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Moving on – Business succession

Whilst the major corporate brands tend to dominate the financial press and the evening news, privately owned and funded businesses represent 70% of all businesses in Australia, they employ 50% of the workforce and are worth $4.3 trillion.

However, the average age of business owners in Australia is 55. Therefore, this very important and valuable sector will face challenges over the next decade or so when it is estimated that 80% of owners intend to retire. For many, the release of business value is necessary to fund their intended retirement lifestyle. But with the huge number of small to medium sized enterprises being sold and unknown future economic conditions, we expect to see downward pressure on business values.

If you are a business owner, particularly in this age category, you need to carefully consider your business succession strategy. 70% of all business owners have no succession plan at all and could be unpleasantly surprised when it comes time to retire or release their equity. Rather than just attempting to find an elusive buyer, there are a few other succession options that may be attractive depending on your circumstances.

Maintaining ownership when retired

These options provide some distinct advantages. You may still get to retire but the business may provide an attractive ongoing return to fund your retirement. Additionally, you may consider delaying your exit strategy and in the meantime work on your business to enhance value. It is also likely that you will receive a return on your investment that is much better than investment market returns.

Getting your business right

To ensure success, you need to develop a business model that does not rely on you. Build a strong management team and scale down your role in the business. Also consider incentive and profit sharing schemes for key personnel, and management equity holdings.

If you get it right, you might find that a management buyout might develop as the natural option as time passes and the business thrives.

Management buy out

You will often find that you are not the only person in the business with significant commitment. Selling the business to some of your key people might be the ideal succession solution. Articulate an attractive business case based on sustainable return on investment. The terms need to be acceptable to all parties. It may be that some external funding may be required to help with the buy-in.

Restructuring the business

Ask Saward Dawson about the implications of this option. Restructuring the business to get it ready for sale may be required and a shareholder agreement established. Don’t forget that there are likely to be tax issues and business strategies on which we can advise.

Keeping it in the family

This can be a good option but there are a lot of things to consider. Anecdotally, it gets harder to achieve with each successive generation and today’s Gen X & Y are generally not that interested. You also need to consider if this strategy would cause conflict and impact on family relationships.

However, done properly, everybody can benefit if the fit is right and there is commitment to the changes. Once again, a shareholder agreement is important and you need to get the business structure right. Saward Dawson would be pleased to help with all these strategies.

Start early

We cannot stress enough the importance of having a well defined and plausible succession strategy for your business. Saward Dawson has helped many business owners maximise or release their valuable equity from their business at the appropriate time. If you are contemplating sale of your business, releasing or handing over control or just wondering where to start, call us to discuss these issues.

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