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Plan early for business succession

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Many business owners have a significant proportion of their wealth tied up in their business. For a large number, the business is both the source of their current income and also their retirement plan.

For those who intend to sell their business at some point in order to fund their retirement, it’s never too early to start thinking about what their business is worth and what they need to do to get the best price for it.

After all, the business isn’t worth what you need for a comfortable retirement. It’s worth whatever someone is willing to pay for it, and if the business isn’t seen as a good investment, it may not be worth anything at all.

Fortunately, there are actions that can be taken to improve the value of a business in the eyes of potential purchasers.

Ideally, it’s best to start preparing for the sale of a business a good 10 years in advance, as it takes time to implement the measures that will maximise the value of the business when it is time to sell.

Even those who don’t plan to sell or retire from their business any time soon should consider getting ‘exit ready’.

Leaving succession planning to the last minute means the business is at risk of declining growth, confused or disappointed employees, and clients who are taken by surprise at the news of a change of ownership. All these can significantly decrease the value of the business to potential acquirers.

There are a number of factors that contribute to the overall value of the business. By taking action sooner rather than later, business owners can achieve the best possible result.

The four main attributes shared by the most valuable businesses are that they are profitable, transferable, sustainable and visible.

Profitable

Ensure business profitability in the years leading up to a sale or ownership transfer by maintaining a strong focus on the business and continuing to actively manage it.

It can be tempting for business owners to start winding down their involvement before they actually exit the business and take their foot off the accelerator. The distraction of a forthcoming business sale can sometimes cause sales and profit to decline. But this can damage the business by allowing competitors to gain market share.

To maximise value, the business owner’s focus needs to be on business performance and profitability. This includes having a strategic plan in place and maintaining focus on core business operations.

A professional transaction adviser can help plan and manage the sale process, allowing the business owner to maintain their focus on running the business without other distractions.

Transferability

A business must be fully transferable if it is going to maximise its sale price when the time comes to sell.

Areas to consider include whether there are formalised arrangements with key clients and suppliers, and whether all legal agreements, such as leases, have a clause that allows them to be transferred to another entity.

Non-transferable legal agreements are not ‘sale friendly’, so act early to ensure any existing legal agreements won’t create problems once discussions start with potential purchasers.

Issues can also arise because of the structure of the business, including the personal tax structure of the business owner.

Making sure the right structure is in place early 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.

Sustainability

A business that relies heavily on the owner to operate is far less sought-after than a business with systemised processes and experienced management. The sustainability of a business following the founder’s exit is often a major consideration for a potential acquirer.

Ensuring the right staff members and management are in place will aid the success and sustainability of the business.

A business that can demonstrate the sustainability of its revenue base will be more highly sought after than its competitors. Factors such as customer contracts, recurring revenue streams, or a large volume of customers paying via direct debit, give comfort on the future revenues of the business.

For a potential purchaser, a wider customer spread is preferable to relying on a small number of customers, as it represents lower risk to the business in the future.

Visibility

Business owners are often unprepared for the amount of work and the documentation required to support the due diligence process demanded by potential purchasers.

It can be extremely time-consuming to bring together the historical data needed to show the business in the best possible light.

Inadequate reporting systems and incomplete financial information does not instil confidence in a potential purchaser. It can prolong the due diligence process and even put completion of the transaction at risk. Quality monthly management reports and forecasts supported by detailed assumptions provide visibility over performance and the overall operations to potential purchasers.

Review monthly management accounts and question whether they are of a high quality and prepared promptly after month end. It’s also a good idea to regularly prepare budgets and forecasts supported with documented assumptions.

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