I hope you all had a good break over summer – a few days down the South Coast? Skiing in Aspen? Taking in the Sydney Festival or summer sports?

For many of us the end of our break, combined with the start of a fresh working year makes it an ideal time to start thinking more about life outside the business; succession planning, or exit strategy, whatever you want to call it.

Most of us go into business with a view to building an asset that can be realised in some form or another to provide security (and preferably prosperity) when we move on to the next phase of our life (that’s for those who can’t face the R word – retirement).

However, if you’re now reaching that point, unless you’ve been remarkably prescient, there will still be a fair bit of planning and implementation needed in order to get the best value from your business.

What (or who) is your exit strategy?

The first thing to consider is who will buy your business. This will heavily influence what steps you need to take to make it happen. So, who are the likely candidates?

Selling to Family

This has been the traditional solution to succession planning. When it works, there’s no better way of building and preserving wealth, while simultaneously ministering to some of our most fundamental non-economic instincts. 

But this option doesn’t always work. The next generation may not want to go into the family business (and fortunately these days they’re not normally pressured to do so). Or, there may be disputes and jealousies, a story as old as time itself – the Biblical tale of Cain and Abel is really a family succession plan gone wrong.

Even assuming you negotiate these obstacles, generational succession doesn’t insulate you from the risks of the business. For example, you may need to leave most of your money in the business, or take it out over time, as you need it. If the business hits difficulties, you lose your investment.

And even if you do get paid out, you probably won’t extract top dollar from your own kids, and again if things go wrong   (financially or in their personal lives), you may find yourself tipping money and yourself back into the business, long after you expected to be cruising (metaphorically and literally).

Selling to Senior Management 

This is another option that makes sense as they already know the business and are presumably best placed to keep it going after you leave. It also means you don’t have to go through a lengthy “due diligence” process as the managers already know all there is to know about the business.

As logical as this scenario sounds, from my experience it surprisingly rarely works as most times loyal subordinates are happy being just that and aren’t interested in taking on the risks of business ownership.

Selling to Competitors

A competitor wanting to grow its business, or someone in the same line of business from outside your area wanting to expand is often a “natural” purchaser. However, negotiations with people you’ve been going toe-to-toe with over many years can be tricky, and there’s always the danger that they’re just coming to kick your tyres and peer under your bonnet, before going away to put the information obtained to good use.

Other less obvious exit options can include an operator in a related (or unrelated) industry. However chances are you’ll need expert help in unearthing these parties. In this situation, it may be worth engaging a corporate advisor to manage the process.

I’m not talking about the big rock star investment bankers that are out of reach for most us, there are some reputable and capable boutique advisory firms catering to quality SME businesses.

They do charge significant success fees and a retainer for doing the work. However, if they can turn a $5m sale price into $5.5m, or even $2m into $2.2m, a 7-8% fee is still worth it.

Preparing for Succession Planning

Whichever path you take you need to get the business in the best possible shape for sale to ensure you get the best value. Here are several elements you need to consider when planning for your exit:

Financial Accounts

Is the bookkeeping in good shape? An external purchaser will probably want to see at least 3 years of financial accounts. Businesses get sold on the basis of the bottom line, maximising the reported income, minimising the expenses – which isn’t necessarily the way many businesses are run on a day-to-day basis. So, leading up to your exit, a conservative accounting policy will serve you well.

Compliance

• Are all your lodgements with the ATO and ASIC up-to-date?
• Are you fully compliant with the requirements of any business licences you hold (such as liquor, financial services or real estate)?

Intellectual Property

• In all likelihood most of the value from a sale will be in the goodwill of the business, which may include brand value, so is the brand secure?
• Have you registered your brands as trademarks?
• Do you have any technology that can (and therefore should) be protected by patent registration?

Employees

• Are your employee entitlements up-to-date and properly provisioned?
• You may have to absorb long service leave and redundancy obligations on a sale, how will that affect your final figure?
• Are your key employees secured by way of service agreements?

Premises

How do lease expiries fit in with a business sale? If a potential purchaser wants to stay at the same premises, you want the ability to deliver this. On the other hand, they may want to leave the location, in which case a long-term lease would be viewed as a liability. It’s hard to have it both ways – if possible it’s best to get an option for a further term from your landlord (but that too will come at a price).

As you can see running a business is hard work, and so is exiting. While it’s not an easy process, you have the best chance of making the effort worthwhile if you start planning now so as to maximise your opportunities, and make the most of them when they come to fruition.

Neil Scott
Neil Scott Lawyers