The recent share market downturn is likely to force many SME owners who are approaching retirement age to seek higher prices when selling their businesses to compensate for the reduced value of their superannuation investments.
With the share market still uncertain and super funds likely to achieve only single digit growth in the year ahead, the post-retirement lifestyles of many SME owners will depend on how successfully they present their businesses for sale.
Unfortunately, many enterprise owners don’t contemplate exit strategies until the last minute. Unsurprisingly, they are often distressed to hear from their professional advisers that their business—even if profitable—will not attract a buyer at the right price unless certain things are done before it goes on the market.
An owner who is planning to sell now or in the future needs to understand where the potential buyer is coming from. Buying is all about risk. When the risk is high, a prudent would-be purchaser either pushes the price down or walks away. Conversely, buyers who see or sense a low risk opportunity will usually be prepared to pay more.
The psychology of selling a business is the same as that for selling a house. The business needs to be tidied up and presented in its best light. Like their home-buying counterparts, people who buy businesses need to be able to see and understand what they are getting for their money.
The realisation that a business will eventually need to be put on the market gives the owner an opportunity to consider ways of making the business more attractive, even if its core business, turnover and profitability remain unchanged.
One of the early priorities is for the owner is to work out precisely what will be offered for sale. This involves identifying what each company in the structure owns and what restructuring, if any, needs to occur to make the purchase attractive. Restructuring may be as simple as merely putting in managers with specialist expertise at various levels or removing from the business any family-owned assets.
Another priority is documentation. Although prospective buyers will do their own due diligence, the owner can make that process easy for them by having good documentation. The easier the due diligence process is for the buyer, the less risky the investment will be and the more the buyer will be prepared to pay. Historically, good documentation meant good paper records. Today, it means good records on user-friendly computer systems. Everything the business does, and how it does it, needs to be presented for examination. The idea is to overcome any concerns the buyer may have that all the valuable knowledge about the business is in the owner’s head. Documenting this knowledge, and the various systems and procedures, goes a long way towards reassuring the buyer that the business can remain profitable after the owner departs.
Ideally, preparing for the due diligence that a sale requires should begin when a business is being established, and continue throughout its life cycle. This ensures that transparency keeps pace with growth and that its associated costs arise over time rather than in one hit.
Those owners who are contemplating selling their businesses now and have progressively addressed the issues of restructuring and due diligence, should find the sale and their passage to retirement relatively free of drama. However, those who now find themselves caught short by the ailing stock market and who have never formulated an exit strategy should resist any temptation to panic and make that strategy a priority.
* Adam Rich is a corporate partner with Melbourne law firm Wisewoulds (www.wisewoulds.com.au)