Leaving succession planning to the last minute means the business is at risk of slumping growth, unhappy and confused employees, and clients and customers who are caught by surprise at the news of a change of ownership. All this can significantly decrease the value of the business to potential acquirers. It may not be time to exit the business yet, but it is still time to plan. Following are eight tips to achieve the best results from a business exit:
Most business owners think first of competitors as potential purchasers of their business, but this is unlikely to be the only option. Seek out potential purchasers such as international corporate buyers, equity institutions, existing management or long-term employees. All these potential acquirers may value the business differently – and more advantageously – than competitors, suppliers or customers.
Most business owners are unprepared for the amount of work and documentation required to support the due diligence process. This documentation is needed to verify the performance and profitability of a business.
It can be extremely time-consuming to bring together the historical data needed to provide confidence and show the business in the best possible light, so leaving it to the last minute is not a good idea.
The sales process itself is time-consuming and heavily distracting for all involved. This is where a good transaction advisor can take the pressure off management and increase the chances of success.
Maintain business focus
As retirement approaches, business owners may be tempted to take their foot off the accelerator, but this is a mistake. It can damage the business by allowing competitors to gain market share. It’s important to keep running the business to its fullest capacity, or else speed up the succession plan so value is not eroded.
Consider a staged exit
It’s not always necessary to sell 100 percent of the business immediately. Many purchasers see an advantage in a ‘staged exit’ because it retains customer goodwill and gives new owners time to learn how the business operates. For sellers, there is the advantage of keeping an interest in the business, demonstrating its worth, and staying busy while reducing the level of responsibility with a clear endpoint.
Understand tax implications
We’ve known business sales to be cancelled because the business owner didn’t understand the implications of their current personal tax structure.
Making sure the right structure is in place early on is vital to a smooth and successful sale process, taking into account considerations such as capital gains, trusts, small business and superannuation exemptions, and tax-effective distribution strategies.
Keep personal expenses out
The purchase price of a business is usually linked to a multiple of annual earnings, including personal “non-business” expenditure in the cashflow. Therefore excluding such expenses can have a significant impact on the sale price.
Reduce risk for purchasers
Provide a clear business forecast and an ongoing business model that is proven, robust and realistic. This will reduce the purchaser’s perceived risk and help increase the sale price.
It is a good idea to be competitive on technology and plant, but at the same time not to over capitalise immediately prior to a business sale. Any new equipment purchased must be adding value to business processes and efficiency and bottom line to increase sales value.
Simon James, HLB Mann Judd
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