The effects of the GFC and continuing difficult business conditions have hurt small business. Owners are now more reliant than ever on the sale of their business for their next stage in life, which may be retirement or another business venture.
I often hear the term, “My business is my super fund.” But the reality is that many small business owners feel they cannot afford to retire or sell their business. In most cases this is because they have not planned for it.
If you’ve read Steven Covey’s famous book ‘The 7 Habits Of Highly Effective People‘ you may recall habit number 2:
Begin with the end in mind
- Succession Planning – is where you plan to transition the business assets to a family member(s) or an existing team member(s). Someone who succeeds you.
- Exit Planning – is when you plan to sell the business as either:
- Financial sale – like when you sell your family home, you put it out to the market and people put in offers. You would usually use a business broker to help.
- Strategic sale – this one I love! You strategically setup the business to sell to a specific business, group or person. To maximise your results, your business must have an asset(s) of great importance or value to the buyer. This could be in the form of processes, teams, relationships, market share etc.
Like any plan, things change as time goes on, so will your succession/exit plan. It may start off as a financial sale plan and down the line turn into a succession plan to a team member. The key is to establish a plan and review at least every year.
Succession Planning / Exit Planning
There is no exact formula to creating a plan as every business and its owners are unique. But here are a few leading questions I like to use to get started:
- Do you already have a documented and updated One Page Strategic Plan (OPSP)? A traditional business plan isn’t worth the paper it’s written on, although a OPSP is a no-brainer for all businesses to document what you believe in, where you are going and how you will get there. Image looking at a business to buy and they hand you a OPSP!?
- The next question is when do you want to step out? Is it 2 years, 5 years or 8 years? Setting up the teams and processes takes far longer than you’ll expect and the actual sale itself can take years.
- How would you love to sell the business? Will the baton be passed down to a team member, to a family member? Will the business be sold as a financial or strategic sale? How do you see this playing out and over what time frame?
- Do you want to sell all the business or all the business assets? If not, what does it look like?
- Is the business 100% reliant on you and have you documented the roles that you currently fulfil. Most business owners wear many hats unbeknownst to them is the lengths it takes to replace their role. It will take more than one person to replace your role.
- What is your business worth now and what do you believe you could sell it for at your future date? This shows the gap between the two destinations and we can help devise a strategy to get you there. A generic rule of thumb to value your business is to compare to similar recent sales and also:
- if your sales are <$500,000 then you can use the percentage of revenue method.
- if your sales are >$500,000 then a multiple of profits is the common method i.e. profits x [a multiple].
The action item is to answer these questions, as they will form the start to your plan. If you are unsure, just put down what you would love to happen. As time goes on, check in and ask yourself ‘is the business heading towards the succession/exit goal I planned?’ If not, make some changes to the strategy of the business and update your plan.
If you are unsure of any of these questions or where to start, we can help you with:
- planning for sale
- business valuations
- succession planning and implementation
- estate planning
- sounding board or mentoring services
- due diligence, business education and management