Be Informed is William Buck's regular newsletter, filled with up to date news and relevant advice for individuals and businesses.
How did you become an owner of the business?
Over two-thirds of respondents (68%) are first generation business operators having started their business from scratch. A further 14% took over the operation of an existing family business.
As a result, it is likely that most respondents will have a strong emotional connection with their business. They have seen the business develop and regard the business as an integral part of their entire life, and not just a commercial undertaking. They are likely to see themselves as the key person that has defined the business and (likewise if asked) would see the business as a significant part of how they define themselves.
This is reinforced by the survey response that 65% of respondents worked 40 hours or more in the business. This is consistent with other data collected by the ABS which show that a majority of these owners are likely to work more than 49 hours per week in the business. By contrast only a minority of respondents (16%) effectively work part-time in their business, working less than 30 hours per week.
First generation family business operators traditionally have a high level of involvement with their businesses. While this provides for strong and focused management through the early establishment and growth of the business, there is a risk that the business will continue to be run as the corporate extension of its owner with a blurring of “private” and “business” affairs.
Further, it can prove a negative when it comes to selling the business as potential buyers perceive there to be a significant risk that the business is too heavily dependent on its owner to allow it to transition without its results being negatively affected.
Which generation do you belong to?
Over 70% of respondents were born prior to 1964, being either children of the war generation or the baby boomer generation.
This means that a large majority of respondents are either over or approaching 50 years of age. This places the respondents clearly into the age brackets where health, lifestyle or other factors will increasingly drive them to consider their retirement and the future of their business, including either the sale of the business or engaging in a process of planning business ownership succession.
While investors have been digesting the medium-to-longer term implications of current economic conditions, the accumulation of funds that will ultimately need to be invested has continued to grow, and will (sooner or later) be looking for investment opportunities. The coincidence of large amounts of funds looking for investments with large numbers of business owners ready to exit their business may result in a flurry of divestment and acquisition activity over coming years. Being prepared to capitalise on the opportunities when they emerge will be significantly enhanced by timely and proper forethought and planning.
Have you ever bought or sold a business?
The majority of respondents have never been involved in the purchase or sale of a business. This is consistent with the high percentage of respondents who started their business from scratch and are first generation business operators.
Accordingly, whilst owners have strong knowledge and skills in establishing and growing their businesses, they are far less experienced in relation to considering the options for exiting a business or the planning required in order to minimise the impact on the business and maximise their return. At best, the majority of business owners approach what is arguably one of their biggest decisions with only a general appreciation of the factors that will be of greatest importance when selling their business.
While the anecdotal experience of their peers may have given them an idea of possible succession options and processes, few would appreciate the time and effort that is required in order not only to prepare the business for transition and start the process, but also the time and effort required to drive the process to a successful completion once commenced.
Do you have a management team in place that can operate the business in your absence?
Two-thirds of respondents indicated that they have a management team in place that can operate the business in their absence. This indicates that a large number of the businesses surveyed are more significant than “owner-operated” business and are genuine “owner-managed” businesses.
The presence of a management team capable of operating a business in the absence of the business owner creates significant opportunities. A key factor that limits the value of any business is a high dependency on the owner as it may mean that there is a high level of “personal” goodwill in the business that may be lost once the existing owner is no longer actively involved in its operations.
The presence of a management team also creates an additional group that may be interested in participating in the current and future ownership of the business. Management buy-ins/buy-outs represent a logical succession option that minimises the potential disruptions to the business associated with a sale and maximises the potential value that can be delivered to the existing owner through a structured and orderly transition of the business from one owner to another.
A structured management buy-in/buy-out can also increase the options available in funding the acquisition of the business and the payment of purchase consideration. This aspect can result in decreased reliance on the involvement of external financiers, reduce transaction costs and shorten the overall time involved in completing a sale.