There is no doubt that New Zealand business owners have been on a rollercoaster ride for the last 2 years with Covid. Throw the current recruiting issues and the effects of inflation into the mix and it’s no wonder there are a few sore heads.
We don’t want to add more fat to the fire, however, recently released statistics are showing a trend that we feel you should know about, particularly if you are looking to exit your business at some point.
There is a rather large “iceberg” sitting below the waterline, potentially waiting to tear a hole in your business and sadly it is not known by many business owners.
The good news is that you can embrace this and then make some plans to fast track your business well ahead of your competition.
- There are currently approximately 142,000 small businesses in NZ
- 40% of the owners intend to leave their business in the next 5 years
- 60% plan to use the sale of their business as the primary source for retirement
- 70% of those people have NO PLAN and will potentially sell at number much less than the business could be worth.
If you have 5 minutes we highly recommend you read this short report from our Succession and Exit Planning expert Phil Wicks, on how he and our team of BSP advisors have added over 15 million dollars of additional profit to NZ business owners looking to exit their businesses.
This is money that would have been lost if it wasn’t for the owner deciding to reach out for help from us.
What is exit planning?
Exit Planning refers to the process of helping the business owner(s) leave or exit the business and ensures that a successful transition of ownership will transpire in a timely, efficient and effective manner.
The goal in most cases is to maximise the financial returns to the business owner, however in cases of family succession this may be secondary.
In our experience, due to aging owners we advocate implementing an exit and succession plan which focuses on developing leadership within the business to help it run independently of the owner and in turn increases the options for exit.
Options for exit?
The better the plan and execution of the plan, the more exit options there are for the owner to:
- Sell the business at an optimal price
- Transfer ownership and control of the business to family members
- Retire from active involvement (or scale down involvement) by taking a new partner or appoint a manager.
- Allow existing managers or family to run the business and maintain a passive involvement.
- Allow the business to cease – particularly if the business is small and closely tied to the owner's personal involvement
Why do you need an exit and succession plan?
In short, lack of an exit and succession plan could mean missing out on the rewards of decades of hard work and failing to achieve the sale price you deserve.
We often see business owners put into a situation where they are exiting at the wrong time because of ill health or perhaps a downturn in the economy, or due to the business profits flattening.
It's often a fair way down this decline that a business owner will decide to sell, and accordingly the price will be much lower than when the business was actually performing well.
What should every business owner planning to sell or retire in the next 5 years be doing?
When considering the sale of your business, you must consider the two stages.
Stage One: Understanding when to sell – “the getting ready” process
You need to explore issues such as whether you have the right information together for the potential buyer. Does your business look like a low risk investment? Do you understand the key criteria in selling your business so you can structure your business in the best light? Is it likelythat if you waited you could improve the appeal for your business and therefore sell it for more money?
Stage Two: Understanding how to sell
This is the price, strategy and processes that you will use to advertise and sell your business. Don’t take shortcuts because there is too much at stake. Use a process to develop checklists in Stage One, so that Stage Two is the execution of a well thought out plan that result in the maximum sale price.
Selling a business when it isn’t performing well is missed opportunity we see very often in New Zealand.
Having an exit and succession plan can avoid this, and of course, the planning should start as soon as possible, particularly if the business owners are ageing and thinking about life after business!
Process supports value. Start planning prior to the business declining or the business owners getting too tired, will in most cases make the business start performing even better.
Systems and processes can be improved, leadership roles cemented into the business, and a simple strategy to improve profits lead to the business becoming more valuable when sold because it's performing at a higher level.
What are the benefits of an effective succession plan?
- Structured leadership development
- Retention of valuable staff
- More value in the business at the time of sale
- Improved systems and KPI measurements
- Potential increase in sales and profits
- Potentially less time in the business for the owner due to successful leadership development
Now, here's the exciting thing about succession planning.
We get situations where a business owner comes to us looking to sell the business in maybe two or three years' time. And through that process and planning stages, there's often some leadership development.
On numerous occasions, the business owner with our guidance has developed some really good leadership in the business and accordingly they've improved their business significantly.
The business is doing really well, and because of the leadership development, the business owner isn't putting in the type of hours they were in the past.
We see examples where the business owner has actually cut their hours down to 25 hours a week from 55 hours a week and is collecting more income as the business is doing significantly better financially.
In turn, the focus on selling the business becomes less urgent.
The business has also become more valuable as the company has become less reliant on the owner and we see firsthand how leadership or the development of leadership can play a really important part.
And of course, it can also play an even more important part further down the track because potentially there could be people that you're developing within your business that are the perfect people to actually buy your business.
Other interested parties could be family, business partners, shareholders, employees or outside interests.
Some key points around succession planning
Don’t exit without a plan
Obviously, there has to be a plan in the first place before the exit of the owner. Don't exit without a plan.
Select expertise to assist with the strategy.
People that actually have done this before can help you develop your plan. This is a wise investment in your business.
Start development of the strategy and plan.
Improve systems and processes, and formalise policies and procedures. Embedded in the business, these will improve the value of the business, significantly.
The key message in all of this is if you're a business owner who's over 50, then you need to start planning your exit and succession strategy now.
Don't leave it to chance.
You don't want to leave things to chance. Make sure you have a good plan because of the difference in wealth creation between having and not having can be significant.
Give yourself every opportunity to get rewarded properly for the hard yards that you've put in over the years.
There are many different avenues business owners can use to find out more about exit strategy and how to prepare your business for sale. One is to seek out professional help by using either a business advisor specialising in Exit or a business broker.
If you feel like you can do this on your own there are some great resources on the web as well as you can attend seminars and presentations run by experts in the area.
If you're a business owner that feels that you need some help, contact us below and have a no obligation friendly chat.