Is your business ready for your retirement?
Two weeks ago, I arrived back from a family holiday in Europe which had me fantasising about my retirement. Whilst I am at least 20 years away from that, it did get me thinking about some of my clients who are approaching this milestone and what plans they have (or do not have) in place to deal with this transition, particularly as they relate to their businesses.
One of the biggest pleasures that I take as an advisor is when I get the opportunity to assist family business owners sell their business and transition to the next stage in their life. These clients have often put a lot of blood and sweat into their businesses and to them and their families, the sale is not just a financial transaction but an emotional one as well. As an advisor, being part of a successful sale process is very rewarding.
However, just like renovating your home before putting it on the market, key to any successful business sale is careful planning. Business owners who fail to plan for the sale of their business will face increasing competition for buyers as a surge of businesses come to market, and there is growing concern that a number of family business owners will not achieve their expectations when they eventually go through a sale process. Some will fail to sell at all.
An upcoming surge in small businesses for sale…..
Prior the GFC in 2008, many family business owners were in the midst of considering their exit options and plans for retirement. The GFC however, reduced the value of these businesses considerably and decimated other superannuation savings, forcing many of these family business owners to defer these sales.
As a result, the average age of family business owners has been steadily increasing. Between 2010 and 2013, family business owners aged over 65 increased from 12% to 25% (of all family business owners) with an even greater movement observed for family business owners within the 60 – 69 age bracket, from 21% in 2010 to 37% in 2013.
Now, these same business owners who had previously deferred their exits, are approaching the stage when they will have no option but to enter into a sale process. Unfortunately, within Australia there is only a limited buyer universe and with this surge in businesses entering the market, only the best prepared will find buyers willing to pay a price that will meet business owners’ expectations.
Planning for succession…….
According to KPMG’s 2015 Family Business Survey, almost half of businesses surveyed indicated that they had no plan in place for a transfer of ownership or sale, with a further 32% indicating that their plan was under developed. This is despite 72% of businesses surveyed indicating that they expected to have some sort of ownership transfer within the next five years. These statistics are alarming.
In a world of overly cautious buyers, unprepared business owners will find it very difficult to sell their businesses and will likely be forced to accept prices well below their original expectations.
In my view, any business owner thinking of selling their business should start the planning process at least two years prior to going to market. Any shorter, and there will not be enough time to adequately identify and correct issues within the business.
Case study….a lesson in poor planning
I recently acted for a Swiss bank which had identified a small Australian-based business which they wanted to acquire.
The performance of the target business had been slowly deteriorating over the last few years and the offer made by the Swiss bank was very generous, noting that there were some specific strategic reasons for making an offer above fair value.
However, during our due diligence investigations on behalf of the Swiss bank, we identified a number of significant financial risks within the business which ultimately resulted in the deal not proceeding.
It was a disappointing outcome for all parties as the transaction would have benefited everyone, but at the end of the day, the risks identified outweighed the benefits that the Swiss bank was seeking. What is even more disappointing is that all of the risks which were identified could have been eliminated or significantly mitigated with some advance planning by the target business owners.
For business owners, the important lesson to take from this case is that your business should always be “sale-ready” as you never know when a good opportunity to sell your business will come your way.
Whilst it will probably be necessary to seek assistance from advisors, this need not be an expensive process.
At a simple level, this could involve asking your advisory to undertake a high level review of the business and succession options, leaving a number of action items in the hands of management to address. At a more advanced level, this could involve engaging an independent advisor to undertake detailed vendor due diligence on the business with the aim of identifying all issues that may prove to be a deterrent for buyers in a sale process and decease the value of the business.
Taking this further however, I believe that all business owners (whether they are considering a sale in the future or not), should be prepared, as you never know when someone will come knocking on your door!
Another case study…..a lesson in good planning
We recently acted for a husband and wife who were looking to sell their business. Our client engaged us to undertake a full vendor due diligence process which involved us scrutinising the business in detail.
As we regularly act for both buyers and sellers of businesses, we applied our experience to consider all of the issues that a potential buyer might look at. Through the vendor due diligence process, we not only identified the issues within the business that would impact value, but we also identified that the owners’ forecasting process was overly cautious and was undervaluing the business. As a result, we assisted the client by preparing a new detailed forecast which provided a more realistic outlook, and was eventually adopted as the basis for the final purchase price. The revised forecast proved to be accurate.
Our findings were set out in a detailed report which was provided to the eventual buyer and their financial advisor (one of the big-4 accounting firms). Disclosing this report provided a level of transparency which I believe provided the buyer and their advisors with confidence in the transaction and business, and eventually led to a smooth, quick and successful transaction.
The decision to invest in this planning and vendor due diligence process provided our client with significant financial benefits in the millions of dollars, far outweighing the cost of the exercise.
Family and private business owners approaching retirement will face a number of challenges in the future, particularly when it comes to the sale of their businesses. Early and careful planning will ensure that when the time comes, the chances of a successful sale process which realises the true value of their business, are greatly increased.
Seeking professional corporate and financial advice is an essential part of planning for a business exit. A well thought out planning process will provide significant benefits down the track, both financially and towards ensuring a smooth sale process and transition to retirement.
Originally posted on www.nicknavarra.com.au