The role that small business plays in the economy is generally well understood but how well do the owners of those businesses understand their true worth? The large number of business owners fast approaching retirement will need to do some careful planning if they are to maximise the fruits of their labour.
For many business owners, the operations they have spent years growing may form a significant part of their personal wealth and may even be regarded as their superannuation.
Whether the plan is to sell, float or pass the business onto the next generation, the amount they get for it may ultimately determine what sort of retirement they enjoy.
According to PwC, an estimated one third of the country’s 1.54 million private business owners will be over the age of 55 at June 2024.i It is anticipated that in the decade to 2024 more than 1.4 million owners employing over 7.9 million people and contributing almost $500 billion in GDP will retire.
While a surge in business exits sparked by retiring baby boomers has been anticipated, the Global Financial Crisis slowed the pace and volume of exits as many owners decided to stay in the workforce longer.
The issue now is that with a slightly stronger economy a wave of exits could alter the value of some businesses – for better or worse.
Make profit a priority
The exit strategies of business owners may vary but the aim of making a profitable exit should not. Nor should the desire for a comfortable retirement, particularly if much of your working life has been spent building up the business.
A first step to preparing for retirement is to work out how much you might need to sustain your planned lifestyle. The next step is working out what the business is worth.
If the business is not worth what you need to fund your preferred lifestyle in retirement, then you may need to go back and better prepare the company.
Understanding the value of a business is often regarded as one of the biggest challenges facing business owners. While a business may have been someone’s passion for decades, at the end of the day a buyer will only pay what the business is worth to them.
Maximise the business value
High on the list of factors impacting the value of a business are the certainty of future cash flow and profits and some of the risks to achieving them. It is definitely better to have a business with a regular and dependable positive cash flow than one that is patchy or unable to predict.
Since the profitability of a business is normally determined through its financial records these should be accurate, current and reliable.
Messy or out of date records could put an unwanted cloud over the value of the business.
Business owners can expect to enhance the value of their business if they have documented agreements with their employees, suppliers, customers and anyone else who contributes to the profitability of their business.
A buyer will want to know that key drivers of the business such as valued employees and customers are going to be there when they take over a company.
Getting the best people, processes and systems in place before a sale will enhance the value.
The better the quality of these three things the more robust the business and the greater the value the business will attract.
Business structure important
Nobody likes paying more tax than they have to which is why it is important to ensure you have the right business structure.
There are four small business capital gains tax concessions available when qualifying businesses are sold. Applied the right way they may reduce the tax payable on a profit from selling a business, but there are many traps.
One such trap is agreeing to sell the business instead of negotiating to sell the shares in the company which automatically means losing the benefit of the 50 per cent capital gains tax discount.
Plan, plan and plan
The more planning that can go into a sale the better the outcome should be.
This may start with understanding early what it is about the business that is going to create the most value; whether it is the location, intellectual property or experience of the employees and the organisation.
Building on these attributes will help enhance the value of the business.
Unsolicited approaches for businesses are not uncommon, often from competitors. If that happens, you need to be ready; otherwise you can’t take the steps to enhance what you could get for your business and ultimately, that well-earned retirement.
• Do you have the right business structure
• Do you qualify for the small business capital gains tax concessions
• Are the financial records up to date and accurate
• Are there documented agreements with employees, suppliers and customers
• Are you clear on where the value is
• Are the business premises tidy and presentable
• Will you realise enough to retire on
If you would like to discuss how to get your business ready for sale, give us a call on 08 93677023.
i ‘Building for success today and tomorrow: Family Business Survey 2014’, PwC