Is your business exit ready?

With nearly 50% of small business owners planning to exit their business in the next five years, what can you do to maximise your chances for success?

In March 2012, William Buck invited over 2,500 business owners to participate in a rapid response survey to measure the level of exit readiness of owner-managed businesses in Australia and New Zealand.

The results are revealing; almost 50% of business owners plan to exit their business in the next five years, and 70% in the next ten years.  In spite of this, less than half of the respondents have undertaken any strategic planning such as valuing their business or planning for capital gains tax.

Manda Trautwein, Chair of William Buck’s national Corporate Advisory focus group says that business owners should act now.

Read her tips for making your business exit ready.

Preparation is key

Over the next five years we’ll see a flood of businesses on the market and with little demand, the competition for a buyer is likely to be tight.  Preparation will be key; business owners should start preparing for the sale of their business three to five years ahead of when they’d like to sell..

Given a three to five year lead time, owners can work with their advisors to design an action plan which may focus on a number of areas including; restructuring, tax planning, building management teams, diversifying revenue streams and/or closing down loss making divisions.

Any plan should begin with a professional valuation and vendor due diligence to ascertain an accurate value of the business and review it from the perspective of a buyer.

Our survey, however, revealed that 69% of businesses have not been independently valued and almost half of all business owners do not have a clear understanding of what to do to maximise the value of their business for sale.

An early strategic valuation and vendor due diligence will enable owners to determine the key value drivers of the business and identify the areas that will impact on its sale value.

Owners should also begin thinking about how they will go to market as early as possible.  Only 40% of respondents have been approached by a potential buyer and only 30% believe they will face no difficulty finding a buyer.

With a clear strategy in mind, it will be easier to identify potential buyers, especially competitors who may see the dual benefit of expanding their business and removing a competitor.  Targeting potential buyers early and understanding their needs and future requirements will enable the business owner to strategically position their business to the demands of the market.

Prior to putting their business on the market, owners should also look at the forms of consideration they are willing to take, such as cash, deferred payments or shares in a public company.  Not only will this affect the marketability of the business but could also affect the overall tax situation.

Be aware of the tax consequences

Surprisingly, almost 80% of owners surveyed do not know how much capital gains tax they would have to pay on the sale of their business.  William Buck’s Tax focus group Chair, Shane Crockett says understanding the tax consequences of a sale is vitally important.

“All too often we see the profit of a business sale diminished due to an unexpected Capital Gains Tax bill.  It’s heartbreaking for many owners who’ve worked their whole lives in their business,” Shane said.

“A well thought out tax strategy should form an integral part of the overall exit planning process.  It’s important to know up front if your corporate advisor has access to the necessary tax expertise.”

Don’t neglect your personal finances

Minimising the tax consequences and maximising the value on sale are important to all business owners, particularly those that rely on the sale of their business for their future income.

The majority of our survey respondents belong to the baby boomer generation i.e. born from 1946 – 1964 and over 40% of respondents are relying on the sale of their business to fund their retirement.  Moreover, only 38% of those surveyed felt that they had an adequately funded retirement plan outside of their business.

William Buck’s Wealth Advisory focus group Chair Chris Kennedy says with the business acting as the primary asset to fund future income, it is imperative for the owner to pay attention to his or her personal finances.

“Most small business owners focus on accumulating wealth within the business and investing surplus profits back into the operations,” Chris said.

“Essentially, it becomes their only asset. Owners should act early, to separate their personal wealth from their business and implement a personal wealth accumulation strategy.

“Building their wealth accumulation strategy into their exit plan will ensure that they are able to continue their desired lifestyle after the sale of the business and reap the rewards that they’ve been working so hard for.”

Get the right advice

Your advisory board should meet with you on a quarterly basis to review your progress against your exit plan, provide advice and encouragement and most importantly, to hold you accountable.

An effective advisory board will take a holistic approach looking at the commercial, taxation and personal consequences of your exit plan.

Seeking professional advice and setting and implementing a clear exit plan should increase the value of the business long before the decision is made to sell.