Considering Retiring In The Next Few Years? Do You Know your Exit Strategy Options?

Before I begin, I’d like to highlight the scale of business in Australia;

• The ATO defines a small business as an entity (individual, partnership, company or trust) that carries an aggregated turnover of $10M or less which according to the 2015/2016 financial year statistics is approx. 95% of Australian businesses
• The ABS defines a small business as a business employing fewer than 20 people which in Australia according to the 2016 census is a little over 98% of Australian businesses
• Family Business Australia in a survey conducted in conjunction with KPMG, found that over 2/3 of the business community is a family business (defined where a majority of the ownership/control lies in the one family)

The statistics tell us that a huge majority of businesses in Australia and SMEs and a large majority are family owned.

The latest  Voice of Australia Business Survey shows just 19% of Australian SMEs have a succession or retirement plan in place.

To put these stats simply – we have a large majority of Australian businesses where the owner/MD/CEO is considering retirement where there is simply no succession plan in place.

Considering the baby boomer demographic (those born between 1946 and 1964) will all be of retirement age within the next 14 years, the low rate of succession and /or sale planning is very alarming.

To assist in improving these statistics and simplifying the process, let’s firstly look at the 6 most common exit strategy options available to business.

1. Liquidation

This is where all of the assets of the company including plant and equipment, cars, real estate and product or stock are sold before the business is closed.

Advantages

• Usually a relatively quick process.
• The easiest exit option requiring the least amount of work.
• No legals, no contracts, little fuss

Disadvantages

• Your assets are only worth what the market will pay therefore if you are expecting a huge payout, you may be shocked to learn the often cents in the dollar amounts that the market is prepared to pay for your assets.
• All proceeds must be used to pay creditors so after they are paid, there may be very little left over.
• You will almost always receive less cash for this exit strategy than any other.

Sometimes and for unforeseen changes in circumstances or the market, liquidation might be the only option but given time, we regard it as the least preferred option.

2. Cash it in

Basically, this strategy is similar to a liquidation over time. It involves taking profits in the form of salaries or dividends instead of reinvesting them back into the business for growth or diversification.

Advantages

• Cash is made available to the business owner/s straight away
• Provided the business is in a stable market, it could provide cash for new and separate business ideas or plans
• Again, a relatively easy process providing the profit is available to support the process

Disadvantages

• The short term view could have higher tax implications in the form of PAYG tax vs company tax thresholds and/or capital gains tax from the sale of the business
• Shareholders and business partners can be upset by such a strategy unless they are receiving similar remuneration.

This strategy is very successful when planned in conjunction with an accountant or financial advisor and forecasts are meticulously planned. When planned well, you avoid the sudden realisation that cash required for the business is no longer available or that your cash cow has become hungrier for time and attention in order for the cash, profits and your lifestyle to be maintained.

3. Friendly Sale

This involves selling your business to (usually) a colleague, supplier, family member, customer or key employee.

Advantages

• As there is a degree of knowledge in your business, there is generally less due diligence required
• The process can be done over a long period. For example, the purchase could be vendor financed where the purchaser is able to pay off the agreed value over a set period of time or there could be a profit share introduced over a period of years leading to a natural financial succession

Disadvantages

• Friendships and relationships can sometimes be muddied within a business deal.
• Detachment from the business is generally harder when you know the new owner.
• Sometimes, money can be left on the table or too much can be “thrown in” with the deal making it less profitable in the long run.
• Unless clear boundaries are kept, your emotional attachment to the business could get in the way of the new owners' goals and plans for the business.

When deciding on a friendly sale, our most poignant advice would be to employ a professional third party such as a business broker. This way, you can avoid much of the emotional element of the sale and personal/professional boundaries are easier to maintain and respect.

4. Market Sale

To put your business on the market is a viable and often considered exit strategy. Whereas the above option would be to sell to someone you know, in the case of a market sale, the purchaser could come from anywhere.

Advantages

• Less emotional attachment to the deal and to the new business owners’ direction
• This strategy is usually more considered than the “Friendly Sale” and is, therefore, more likely to garner a larger sale value.

Disadvantages

• This can be complex and stressful if trying to sell your business yourself.
• Again, if trying to sell your business yourself, this can be a long and very time-consuming process and your business and its inevitable value may suffer as a result.

Whilst one of the most common exit strategies, we find that many business owners vastly underestimate the time and consideration required to sell your business yourself. Again, we would always recommend seeking the assistance of or commissioning a selling agent experienced in business sales so that you can continue in the day to day running and success of your business.

5. M&A

Within many industries, it makes sense for businesses with similar target markets and similar values or business models to sell to each other or create a merger. One of the easiest ways to achieve economies of scale is simply to purchase another like-business.

Advantages

• A highly motivated competitor who sees value in your business may be prepared to pay a premium price.
• Depending on your perceived skills and knowledge, you may have the opportunity to stay involved in the company or business that purchases yours and again, depending on how highly the purchaser gauges your value, you may be able to simply name your price is so far as salary, shares, profit share, and benefits.

Disadvantages

• Depending on the terms of the merger or acquisition, you could be required for a contracted period of time to remain with the purchaser. If the acquisition is not a particularly good fit, this could cause considerable stress and angst.
• The merger or acquisition could adversely affect your employees or you could be left paying large redundancies in light of the newly formed unit.
• The due diligence period can be very long and again, time-consuming. You must be very careful during this period that the prospective merger or acquisition partner is not simply motivated to “suggest’ the deal simply to gain access to your customers or suppliers during the due diligence without any true motivation to close the deal.

Mergers and Acquisitions can happen in any industry, with any size of business. They are, however, more common with larger companies and require the experienced advice of business brokers, financial managers, and lawyers.

6. IPO

Referred to as taking a company public, the IPO (Initial Public Offering) involves a private company offering its shares to the public for purchase for the first time. Once complete, those shares become listed on a stock exchange and trade in the open market.

Advantages

• The potential upside to an IPO done correctly, at the right time, with the right advice and under the right conditions is huge. Your company can increase hundreds or even millions of times in value literally overnight.

Disadvantages

• The IPO process is very long, highly regulated and very costly.
• IPO compliance is among the highest required in the commercial world.
• Structures and financial processes are very particular for an IPO and must be in place almost from day one of the business startup for an IPO to be successful.
• The failure rate for achieving an IPO is high.
• The focus on the business owner is almost entirely on the IPO and not on running the business.

In the modern tech market, we hear of the huge success of IPOs such as Atlassian and AfterPay, however, the dark side of unsuccessful IPOs is not often reported in main stream media.

Of course, there are many other exit strategies that involve a combination of the above. In the end, the best exit strategy is the one that is planned, considered and right for you, your family, your employees, your shareholders, your goals and your lifestyle.

If you are starting to think about exiting your business, contact us today to discuss your exit options.

Ph: 1300 133 540 | E: ask@exitadvisory.co