“Australia is being transformed by population aging… We are at a critical demographic turning point because the baby boom cohort – the 5.5 million people born between 1946 and 1965 – has begun to turn 65 years of age…By 2030, all baby boomers will be 65 or older” NSPAC 2012
“Retiring Baby Boomers struggling to sell businesses as value of SMEs decline” Sydney Morning Herald, 25 April 2017
“Many Business Owners Can’t Sell When they Want To… Owners are woefully unprepared the this event that for probably two-thirds of business owners is likely to occur within the next 10 to 15 years” Forbes, 5 February 2017
“Little attention is being paid to the baby boomer business exit tsunami in Australia” InvoiceX, 22 February, 2016
Directly proportional to the 800% increase in the number of businesses for sale over the past decade, the value of Australian small to medium enterprises (SMEs) has been trending downward for the past 11 years.
Firstly, because more businesses are coming onto the market – a direct result of baby boomers looking to get out, with no family looking to succeed them in the business as they might have in prior generations. In 2012, 38% of owners planned to pass their business on to the next generation. As of 2016, it’s below 25%. When stacked against competition, does your business stand out? Can you articulate why it should stand out? Who are your competition? What are buyers looking for?
Secondly, because many businesses simply leave it too late to consider their exit strategy. More than 70% of private business owners have no business exit or succession plan.
It will take the average business three to five years to achieve the things that need to be in place in order to maximise any sale price.
THREE TO FIVE YEARS.
Becoming sale ready is not a straight-forward or quick process.
A business that seems like a good investment may quickly tarnish under scrutiny, once prospective buyers ‘lift the hood’. Generally. you only get one bite at the cherry – if your business is assessed and found wanting by a potential purchaser, that opportunity is likely lost.
Thirdly, many businesses are going it alone and have not sought advice about a transition or considered their options.
• Trade sale – and how do I maximise the value of the business that I’ve poured everything into?
• Family Transition – and what does that look like from all sides? Do the kids actually want to take over the business?
• Management buy-out – and can I be confident the managerial team would be successful if the current owner(s) aren’t involved after the transition?
• Partnership planning – is there a buy-sell agreement in place? What are my partners’ exit plans? Will I be left holding the bucket, and then what are my options?
Fourth, many business owners have no idea what they need to retire. They don’t know what after-tax income they need to support their lifestyle, or what value their biggest asset – their business – will contribute to their nest egg.
Because of all these factors and even in spite of them, it is wise to think about being ‘sale ready’ from day one – not necessarily because you intend to sell anytime soon, but because a business that is sale ready is optimised and likely generating the best returns for its owners along the way. It also means that if an opportunity arises, the business is in a position to enable the owners to take it.
Being able to maximise your return means understanding what the market wants. Generally the market wants less risk so you need to create less risk in your business.
- Have systems and processes in place – don’t overthink this. You need documentation such that things can continue to function whether you (or any other particular person) are there or not, and it needs to cover EVERY key process in your business. This reduces ‘key person risk’, which is one of the biggest inhibitors in maximising a sale
- Lock in your best and brightest people with incentives and, in many cases, equity
- Reduce or remove, at the very least mitigate, concentration risks in your customer base
- Ensure cash flow is sound
- Lock in income streams on the right terms wherever you can
- Structure and fund your assets appropriately
- Implement a disaster recovery plan
- Put robust governance and reporting structures in place
- Build a team of the right advisers, with appropriate and proven skills, around you so that the status quo is challenged. That team of advisers will show you that the above list is not comprehensive, but a minimum starting point.
Really, your plan needs to start at the end – what value do you need to realise from your business? What can it realise now – and is this in line with your desired value or your expectations? If not, then time is your biggest ally, providing you use it well and have the right people on your team to make sure you get there.
If you want the best chance at your best outcome, don’t leave it until you are ready to sell. When you have had enough, you won’t have the energy to really get ready.
Returning to the first point – the baby boomers: it’s critical that we don’t underestimate the impact on the market for Australian businesses. We are moving from a long period of asset accumulation to a significant period of liquidation. A weighty shift in the supply and demand equation.
The wave is coming!