The best time to start planning an exit strategy is yesterday
But even starting today is better than keeping your head in the sand.
It’s not every business owners favourite subject, but succession planning is a critical part of running a business. It’s never nice to confront the reality that you might, one day, hand over the running of a business you’ve worked hard to build up, to another person or people. Of course, no-one will ever run it the same way you do. But that’s not always a bad thing. New owners can bring new ideas and energy. The truth is, one day, you and your business will reach a point where you must part ways. Being prepared mentally and practically for this day is wise. And the further ahead you plan for it, the smoother the transition will be.
Don’t let the need to plan for exit sneak up on you
Macquarie Bank’s 2013-14 Insurance Broking Benchmarking Report1 describes several approaches to succession planning by businesses. Of those surveyed, 30% planned to sell to another firm, 29% intended to give staff the chance to acquire equity. A further 25% planned on family succession. Many businesses had no plans at all. Of the firms without a succession plan, 16% had no successors who they could pass the business to. And 7% described it as too hard.
The truth is, the subject of exiting often simply sneaks up on business owners. Over 50% of exits (business sales) are involuntary – or unexpected or unplanned, often due to upheavals such as death, disability, divorce, distress or disagreement. And with 22% of businesses are owned by those aged 60 and over, not having an exit strategy in place is, frankly, foolhardy.
A solid plan for exit could make a huge (positive) financial impact
So there’s a growing need for businesses to prepare an exit strategy or succession plan. And along with this comes the need for experts who can guide businesses through this process. Engaging a succession expert or financial adviser could be the difference between a lucrative business sale, and the business shutting its doors. If business owners are willing to recognise the need to plan for exit as early as possible, it’s possible (with the right guidance) for them to make a significant difference to the way the exit plays out.
There a great deal of potential value in solving this problem.
On average, businesses sold up to $1m in value are sold at a value of between 1 and 2 times their annual profit. Businesses above $1m in value are sold between 2 and 4 times their annual profit.
This is because a business under $1m in value has not grown its model and brand beyond the main business employee (typically, the owner), meaning there is no sustainability to the business once the owner is not involved. An article by CBA on business exit strategies says that a business which depends on its owner for continued survival will struggle to be on sold as a going concern. It goes on to recommend that owners consider making themselves redundant2.
Begin to separate from your business
Buyers will pay for a sustainable business model that gains customers and revenue from an established brand. This means you must build your business up to the point where it generates value from a brand that stands alone, and is not tied to just one person. You must accept the fact that one, day in the distant or near future, you’ll no longer be in charge.
If you make a commitment to prepare your business for an eventual sale you will benefit in the short term, because you’ll shift your business from one that revolves around its founder to one that exists independently. If you study your business for ways to improve it, to tighten processes and manage costs with an eye on a future buyer, your improvements will benefit you and your bottom line too. These efficiencies will add value to your business and increase the price you can ask for it at sale time. And what a great feeling, to know your business will continue to chug along without you once you’ve retired.
The Department of Industry, Innovation and Science have a Succession Planning template3,on their website. which will help to kick start your thinking.
The bottom line: start planning now
Whether exit is imminent or some way off, it pays to have a trusted advisor that can help you make business decisions that will create long term value for when you do exit. Creating an exit plan for a business you’ve built from scratch will be confronting. But if you want to give your business the best opportunity to fetch a great price when you’re ready to move on, understanding how to separate yourself, and formulating a strong, practical exit strategy could make all the difference to your final price.
If you like some help planning a lucrative and well thought out exit from your business contact Mike from Truro Partners on 0401 142 311.
Over to you
Thought about an exit plan for your business? Share any tips in the comments.
Sources:
Macquarie Bank’s 2013-14 Insurance Broking Benchmarking Report
CBA–Leaving a business, creating an exit strategy
NSW Business Chamber– Developing and exit plan and selling your business