business paperworkIt is widely accepted that every person should have a Will to ensure the efficient distribution and control of their assets on death and an Enduring Power of Attorney appointing someone to look after their financial affairs in the event of their incapacity. It is no different for a business.

A business needs to establish a Business Succession Plan, often referred to as a Business Will, to ensure the ongoing viability of the business and to protect the value and control of the owner's interest in the business.

YOUR BUSINESS TRANSITION OPTIONS

A well crafted exit plan is a business essential, and something that owners should be thinking about from the day they open their doors. But too often, owners aren't aware of more rewarding and remunerative exit strategies than the one they've chosen, resulting in unsatisfactory sales. It’s important to be aware of your options and how to evaluate them.

Choosing the exit strategy that will meet your personal and business needs can be a complex matter. There are several common options for exiting a business, and the decision as to the right one should be based on the considered judgment of what will optimize benefits and realize the personal and business objectives of the exiting owner.

 

  • Transfer to a family member or members

Selling the business to a close family member can seem an attractive option answering to a number of personal and financial objectives: passing the assets to heirs; maintaining an involvement in the business; continuing to draw an income from it.

However, it does carry some inbuilt uncertainty. There's no guarantee that a family member will be interested in taking the business on sometime way into the future or that they will have the skills and aptitude to do so. If the business was started with the clear aim of eventually passing it on to family, it commits the owner to early and detailed planning around keeping the intended family members interested in taking over the business (years later) and having them trained up to be sufficiently competent to do so when the time comes.

Selling to family members frequently results in family dissension. Careful planning is needed and family input (usually through a formally constituted family council) and a formal succession plan laying out who gets what, are also required.

 

  • Sale to a financial buyer

Here, the critical issue is the value of the business. This means long-term activity needs to have been devoted to grooming it for sale prior to putting it on the market. This may be a preferred strategy even for a family business where there isn't a family member interested in or capable of taking over. The family might benefit more from having the funds to invest elsewhere than from running the business inefficiently.

To optimize the terms of the sale the new owner may insist the seller continue to operate the business for an agreed-upon period of time. Changing from employer to employee may not be agreeable to everyone.

The sale is usually made to the highest bidder so placing it with a broker means the widest range of possible buyers will be identified.

If the business consists of a number of clear and separate profit or operational areas it might be advantageous to break it into those and sell them separately.

 

  • Sale to a strategic buyer (mergers and acquisitions)

In most mergers the company shareholders receive stock in the bigger company. Therefore, in mergers the seller may not actually receive their cash for some time after the sale and will need to have made provision for the interim period. And the seller may be required to sign a non-compete agreement limiting their freedom to operate in the same industry for some future period.

Exiting by acquisition involves finding a larger company that will benefit from acquiring the seller's. They might be looking to expand their market by region or product line, or acquire intellectual property that would take significant time and money to develop themselves. Being the gateway makes it possible to leverage a premium price from the buyer.

Planning to go this route involves building competitive advantages or strong markets that would be valuable to another company.

 

  • Buyout by managers/employees

This option may not be as profitable as selling to a financial buyer but it does have some other advantages. Business owners do not have to sell all at once so, subject to agreement, payment could be taken over time.

Because employees know the business there's less due diligence required and because they own it they have a commitment to making it work. Shares that the business owner retains could earn a higher dividend or carry a higher value when they are eventually sold.

There are also some considerable tax advantages to employee buyouts, particularly in the case of employee stock ownership plans (ESOPs).

 

  • Asset liquidation

For businesses unencumbered by debt or messy commitments (such as long term leases) and if its legal structure allows it, then an easy way to achieve instant liquidity without any protracted planning and negotiating is to shut down the business and sell the assets.

Liquidation may be the option of choice because of the type of business (many micro and home-based businesses exit this way when they could actually be sold); because of the way it is managed (the owner has allowed it to become so overly dependent on their particular skills that sale is unrealistic); or because of unplanned circumstances (a disaster in the absence of any disaster recovery plan).

This strategy, while clean cut and relatively simple, usually returns the smallest amount of money because it consists of only the raw assets at whatever price buyers are willing to pay for them. However, it's the less tangible assets such as client lists, reputation, business relationships and even key employees that may provide the hook to catch a buyer for the business as a going concern. Unless the owner appreciates the real values of these assets and takes the effort to search out likely interested parties their value will be lost.

Developing an effective exit strategy is an integral part of the succession planning process. Just as building a successful business takes planning, hard work, and a little luck, so does successfully leaving it.

 

About Lynette Murray
Lynette Murray is the founder of ActonLendingSolutions part of the ActonAdviceGroup and the author of “Pretty Rich”, a book about Money Personality. ActonLendingSolutions provides lending advice tailored to your unique situation, whether you’re a first home buyer; a property investor; or wanting to refinance to consolidate debt, renovate or manage changing family situations. As senior adviser, Lynette Murray has over 30 years’ experience in the financial services industry, specialising in financial planning for over 15 years.