The future viability of small businesses is being risked as owners increasingly fail to recognise the value of an exit strategy.
Small business is the engine-room of Australia’s economy, with more than two million small businesses employing around 60 per cent of Australia’s total workforce. Evidence suggesting the sector is insufficiently prepared to administer succession transitions is thereby all the more alarming and should be regarded by small-business owners as a matter of urgency.
With an estimated one in four small businesses without a formal succession planning strategy, this is of particular concern given the high proportion of Baby Boomers expected to retire in the next five to ten years.
Crowe Horwath has also identified in its own research that over the next ten years there will be 500,000 business owners looking to transfer $1.6 trillion worth of wealth – yet only 36 per cent of these businesses have a succession plan in place.
But for all the telling statistics, the good news is succession planning needn’t be an exhaustive, labour-intensive exercise. All strategies should include relatively basic business information – a current valuation, tax structuring, and compliance issues – with any additional content dependent on the size and nature of the individual business.
One of the first points to consider is it’s never too early for a business to start working on its succession. Even the greenest of start-ups need to map a timeline of where it expects to be at each phase of its lifecycle, including the final stage of exiting the business.
A timeline needs to bed-down milestones so the new owners can see the gradual acquisition of the business and the former owners can see the winding down of power – this should be set out over a three year period, at a minimum.
Owners should also look at the structure of the business, as well as key personnel and its client list. They will need to assess the particular segment of the market they operate in as this can influence the exit structure the business enters into as being saleable or transferable.
A lot of small business owners ignore the fact it’s not just about transferring the sale but also the leadership, which is intangible and often very hard to define or quantify. The issue is often the owners that are exiting are also the leaders, and they’re yet to cultivate that next generation of leadership, making the transfer problematic for the new owners. Owners also need to consider if what they have developed is “saleable” – without them, what are the assets in the business or is it in fact the intellectual property of the owner?
Another common issue within succession planning arises when family-run businesses approach the exit phase. Traditionally, the succession would automatically pass to the next generation, but this is increasingly fraught with challenges when children or siblings are not the obvious choice to assume responsibility.
People are driven by tax effective structures and the ability to borrow and distribute equity among family members, but having a formal structure in place – including wills and estate planning – that enables them to exit is often overlooked.
The financial needs of all parties need to be understood and despite being family, all parties need to view any succession transition as a business transaction. Elements that need to be considered include any shareholder agreements with rights and entitlements, insurances which cover any unfortunate consequences, and transfer documentation required at the exit phase.
So, while it can be a daunting process for many owners who have steadily built an SME over years and sometimes decades, investing the time and effort into succession planning can ensure current and future owners recognise the true value of the business.
About the Author
Paul Bakker is the Lead Partner – Business Advisory, Crowe Horwath
Crowe Horwath is a member of Crowe Horwath International – one of the largest professional services networks in the world encompassing 141 independent accounting and advisory firms with nearly 590 offices and 28,000 professionals and staff in more than 100 countries. For further information refer to www.crowehorwath.com.au