The value of an exit strategy
In Australia there are over two million small to medium businesses, which account for approximately 99% of all businesses. More than 80% of the current small to medium business owners plan to exit their business in the next 10 to 12 years. The majority of those owners state their business is their retirement plan. Yet 66% of small to medium business owners indicate that their business is not sale ready. In other words they have no exit plan in place.
From our experience the number one problem facing small to medium business owners is a lack of a road map as to how they should exit their business. How they get their hard earned money out the business they have built up over many years?
Exit planning should not just be seen as a requirement for an owner who is eyeing retirement in the short term. It is a vital component of all business planning. Knowing how and approximately when you expect to leave the business will help shape the decisions you need to make in the business. Decisions will be a lot easier as you can simply ask yourself ‘will this help or hinder my exit plan’.
However many business owners delay their exit planning until they want to retire or simply get out of the business. Having no exit plan in place will inevitably come at a cost. The cost being:
Not achieving the maximum price and potentially a much lower amount;
Being unable to take advantage of an offer because your business isn’t sale ready;
Unexpected costs such as accounting and legal and accounting bills to fix problems; and,
Lower amount of cash received upfront and a higher amount being part of an extended handover period.
Of course the opposite applies as well. Business owners who start their exit planning early know they can execute quickly on opportunities or a change of circumstance. This is similar to a home owner who keeps their property in excellent order. This preparation gives them every chance of selling quickly at a good price.
A good exit plan contains two important components – retirement and disaster recovery.
An early business exit or retirement strategy consists of either: keeping, selling or liquidating the business to meet your personal and family’s lifestyle requirements. Depending upon the type of business and the timing of your exit, funding your retirement lifestyle can be achieved by regularly extracting cash from the business, as well as growing the business for a sale.
A retirement exit strategy also involves carefully transferring the control, management and equity of the exiting owner. The appropriate retirement exit strategy should reflect each owner’s particular circumstances. Early exit and retirement exit strategies must have suffi cient funding, be properly documented and regularly reviewed. These documents need to be easily located and kept up to date.
Disaster recovery plan
As we all know the only constant in our world is change. Therefore it is critical that every business should have a disaster recovery plan. Your plan should incorporate strategies to deal with disasters such as a loss of a key person, a major customer, a key supplier, fraud, fire, water and malicious damage.
An example of a common issue covered by a good disaster recovery plan is the loss of a key person to illness or death. A disaster recovery plan would involve a strategy which results in the remaining business owners receiving a cash lump sum to payout the departing owner’s family. A cash lump sum would also be paid to the business to help the business survive this rocky period.
The key person protection component of the plan requires additional documentation such as a Will and business agreements. This documentation will provide legal certainty for the departing owner’s family as well as the remaining owners. The appropriate disaster recovery plan should reflect each owner’s particular circumstances. As with the retirement exit strategy the disaster recovery plan must have suffi cient funding, be properly documented and regularly reviewed. These documents need to be easily located and kept up to date.
Prepare early for the best result
The key requirement here is preparation. The more planning and preparation that you do in advance of a planned or unplanned exit the better the result you can expect. You can’t just put your business on the market at the last minute and expect to sell it for top dollar for very little effort.
James Stepehn is a licensed fi nancial adviser and owner of Stephen & Partners Wealth Management. He is an authorised representative of Charter Financial Planning Limited. For more information visit www.stephenandpartners.com.au.
NOTE: This editorial provides general information only. Before making any fi nancial or investment decisions we recommend you consult a fi nancial planner to take into account your particular investment objectives, fi nancial situation and individual needs. Charter Financial Planning and its Authorised Representatives do not accept any liability for any errors or omissions of information supplied in this editorial.