Current as of April 2018
With Australia’s ageing population and retirement funding issues, the ageing business owner also has decisions to make – when to retire and how to fund it!
Australia’s economy is built on the SME market. However less than 20% of businesses have a formal succession plan in place. A succession plan is essential for a family business transitioning the business value and skills to the next generation to manage and grow.
To ensure that equity value is realised, it is vital that planning begins 3-5 years out from the sale of business or the transition to the next generation of the family.
There are lucrative capital gains tax concessions for small business owners who meet the criteria. Planning in advance is required as the business may need to be restructured to meet the criteria.
A reoccurring issue with succession planning is the business owner stays in the business for too long and equity value declines. This could be a result of, not keeping up with technology, not having the foresight to change with the changing market and becoming too set in their ways.
Understanding the cycle of the market
Selling at the optimal time in the businesses lifecycle will have a positive effect on the sale price.
A soft drink post mix syrup business got an offer for the business, which was rejected as the business owners got cold feet and decided to hold onto the business for longer, for income purposes.
At the time the business was very profitable, however business margins started to decline, due to a change in the market, not expanding the geographical supply of the product when the Sydney CBD lock out laws were introduced. The business was sold 3 years later for 40% less than the original offer. Holding onto the business for too long and not keeping up with market changes, resulted in a lower price for the business, which has resulted in less income to live off in retirement.
Adapt to the new market and know your potential buyers
A media advertising business had a 3-year plan to sell the business. The owners wanted to exit the business and explore other business interests outside of media. There were falling revenues due to market changes.
The business invested in staff which had digital media skills in niche markets, this introduced new clients to the business which increased turnover as well as margins. An employee profit share plan was introduced which resulted in a decrease in costs and increased productivity, staff began thinking and acting like business owners.
The business owners made a conscious decision to know and understand potential competitors that could create synergies by acquiring their business.
The result – 3 to 5 years later the business was sold to a larger competitor for a high industry multiple.
The 3 business owners also qualified for the small business capital gains tax relief so the after tax result was great.
To implement a succession plan which is successful, it requires time, planning, knowing the business cycle and understanding the competitors. Don’t hesitate to contact us to plan for the exit from your business.
Written by our guest writer Preston Foster, who specialises in succession planning in the SME space.
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