eng (Mech) Engineering and an MBA.