Exit strategies explained…three common plans for succession

by Jason Cursley 13th of September, 2022

Exit strategies explained…three common plans for succession

Australians are known for their innovation, can-do attitude and desire to be their own boss. A common way of capitalising on these skills and opportunities is owning your own business.

Most business owners and those looking to start their own journey into owning a business go through a thorough feasibility process to determine whether their business is likely to succeed or fail.

Financial modelling, capital and cash flow requirements, determining necessary resources and deciding on product-market fit (amongst many other processes), are all diligently uncovered in order to successfully begin trading.

An equally important component to this process is one that is less commonly considered but equally important…the exit strategy.

Small businesses can provide a great lifestyle and access to a profitable and sustainable source of income. An exit strategy is a plan that is established to uncover the best way to exit the business when that time comes. Some business owners set up and sustain a business with a view of handing it down to their children or dependents in the future.

Others might have a shorter-term mindset involving an acquisition at a strategic time upon business maturity. Whatever the motivation, you as an owner of your very own business need to know the options available and how to achieve these goals.

Typically for small business owners in Australia, there are several common exit strategies available to them. For the purpose of why most of you are interested in learning about an exit strategy, we will focus on three main types and how to position your business to successfully move along each path.

Depending on the size, scale, and profitability of your business, there are other options ranging from liquidation at one end of the scale, to an IPO at the other.

Selling the Business on the Open Market

A common course of action for exiting a SME business in Australia is to sell to a third party and advertise on websites such as bsale.com.au. If you have planned a strategy for exit at the inception or have planned for a sale during the growth and maturity of your business, you would have considered the key components of readiness for a sale.

The business accounts are transparent creditors, debtors and tax liabilities are up to date. Your key staff members have retention measures in place and your stock (if applicable) is at suitable levels. Your business complies with all regulatory or licensing requirements and your tenure at your business premises is secure.

This will position you to approach a qualified business agent to provide an accurate business valuation/appraisal and to then efficiently move through the sales process allowing you to sell the business for as much profit as possible.

Choose a business agent like LINK Business Sales Sydney with experience in your field of operation and ask as many questions about their experience and records of success as possible. Testimonials are often a good indicator of how a business agent has interacted with previous business sales.

Understand what a buyer wants in purchasing your business. If the prospective buyer can see your business offering them the same performance and rewards (or better) that you have been able to verify to them, they will be willing to pay more for your business

Selling the Business to a Competitor… A Strategic Buyer

There’s usually competition amongst any small business sector with similar companies appealing for the same dollar as you. A competitor to your business may just be the perfect buyer!

A strategic buyer will want your business for several reasons, often giving the business a higher value than it would otherwise have. A competitor may want to eliminate (buy) their competition and take a larger market share. They may also your business as a suitable add-on to their own and compliment their existing business with the products or services that you offer.

It’s important that the “secret sauce” to your business is protected during these types of transactions. The last thing you want is to share confidential information that may be used to advantage a competitor and in the same way damage your own. A non-disclosure agreement is an important document used in all business transactions and even more important in these instances.

Sharing of company information such as suppliers and clients, needs to be handled precisely to balance transparency with preservation of the business assets.

Planning for a Successor. “Won’t Somebody Think of the Children”??

You’ve worked on and in your business for your entire working life and as your kids have grown into the workforce, they have played a role in your business as an employee and have moved into a decision-making or management role. They are as engaged and as knowledgeable on the business as you are! Now it’s time for you to retire!

Firstly, you will need to decide on a suitable successor(s) and have the future success and profitability of the business at front of mind. There’s no point setting a succession plan if the business won’t be able to remain as profitable and sustainable as before. Make sure that the accounts are in order and the business is transparent as it can be to hand over a business in the best possible condition. As the business owner, you will need to decide in what capacity this transfer, or succession occurs.

You may decide to gift the business with no compensation but more likely a business valuation or market appraisal will be undertaken to get the best idea of what the business is worth. It is then a matter on consideration of tax implications, etc to establish what type of sale is suitable or whether a family trust or similar will own the business going forward. Always consider your accountant for advice and seek an independent valuation from a suitably licenced business agent.

An exit strategy for a business owner is certainly not limited to the examples above and it is never too late to consider and reconsider the best method of passing on your business to a new operator, whether it be family, existing staff or to a new, enthusiastic purchaser. Your strategy can be revisited anytime to address new circumstances and new opportunities. Ultimately, the strategy you as the owners decide on, is the pathway to ongoing success of the business and providing you with the financial fruits of years of your labour and sacrifice.

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