A business begins with you, but it doesn’t have to end with you. Steve Brown considers options that allow an owner to bow out gracefully and ensure that the business has the best chance of a long and fruitful future.
A business can have a much longer life than the human cycle of birth, maturity, death. There are many exit options for owners, but it takes consideration to choose and plan the right one for you, and for the future health of your business.
Initial Public Offerings
An initial public offering (IPO) is also known as a public float. An IPO should be considered when a business is of a size that it requires further capital to grow—and the capital can’t be obtained cheaply enough by way of debt—or when you have reached a point where you are prepared to trade off a large sum of money in return for losing absolute control the business.
An IPO is a sale by you of your business for cash and/or shares to a public company. Besides the sale, you should consider:
• Are you retiring from the business entirely or merely relinquishing some control?
• If you are remaining in the business but with less control, how much control will you part with?
• Are you prepared for a third party takeover in which all of your rights to the business are lost?
• Can the business afford the additional costs of operating as a publicly listed company?
Sales, Mergers, Acquisitions—
As a sole trader, partner or through shares in a company, you may sell your business to your children, friends, through a management buy-out or to unrelated third parties. You may choose to merge your business with a competitor, or perhaps it is acquired by a party already involved in your industry, who purchases outstanding shares or assets. Regardless of the type of purchase, you should consider:
• What is more important: the sale price or the continuation of the business?
• Do you want the ownership retained by a family member, or do you want the business to be in the hands of the best person to grow the business? If the sale is to be to a family member, who in the family will purchase the business? How will the succession best be achieved? Do you need expert help in succession planning?
• If you are only concerned with maximising the sale price.
• What tax breaks will you receive if you sell the business and retire?
• Are you prepared to remain in the business after it is sold? If so, for how long, and on what basis: as an employee, paid or unpaid consultant, or as a director of the board?
• Are you prepared to provide a restraint-of-trade provision in the sale? If so, for how long and for what geographical area?
• Will the existing employees have to be dismissed, or will the new owner want to take them on?
• If you own the business premises, will the premises be sold with the business, separately to the business, or leased to the new owner?
• If the business uses intellectual property that you own, will the intellectual property be sold with the business, or will you retain ownership and license use to the purchaser?
• If you are going to license intellectual property, how will you assess or verify the accuracy of the licence fees paid to you?
Some business owners decide against selling or listing the business, opting to simply cease trading. Whatever the reasons for closing down, you should consider:
• Do you have sufficient money on hand or from the sale of assets to pay all of the debts of the business? If you don’t have sufficient money to pay all creditors, you must cease trading through bankruptcy or insolvency.
• How much money will you have to pay the employees on them being made redundant?
• What expenses will you incur in ceasing to use a business name or trade mark?
• What expenses will you incur in deregistering a company if you operated your business through a corporation?
• Is this the most appropriate course of action and if so, when should you do it—during a financial year or will there be tax benefits if it is just after the commencement of a new financial year?
• Will you receive a capital loss by simply ceasing to operate the business?
• Will you be in a financial position to meet the costs of ceasing trade?
Steve Brown is owner of Etienne Lawyers. Contact him at www.etiennelaw.com
In the Public I-PO
Ross Human Directions—formerly Julia Ross Recruitment—was founded by Julia Ross more than 17 years ago. Although not a recruiter herself, Ross worked in the industry, which equipped her with the skills needed to run a successful recruiting business. In addition to industry knowledge, Ross had experience in opening new branches, so this was part of the plan when she set out to create her empire, which included becoming listed on the stock exchange and the acquisition of Spherion Group, a technology recruitment company.
As the Julia Ross brand grew from one Sydney branch to several, then to the eastern seaboard and interstate, it didn’t take long (just over a decade) for this one-woman operation to be turning over $150 million. Although quite a milestone, it was not without its problems. “I became a little uncomfortable with the size of the business as a sole owner. There were no investors, no business partners, and I got to that stage and thought I’d like to share the load a bit.”
Going against the advice of her advisers—who were keen for her to bring investors on-board—Ross made the decision to go public, listing on the stock exchange in September 2000.
But she wasn’t prepared for how much work the due diligence involved. “Everyone told me it was going to take a lot of time and effort, yet I still underestimated how distracting it would be.” And although Ross had a consultant handling the paperwork side of the process, the work involved still distracted her from day-to-day business activities.
Although she says her board is quite supportive, because she is answerable to them and the shareholders, she finds it tough when their goals are different from her own. “They are bottom line driven,” she explains. Not that she would run an unprofitable business, she adds, but it can be quite distracting from the original goals for the business.
“When you’re private, it’s only you that it matters to, it’s not a public issue. So it’s not slapped all over the newspapers. When you have that visibility,” she explains of being a public company, “you’ve got to try to keep the profits up and cash flowing through dividend payments, it’s a big difference. When you’re private and quite entrepreneurial, it’s more about growth and kicking goals, winning big deals—your whole work is focused on those issues.”
Acquiring Spherion Group last year was another feather in her cap. “It was a strategic fit and took us to a different level so we could offer more to the client.” The move was not without its dramas though, and Ross took on external contractors to smooth the process. “We needed help with the cultural change,” which she says was the hardest part of the acquisition.
The move gave her access to the IT recruitment market, as well as to offices in Australia, Hong Kong, New Zealand and Singapore. Of the overall process, she says: “It confirmed my belief that, if you’re going to do acquisition do a large one.” This, she explains, is because with smaller ones it is harder to gauge success.
Although far from finished in business, Ross has given thought to exiting the business, and even if she doesn’t have an actual strategy in place she tries to ‘replace’ herself all the time by “employing the best people I possibly can”.