When you first started your business, the possibility of leaving it one day was probably far from your mind. And yet this is an inevitable reality. The plans you put in place today could impact the terms of your eventual exit, and the value you extract from all your hard work.
For many small and mid-sized business leaders, retirement plans will depend on the sale of their firm or share in the business. According to recent research by Count Financial and Bstar, this is a medium to high business concern for accountants – and 65 per cent do not believe the proceeds from the sale of their practice will be enough to fund their next business venture or retirement lifestyle.
“A significant proportion of professional services firms are being run by baby boomers, and there will need to be a generational transfer of ownership at some point,” explains Paul Cilia, National Head of Sales with Macquarie Business Banking.
Having an exit strategy in place, and being able to implement it at any point, lets you maximise the valuation of your business.
By 2020, the estimated value of Australian private businesses in the process of transferring ownership from baby boomers is approximately $3.5 trillion. Almost half (40 per cent) of these businesses are expected to change hands in the next 10 years – yet in a family and private business survey, 66 per cent of business owners indicated that their business was not exit or succession ready.
Cilia believes the next generation also has less appetite to pursue ownership.
“They have different expectations of their career. They don’t have as much savings or property equity to draw on to buy into a business. So the onus is on the business owner – whether they want to retire in five or 20 years time – to bring them on that journey, and paint a picture of what future success could look like.”
Succession ensures continuity
As well as protecting your own interests, an exit strategy manages the inherent risks of running a business.
More than half of all Australian business exits are the result of some kind of failure – including bankruptcy, partnership dispute, divorce, illness or death. Being prepared at any time for the opportunity to sell can help you manage the risk of an unexpected market downturn or change in personal circumstances.
“Having an exit strategy in place, and being able to implement it at any point, lets you maximise the valuation of your business,” says Cilia. “You need to expect the unexpected, as an exit could be forced upon you at any time. That means running your business with maximising value in mind at all times.”
It may also mean relinquishing some equity to bring in the right people – those who can increase revenue or increase productivity, and hence value, in the business. “Through every business lifecycle, there are stages where the business will plateau, and you need to game change to take that next leap,” suggests Cilia. “Equity can be a good retention strategy for the people you need to keep engaged and motivated beyond the standard remuneration and bonus package.”
More than half of all Australian business exits are the result of some kind of failure.
Defining value versus price
“Price is what you pay, value is what you get,” said investment sage Warren Buffet. If your exit strategy involves selling the business to an external party, focusing on value from the buyer’s point of view can help you extract a price beyond what most other buyers would pay.
Some potential buyers may be in a position to extract more value from your business in the future than others. Strategic acquisition motivations include:
- Geographic expansion – a ready-made client and talent base in another city or state
- New products for their client base – proven services to add more value to their existing business
- New clients for their products – such as purchasing a rent roll
- Removing the competition – to expand market share or avoid price wars
If you can help a buyer see how they can maximise the long term value, or return on investment, of your business, you can improve your negotiating position by creating a higher perceived value. Cilia says the market today is much more concerned with efficiency and productivity.
“As buyers become more diligent, and the level of expectation of maximum bottom line is greater, they want to know more about the underlying assets they’re purchasing,” he explains. “For example, at face value two real estate rent rolls may look the same. But the one with better quality properties, higher rental prices and more sophisticated investors who understand they need to invest in maintenance may have more intrinsic value for the buyer. In addition, what infrastructure is in place to support running those properties under management?”
A quality client base, diversified service offer and evidence of sustainable profitability will all add value to your business. “If you think about this every day, you’ll see opportunities to maximise value,” Cilia says.
Understand your motivations
Knowing what the buyer really wants is one thing – but you also need to be clear about your own motivations to sell. It’s not always a case of taking a cheque and closing the door. In fact, almost half of business owners see themselves working in the business beyond the age of 65. This may simply be because they’re not ready, but it may also be a personal choice to continue their legacy in some capacity.
“Keep your mind open to what an exit might look like,” advises Cilia. “You may stage a transaction over time to manage the tax impact. You may want to retain a smaller amount of equity but scale back your commitment – act as a consultant or take a position on the board, for example.”
Staying involved for a specific period of time can also help mitigate the buyer’s risk. It can make the transition smoother for staff and clients, and ensure revenue remains consistent with your financial statements.
Getting ready to sell
If your plan is in place but you don't have a strategic target buyer in mind, Cilia suggests having some conversations within your trusted network. As a specialist banker in professional services sectors and a provider of succession and acquisition funding, Macquarie often plays a part in this process.
“The discussions we have with our clients can lead to opportunities to buy and sell. We know the market and who has an appetite, and we can screen financial capabilities to provide a qualified list of prospective buyers with an interest in having that conversation with you.”
So will your exit strategy be forced upon you, or will you take control of the terms of succession? This will come down to the plans you put in place today.
“It’s not a quick process to sell a business or transition in a successor,” concludes Cilia. “You need to be ready. Today, buyers expect a level of transparency and data and if you don't have everything in order they won’t pay maximum value for your assets.”