At some point everyone has to stop working. For many, retirement is a time of anticipation and excitement – after devoting many years towards building a business it can be a time to kick back and enjoy the fruits of your efforts.
But like any major life change some planning is always a necessity. Transitioning to a life without business will require some preparation, not least of all the passing on of the business and the realisation of the equity you may have built up in it.
Most succession issues fall into two camps; those who have an obvious successor to take on the business, and those who don’t. For those who do there are several factors that need to be considered:
1. How Much is the asking price? The issue of money and family can be a cause of headaches and the process of planning a succession for a family member can be complicated. Emotions can easily become involved and determining a value can be a complicated process that is about more than just the numbers. It may not necessarily be viewed as an arms-length transaction in the way that a sale to a stranger may do, however, this needs to be balanced against the ongoing requirements for income that the seller may have.
2. Timing Working towards a deadline can provide certainty for all parties involved, and this isn’t just a financial issue but can be one involving leadership and direction as well. Nothing provides greater business frustration for an offspring than finding a parent who won’t let go. These issues need to be agreed and a clear hand-over date set. You need to decide if there will be a transition period or a clean break.
3. How will it be paid for? Family successions will often involve some financing by the seller, often on terms that are more generous than usual. How this will be dealt with is an issue for both parties, including the expectations of repayment. This should be laid out in a written document so it is clear to the borrower what is to be repaid and what may ultimately be forgiven – dealing with family does not remove the need to dot ‘I’s’ and cross ‘T’s’.
4. Are there other people to consider? Having several children but only one buyer can cause problems. If the business will pass to just one sibling the consideration of the others must be included. How this will be arranged, what compensation the others will receive, and what price the buyer will ultimately pay must be discussed by all involved.
What about if you’re considering selling to an outside party?
1. Does the business genuinely have value? Everyone likes to think their business is worth more money but unfortunately some businesses only provide a return that is little more than a wage (and others even less). A starting point could be to ask yourself the question – “knowing what I know now would I pay money to purchase this business if I was starting again?” The answer can be enlightening!
2. Who will help with this process? Is there a broker, advisor or even trusted friend who can provide a sounding board in this event? It ’s important to gather all necessary advice and information at the start of the process, particularly around issues of tax.
3. What is the timeframe for completion? Again, you need to work towards a date ahead of time. Too often business owners only think about retirement or selling 6 to 12 months before it’s completed. This seldom provides sufficient time for a business to be successfully groomed for sale.
4. Will you finance the buyer? This is an issue best addressed ahead of time. It’s very easy to be swayed by a willing buyer when the time comes, especially if the business has been on the market for a while. If you can set your expectations via the cold light of day ahead of time it will make it easier to decide what is best for you.
5. What grooming does the business need? This will be your biggest task and can take considerable time if you want to maximise your return when selling. You may be banking on the proceeds funding you for many years so take the time to groom it properly.
Now is the time to plan for selling well before the reality happens. Give some thought to what may eventuate and what would be the ideal situation for you. You never know when you may be forced to sell quickly for health or other reasons so keep your business ‘sales ready’ as much as possible.
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The information in this article is general in nature and does not take into consideration your personal situation or circumstances. You should consider whether the information contained in this article is suitable to your needs and where appropriate, seek professional advice from a Financial Advisor or other finance professional.