Planning an exit strategy

This is the first in a regular series by Bill Hovey, who shares his extensive knowledge and expertise with SME owners to help prepare the way for your inevitable departure from the business.

Regardless of the size of your business or the industry you operate in, you will ultimately leave the business. A planned departure gives you some control over how the future unfolds for both you and the business.

As a business owner you probably have expectations of what your lifestyle will be like after you leave. However, if you intend to fund your lifestyle from the sale of your business, and you don’t have a solid succession plan in place now, when it comes to departure time you may be disappointed with the opportunities and financial options available to you.

The scenario could be even worse if you are a business owner without a sound succession plan and you intend to retire in the near future and expect to sell 100 percent of your business. The expectations you have for your proposed retirement and lifestyle could be seriously hampered.

The earlier you develop your business succession strategy the better. It is never too early, but it can definitely be too late. It is simply sound business sense to make time in relation to your future business exit, to examine where you are going and how you are going to get there. Don’t be tempted to delay planning if you can’t see an immediate reward, the key is to have time on your side. Leaving your planning too long can jeopardise all that you have built and hoped for. Effective internal succession planning is ongoing and the earlier you start planning, the more viable you can make the business.

With no succession plan in place there is a strong likelihood that you are exposing the business to a catastrophe. By putting succession planning in the ‘too-hard basket’, or only planning to act when retirement is on the horizon, you could experience monetary losses, and even loss of the business itself through any number of factors.

These can include degradation of the brand, failure to keep pace with the competition, loss of customers, loss of sales, staff attrition and loss of key talent, a fracturing of stakeholder relationships and goodwill, and a gradual decline in the value of the business.

Your business is no different to a share portfolio. If you manage it properly its value can grow over time. Your business succession strategy is an important element of your management process and you need to develop it to balance and protect all aspects of the business.

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Exit strategy

Your strategy should:

  • * ensure the business continues to operate soundly into the future
  • * protect the interests of employees
  • * protect the quality of services to clients
  • * increase the monetary value of the business for you as the owner

Having a succession management strategy allows you to develop and review the direction the business is taking while considering a range of market factors. It also allows you to take the appropriate time to invest the necessary resources and to undertake the required ‘housekeeping’ so that your business is investment-ready or sale-ready at any time.

Future Shock

According to a survey—KPMG, Family Business Australia and Deakin University of Family Business Needs 2006–more than 70 percent of Australian businesses are family- owned and are typically small to medium size.

This sector, like others populated by the baby boomers, is about to experience an age-driven shock. The age profile of SME owners in Australia today consists of those aged 50 years or older (33 percent and growing at 3.7 percent per annum), those aged between 30 to 50 years (58 percent), and those aged younger than 30 (9.4 percent).

The number of business owners who intend to sell their business on the open market as an exit strategy has more than doubled from 16 percent in 2004-05 to 38 percent in 2005-06. A quarter of family business owners intend to retire within the next five years.

There is a disproportionate number of people between 45 and 65 years old (24 percent of the Australian population) when compared with the number of people in the potential buyers category 35 to 45 years old (15 percent of the population).

This demographic mismatch means that only truly profitable or professional family businesses will attract premium pricing, with the prospect that the ‘also-rans’ will be difficult to sell.

* Bill Hovey is CEO of the linchpin group Australia "linchpingroupaustralia.com" and practice executive director of linchpin succession management "successionmanagement.com.au"

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