New research indicates that thousands of Australian business owners have failed in their last and biggest job: to exit business with money. Read on to understand what is happening and know what you can do about it.
In 2019, more than 415,000 Australians expect to retire. Yet this doesn’t represent everyone entitled to finish up working: Increasing numbers of Australians are remaining actively employed over the age of 65. In 2006 that figure was 8% of eligible retirees; by 2016 it was 13%; and by 2020, the Australian Bureau of Statistics predicts that number will be over 21%.That “actively employed” figure contains Australia’s largest group of self-employed business owners and entrepreneurs. These people should be entering the “business exit to retirement” period; but they are not. Interestingly enough, these baby-boomers, knowledgeable and astute business owners, have seemingly forgotten the job they set themselves to do last: exit business with money! It is worth reflecting on what is going on here. No doubt for some of these non-retirees, that’s exactly what they want, and they have no intention of stopping. But for many, the choice has been taken from them.
Recent research conducted by The Negotia Group has uncovered four key reasons for the reluctance of business owners to engage with the exit process:
Unfortunately, more than half the business owners who approach Negotia to discuss their exit have left it too late! The freedom to depart at their own discretion, in their own timeframe and on their own terms is now out of their personal control. 4 old familiar factors beat them to the punch: family, business slowdown, health problems, death.Since Negotia started in 2014, we have advised many owners on exiting. We have counselled wives whose husbands died at their desks; we have spoken to owners who have survived break-ups and heart-attacks, debilitating cancers, accidents, banks and industry collapse. After events such as these, people can do little but watch as their business withers and dies in front of them. It’s heartbreaking.
Yet at its heart, selling a company is just another business process like any other. If you can build a business, you’re perfectly capable of selling it. It evolves – just like product development, financing plans or customers walking through your door. Here are 3 situations when all too often we see complexities and uncertainties emerging: That is when business owners
On the flip side, if you are looking for industry understanding to help you harvest value, then good, experienced, professional brokers have been building their systems and processes for just this purpose. Their knowledge, currency of experience and skills can get you exactly the outcomes you need.When seeking to engage any representative, no matter how long they’ve been around, there are some emerging key market factors which they should be well able to address. If they don’t have an embedded response, it means they’re only now thinking through their solutions to these industry-wide issues. What that means is that they are not going to be able to help you.
There are three issues that began to emerge early last year and are now very real, and will likely have even more impact on your potential exit process in 2019.
Since early 2017, investment finance has become harder to obtain. Consequently, investment has become riskier; and prices of small to medium businesses have dropped – in some segments by more than 30%. Yet we’re still finding that the average broker has not yet twigged, and can’t tell you the phone may simply not be ringing, because you’re outside the market looking in.
Hand-in-hand with the imposed scarcity of investment funds is the growing use of a "Purchaser’s Qualification Questionnaire". This is a new process, introduced by buyer-agents as their present first step in the buy process.This is a detailed legal affidavit which the seller must fill out and sign BEFORE any scrutiny of the business and its finances even starts. It is a direct and proper response to unprepared and lazy agents. It says, "I am sick and tired of being fed rubbish, incomplete, wrong and misleading details and talking to owners trying to keep quiet about business weaknesses and problems."As an example, Negotia recently valued a business for sale at $5m and, on the basis of the information we were provided, secured a draft contract of sale at $5.4m. However, during the information gathering process, we challenged the business about the value of Work in Progress (WIP): It was at a higher ratio than we had expected to see. Assured vehemently that the figures were correct, we proceeded; that was only to find that during due diligence the potential buyer identified an error in the WIP figure. That caused the buyer to walk away.Buyers and their agents are savvy, risk-averse individuals increasingly frustrated by lack of meaningful disclosure. Due diligence will not be simply satisfied by scanning last year’s financials. In fact, the evidence is that answers to more than 70% of the questions you will be asked will not be found in the P&L at all.
Because sellers are unprepared, and as a result taking far too long to respond to rational and intelligent due diligence questions, the “Earn-Out” clause has become a standard response. And we confidently predict that it will remain so for a long time to come, until sellers and their agents don’t get it together or hell freezes over, whichever comes first.The “Earn-Out” clause is an effective risk mitigation tool for buyers who consider there is future risk. This process quantifies their risk and makes tangible what is at that point intangible. It works like this: buyer and seller agree on a price; but only partial payment occurs “at settlement” and the remaining payment occurs in the future – anything up to two years. Further, that future payment only occurs if certain terms (imposed hurdles) are met. These hurdles might be that something must happen (or must not happen) after the new owner takes possession. Most frequently the special condition or clause has a link to revenue and profit targets, clients, staff or operating process.
There are large numbers of businesses for sale. Given this vast choice, yours will simply be passed over with barely a glance if you do not arrive at the negotiating table prepared, and able to react immediately and effectively to your potential buyer’s questions. What does prepared mean? It means that you do three things:
What this means: A sure way to save time and money is to have an accurate appraisal of business value – what it’s worth and why. Many business owners have an emotional tie to their business that prevents them seeing its true market value. Your business isn’t worth what you think it is, it’s worth what someone is willing to pay.
What this means: Your selling information kit is locked and loaded in both PDF and paper trails; you have anticipated questions and provided answers. As much as anything, the potential buyer is basing their decision on how you present your business. Quite reasonably, they will assume that how you go about selling your business is how you’ve gone about building and running it. If your presentation is haphazard and slipshod, what would you expect them to conclude about how your business runs?
What this means: You’ve created a marketing process and have the time to sieve out the dreamers and predators from the bona fide prospects. You can take yourself out of the business and devote time to negotiation and settlement. There should be the clear appearance of a quiet and steady process (even if the webbed feet are paddling away like crazy below the surface).
Inevitably, all business owners – and that includes you – must identify someone to whom they will transfer their ownership interest. It could be family members, co-owners, key employees, or even an outside party… Yet new released data shows that about 65% of long-term small businesses now simply shut the door and fold. Don’t let it be you!There are ways to significantly increase the ultimate exit value of your business and reduce costs, if only you start early enough. The alternative is to sell when you need to – by which time, the easiest and best-value options will have long gone.So, if you are considering how you might maximise the chance of successfully exiting your business in the next one to five years, the time to prepare is now! Contact Kevin here or directly
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