Planning ahead is key to achieving a successful outcome to the succession of your business, says Simon James of HLB Mann Judd
With the first of the babyboomer generation reaching retirement age, there have been predictions of a large number of small and medium size enterprises (SMEs) coming onto the market and depressing sales prices.
Simon James, partner at accountants and business advisers HLB Mann Judd Sydney, said that business owners who plan ahead can still achieve an attractive price even in a buyers’ market. He says, “It’s likely that the numbers of businesses for sale will reach new heights in the next two years and, with one or two ups and downs, will remain high for the next ten years or so.
“But even with a large increase in the number of businesses on the market, sound businesses with a good outlook will still be in demand. Some commentators have suggested that, as many baby boomer business owners retire, there will be fewer people around wanting to buy businesses, but I don’t believe this is true.
“In my experience, many SMEs are sold to larger businesses such as consolidators or international companies wanting to expand in Australia, and a number of SMEs are sold to family members. There is no reason to think that this will change for well positioned businesses.”
James says that the critical thing for all babyboomer business owners is to be investor ready. He says, “Those who haven’t already started their succession planning process should be prepared to stay in the business for another two to five years, to give themselves enough time to set up the business in a way that will gain maximum value. Getting advice is a critical part of this, not only to ensure the business is attractive to buyers, but to help support the sales process and maximise the sales price.”
James says that a number of the business owners he works with would like their business to remain in the family but this still requires careful planning.
He says, “In this situation, the owners’ retirement planning needs to take into account how the sale is going to be financed, especially if its sales value is a major part of their retirement planning.
“Holding discussions with family members and lenders; ensuring the business runs independently of the owner; and giving the family the opportunity to show lenders, employees and clients they can run it successfully, will require planning.”
If an owner is committed to retiring in a particular year then the price can be affected, particularly for a trade sale. James says, “Waiting for the best market conditions can make a significant difference if the market is in the doldrums.
“Selling to the family may also mean selling at a time when the market is subdued, as a commitment to handing over the reins and all decision-making will need to be made to avoid dissatisfaction and dispute.”
According to James, succession planning is not a short term activity. He says, “Some long term strategies are essential to get maximum value from the sale – of particular importance if it is to fund the owner’s retirement.
“Unfortunately, the value of your business is not the amount that you want for retirement. It is the amount that someone else is willing to pay for it.”
He reckons that a business with a strong management independent from the owner, good profit record, audited accounts over several years, good financial records, and sound marketing plans for the next several years, are all considerations that make a business attractive to a buyer.
There are other issues that owners need to consider when selling the business. Many of these need to be covered in the succession plan and include:
• How the business will be sold and what is included and the tax consequences of this. For instance, will premises be included in the sale? Is it a sale of the company or only the business activities? What tax liabilities (eg capital gains tax) may be triggered?
• What is the ongoing involvement by the old owners (if any). For example, will there be a transition phase where they remain involved in the business for a certain period after sale?
• What is the timing of the transfer of ownership? When would the owner like to fully step down?
• Have the roles of management, including any family members, been properly defined and agreed? Is any training or professional development or recruitment needed to strengthen the team?
• Are plans in place for managing the sales process, including contingencies if it falls through? The sales process can be a long drawn-out process and the first set of negotiations may not be successful.
• Is there a communication plan for contact with third parties such as employees, clients, financiers and suppliers? It is important to keep the goodwill that has been built up over the years, as it’s often what the new owner is paying most for.
• Are legal changes to existing arrangements such as shareholder agreements, corporate restructuring, share transfers, insurance contracts etc needed? This should start before any sales negotiations begin so that the seller knows exactly where they are in the process, and there are no unexpected hold-ups during the sales process.