When it comes to time to sell a business, there are a number of misconceptions about what can make the most profitable return. Here are four of the most commonly held myths circulating about selling a business as a succession plan, and what they often deliver in practice.
Myth 1 - 'The longer I hold onto this, the more valuable it will become'
Overwhelmingly, business owners have a thought in their mind that links their businesses to real estate-like outcomes. That is: ‘The longer I hold onto this, the more valuable it will become’.
Nothing could be further from the truth.
Whilst the investment in premises, as a part of the business plan and business investment structure, has proven to be a great strategy, the property may be the only thing left of value associated with the business, as the years of poor business acumen and review take their toll.
Businesses are a living thing, not inert bricks and mortar. Property values are controlled by far bigger forces than any individual business. The owner’s business value destiny is in their own hands.
The main issue with this view is that it increasingly limits the exit options which might be available; some exit options take time and effort to implement correctly.
For instance, an Employee Share Ownership Plan (ESOP) is typically implemented over five to 10 years; it takes that long to transfer ownership and control to the employees and can't be rushed!
One example followed the transfer of a small-goods business in Sydney to a 75-year-old from her father who founded the business many years ago.
The associated assets, such as the building, plant and equipment, were old and needed substantial work and capital investment. This was difficult to debt fund for the new buyers – the end result being there was less capital available to pay out the owner and therefore a larger than normal vendor finance component.
This is the last thing you need at 75 years old!
Myth 2 – Let the buyer make the hard decisions
Too often business owners will identify change, draw attention to issues which need to be resolved and see ways to improve the business, but these get left for the buyer to address.
One business owner even said he left a few obvious things for the buyer to do so they “saw some upside”.
That’s the same as leaving the front fence fallen over on auction day so the buyer can see some upside in getting it fixed!
Myth 3 – Owner alignment, exit intention, and ‘it will all work out!’
Often business owners are working so hard on everything else that they never get to think about the exit strategy, and this is often the key to financial success.
However, many business owners haven’t had the conversation or done any planning, so an exit becomes a surprise and is rushed!
Business owners who strategically plan and manage their exit strategy can do two key things: maximise the value of the business and the amount they receive; and achieve a successful exit, which means the business can continue to be successful after the transfer. They can fund retirement and employees have ongoing employment and probably greater opportunity.
In some businesses, the ownership group is simply not aligned: they have never had a detailed conversation about exit intentions, timing or valuation.
The end game is uncertain; no one knows who is planning to retire when, show how much do they expect to receive when they sell? How is that going to be funded? Who is going to buy in?
Myth 4 – 'Someone will buy it'
According to recent research by the Exit Planning Institute 'State of Owner Readiness' survey, 46.3 per cent of all business owners expect to transition in the next 10 years.
Despite this, few have done any formal planning, as 79 per cent have paid some or no attention to exit planning and 75 per cent “profoundly regretted” the sale significantly within 12 months of selling.
A large number of businesses listed for sale by brokers fail to sell.
The reality is these are largely “distressed” assets; in real estate terms they are not ready to sell, the owners are not ready to leave, the business can't run effectively without the owner, and most business buyers are not looking for a “renovator's delight.”
In contrast, well-prepared businesses with a strategic exit plan and enough time to effectively implement a strategy to maximise business value and achieve a successful exit will always sell, and the owners will be able to adequately fund retirement and ensure the business continues to be successful.
Craig West is the CEO of Succession Plus