With 83% of baby boomer businesses not having an exit strategy there is big problem coming our way. If this problem is not met, a lot of business owners will face a bleak future. We talk to small business financial specialist Warwick Russell on how we can address this issue and turn the problem around.
Why is having an exit strategy important for business owners? And how bad is this problem? You really need to begin with the end in mind if you want to exit your business successfully. The best results for you will be achieved when your planning starts at the same time as your business, or certainly well ahead of your planned exit.
Here’s the truth behind the reality of exiting businesses for you to consider.
- Often the decision on when to exit the business is driven by events beyond the owner’s control with one of the four ‘Ds’ (death, disease, disability, divorce).
- We hear from business brokers that three out of five business owners coming to them get turned away. This is because the business is not making any money and has a low value, or the business owner has unrealistic ideas of what their business is worth. That’s right, 60% of business owners face getting zero return when they intend to sell!
- It is estimated that 60,000 baby boomer owned small and medium businesses will come onto the market in the next 10 years. But only about 17% have formal plans in place for succession or to transition out of the business.
- Entrepreneurs live for the challenge of launching their business, but forget that decisions made on the day can have huge implications to the value of the business, and with how they get their money back to move on to their next challenge.
WHAT IS THE TRUE PROBLEM FACING BUSINESS OWNERS, AND WHAT CAN BE DONE ABOUT IT?
Most people go into business not only to earn an income, but also to build the value of their business to ultimately sell.
That sale will often be the primary source of funding for their retirement. But most business owners never take enough time to develop and implement a plan to sell their business, and risk not realising the full value of their investment. This is the single biggest mistake a business owner can make.
The key questions to consider are:
- When do you plan to exit?
- Can you be removed from the business without affecting its operations?
- Do you want to remain involved and exit gradually while continuing to earn from the business?
- Who are the potential buyers for your business and what are their perceptions of the risks and opportunities of the business?
- What is the business worth now, how that can be enhanced and how easy is it for a purchaser to fund?
HOW CAN YOU FIX THIS PROBLEM?
Identify the value of your business now and the gap between that and how much you need or want on your exit. Identifying the value of the business is a bit like reverse due diligence. It is a review of the risks and opportunities of the business including the following elements:
- The attractiveness of the industry
- Business factors including financial track record, customer base, key staff and existence of business plans
- Business growth factors: existing customers, new customers, new products and services and ability to support growth
- Buyer risk around owner dependence, supplier dependence, customer concentration, performance compared to industry benchmarks and ability to raise finance.
Develop and implement a plan to lower these risk levels and improve the financial performance and attractiveness of the business to a potential purchaser. It may take one to three years.
The readiness level of your systems and documentation to be opened to scrutiny by a potential buyer also reduces risk. Identify who an ideal buyer may be, and understanding the buyer’s view on value will enable a business to target what is attractive to a buyer.
Get the right advisors on board at the start. Include your accountant, business advisor, business broker and lawyer.
Warwick Russell is the owner of Auckland-based SMEtric, offering Virtual CFO services and consulting on financial turnaround and business planning.