For Sale – Small Business, Owners Ready To Move On
Your business is likely to be your most valuable asset (other than your home). The proceeds from your business could fund a significant part of your retirement.
3 November 2021
Roger Sutherland shares several strategies for business owners to get the best price when selling. He also identifies some of the pitfalls you may face by not having a succession plan in place.
Deciding to sell your business will probably be one of your biggest financial decisions. To maximise its sale value you will need to present your business in the best possible light, which will likely take some careful planning over the years.
New Zealand sits well above the global average for the number of privately held businesses per capita. According to a Grant Thornton International Business Survey, many business owners see succession as an important issue (82 per cent). But only 25 per cent had sought professional advice, with less than a quarter of that group having a documented plan. However, in reality, experience shows that fewer than two per cent are in fact ready to face even a basic succession issue – such as ill health or death – let alone a planned exit from their business.
What you should be thinking about
As a business owner, you need to decide which succession strategy will provide ‘best value’, while also achieving any other wishes you might have in exiting the business.
For many people, their business has been their life and they haven’t thought a lot about selling until they near retirement. This can present some challenges. Research indicates that exit-strategy concerns include:
• All assets are tied up in the business and there is a need to get capital out.
• Agreeing an appropriate value – what multiple of revenue, or other method, is used to determine market price?
• The timing of the sale – the owner wants to be out in one year, but needs to be there for two or three years to transition the business.
• Management and staff retention – will key people leave the business if the owner changes?
To combat these concerns, business owners need to start preparing for sale as early as they can, even if they are not intending on selling in the near future.
Preparing your business for sale
Most people will paint their house, tidy the garden, and complete any outstanding maintenance work before listing their property for sale. To get the best price for their business, owners should have a similar approach and present the business in the best possible light. After all, this transaction represents a one-off opportunity to convert what has often been a lifetime of effort into valuable retirement dollars. Focus on these points:
1. Work out when you want to sell – next year or in five years – as this will help shape your planning.
2. Start reducing dependency on you as the main breadwinner of the company.
3. Ensure your accounts are in order, with up-to-date forecasts for the coming years.
4. Sell non-core assets, which might include transferring your commercial property to a trust, selling it or leasing back to a tenant you know and understand well – a convenient strategy to release capital, yet retain a valuable future income stream.
5. Consider who will buy your business and what it might be worth. Talking to a business broker will help.
What is your business worth?
Identifying the various value components of your business can help create a ‘value-improvement strategy’ that will result in a better exit price. Two of the most significant considerations will be revenue generation and profit history.
A purchaser that is able to easily merge your business with their own is more likely to value your business in terms of its top-line revenue, because when the two businesses are combined, the increased scale, market share and consolidation of costs often leads to significant bottom-line gains. On the other hand, purchasers of stand-alone businesses will be more focused on current profit margins, and their ability to maintain and grow those margins over time.
The purchaser will also need to consider ‘future risk’. This assessment will usually include business-owner dependency, market share, product range, service proposition, technology, exclusive licenses and franchises, competitive advantage, and growth/profit trends. Business systems, practices and procedures will also be reviewed.
While there are a number of ways to value businesses, ultimately the price tag will be determined by the strategic position of the buyer and what they are prepared to pay.
Ways of selling your business
Here are four common strategies you can use when planning to sell a business.
The key to management buyouts is building a team of the right people around you; people who share your desires and dreams, and possess skills that complement your own. In this way the change in ownership can be staged over time, making the transition virtually seamless. For this approach to work well, planning needs to start at least three to five years before exit.
Trade sale or merger
A trade sale or merger is like putting your house on the market. If you are looking to sell your business on the open market, then you will want to ensure confidentiality and integrity throughout the process, so choose your professional advisers carefully.
If competitor businesses become aware of your intentions, they may look to take advantage of that information. You might also want to keep details private from suppliers, clients and staff. Make sure any party completing due diligence on your business signs a confidentiality agreement.
If the purchaser is either new to the industry or from overseas, they may want to secure the services of an existing owner over a one- to three-year period following sale, to help maintain value, and retain existing business relationships and management skills. Agreeing to ‘stay on’ for a while can be a useful way to achieve a ‘top-dollar’ result. It removes a lot of risk for the purchaser, potentially increasing the price they are willing to pay for your business.
Family succession can raise many questions and choosing this strategy requires careful consideration. You need to assess whether your family members have the ambition, passion, desire, drive, and skills to run the company or whether outside help would be needed. How do you treat all family members fairly? How are they going to pay for the business – or is the intention to gift it to them over time?
For many rural businesses there is a strong desire to involve family, just as their parents did. However this is becoming increasingly difficult with the continual increase in land values and ‘next-generation’ family members to be considered. An outright sale, to an already
identified individual, or group of individuals, who have cash to invest, may be a better option for many.
Private equity funds
Your business could be sold to a specialist fund, which sources investment capital from wealthy private investors. These specialist funds are managed by very experienced, business-savvy individuals, able to spot opportunities for significant value appreciation over a relatively short time period.
Private equity funds often invest in several businesses at any one time and their management expertise enables them to repackage, re-engineer or reposition their businesses into larger, more profitable and valuable companies.
The sale of a business is an involved process that requires careful, advance planning. Get professional advisers involved from the planning stage through to the sale, so they can provide independent financial advice to help you manage the money you make and you can get on and enjoy your well-earned retirement.
CONFIDENTIALITY AGREEMENT: a legal contract between two (or more) parties that outlines confidential information they wish to share with each other, but not disclose to third parties. Also known as a non-disclosure agreement, it is commonly used when two businesses are evaluating a potential merger, acquisition or relationship.
DUE DILIGENCE: an investigation and assessment of a business to gain a better understanding of it prior to a potential purchase.
MANAGEMENT BUYOUT: purchase of a business by its existing managers or executive directors, usually with outside financing. Because the managers are familiar with the operations, they can create value by continuing on in the business.
First published 2 June, 2016
By Roger Sutherland
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