All business owners will at some point exit their business, usually through a sale, via a succession planning process or a forced exit.
RSM Bird Cameron’s latest thinkBIG study found 42 per cent of small- to medium-sized enterprise owners have a plan to exit the business. Fifty-two per cent of those with a plan anticipate the exit will happen within the next four years. More than a third of business owners (36 per cent) expect the proceeds from the sale of the business to be their primary source of retirement funds.
The 2014 study also found business owners feel insecure about being financially capable of managing their retirement and are making plans to combat this. The ageing population, as well as the economic uncertainty impacting small business over the past few years, has seen more business owners begin considering how to make sure they are financially secure heading into retirement.
On top of this financial uncertainty, thinkBIG found only 35 per cent of business owners have completed a formal valuation of their business, even though 67 per cent of respondents believed the value of their business had increased over the past 12 months.
While some owners might have a rough idea of what their business is worth, often this figure can be far from accurate. It is important to know the value of the business, especially when relying on the proceeds from the sale for retirement.
The current reliance on the sale of a business to fund retirement reflects the generally poor investment returns that we’ve seen over the past few years.
It’s important to consider undertaking regular indicative valuations to track movements in the business value as profits go up and down and industry and economic conditions change.
The most successful business owners have a clear exit plan in place and develop and groom their business for exit. They tackle questions around growth, family, diversification, funding and profits early on so they can plan ahead.
Six ways to increase the value of your business
1. Structuring of business assets. The structure of a sale can have a fundamental impact on both the price a potential acquirer is willing to pay and the post-sale taxation liability of the vendor. Analysis of the structure should preferably occur before the sale process commences.
2. Obtain an accurate valuation of the business. This will help you establish a baseline to assist with negotiations and identify possible funding gaps to meet income requirements in retirement.
3. Maximise the value. Planning well in advance is essential. Strategy planning can’t start early enough, but a minimum of at least three years is critical.
4. Determine potential buyers. Business owners need to be clear on who is likely to buy their business. This helps determine how to groom the enterprise to make it attractive to potential buyers.
5. Develop a plan to pass on the business. If owners are thinking of passing on the business to family, it is crucial to develop a family constitution or charter, which clearly lays out the rules of how the business will be owned, managed and operated including the specific roles of family members working in the business.
6. Be aware of tax concessions. These concessions reduce the overall taxation liability that arises as a result of the sale. Failing to understand the tax concessions the business may be entitled to can mean a missed opportunity to significantly reduce taxes, and in some cases eliminate them altogether. Some concessions are very generous and can support funding proprietor’s retirements. Careful planning and building a tax strategy into the business plan is a necessity for funding a business owner’s retirement.