Let me repeat some statistics: 75% of all small to medium sized businesses never sell. 17% sell for a disappointing sum. Only 8% sell for a sum that meets the owners hopes and desires. That is 1 in 12.
So if your business is likely to be in the 75%, what can you do to get value?
Some businesses are not suitable for sale. Typically, we are talking about businesses in the following categories:
- Owner is totally critical to the business – examples can be found in most small professional practices where the client acquisition and service delivery is solely the responsibility of the owner
- Sole trader with distinctive skills, such as a trades professional e.g. a plumber or an electrician who are incapable of managing other people, or who prefer not to manage other people, and are satisfied to make a living on their own, having built up a wide referral base of satisfied customers
- Businesses dependent on one large customer such as a specialist jobbing manufacturer providing short run “specials” for manufactured goods for a business that e.g. imports most of its requirements very cheaply from manufacturers in the Far East. This customer is likely to order progressively smaller quantities from the specialist jobbing manufacturer
- Businesses dependent on a single supplier (perhaps as agent) and the supplier is likely to find another route to market, e.g. a commission agent for a fabric manufacturer where the agent is able to retain the supply contract based upon his personal relationships with buyers and the manufacturer has delayed taking the sales “in-house” until his retirement
- Low profit businesses – will never be attractive to a purchaser because the business is too small or its fixed costs – e.g. premises are too high; it provides a living for the owner but no more
- Freelancer operating as a business – where a buyer would only be “buying a job” such as a graphic designer with limited clients
- Loss making businesses – the business is historically loss making or is expected to make a loss in the future after losing significant customer(s) and the owners need to exit to limit their liability; this assumes that Turnaround specialists have been involved and nothing worthwhile can be done about the state of the business
In businesses such as these, the owner often does not have the will or the skills to expand the operations, clients, suppliers, personnel and structure so that the value lies with the business and not the individual.
Often, it is equally important for business owners to exit with their reputation intact so that their standing in their community remains at the level they desire. This means getting their affairs in order and dealing with contract terminations well in advance so that they do not spring a surprise on long standing business relationships which might damage the other parties’ businesses.
Having established that the business is unlikely to be sold, the owner should:
- extract maximum profit leading up to retirement or exit
- put the affairs of the business into good order ahead of closing down
- appoint reputable Wealth Management Specialists and/or Independent Financial & Tax Advisors , several years ahead of impending retirement, to ensure adequate provision is made from the profits of the business to save towards retirement or exit making full use, if applicable, of legislative incentives such as pension schemes etc
- take care to enhance the value of business assets in advance of their disposal as part of closing down the business
In the next instalment, I will deal with some of the issues that will follow once you do decide to close down and retire.
Please feel free to get in touch with Peter Kroeger to discuss your options for exit.