Archive for the ‘Succession Planning’ Category

Total business numbers and exit rates – based on an ABS survey the total number of  3,015,318  “discrete entities” – Australian private and public businesses needs to reduced as follows:

The total  Non-Agricultural private sector number of businesses can be broken down as follows:

 Small business ( 1-19 employees )                         686,400

Medium business ( 20 – 199 employees )                71,791

Large business ( 200 + employees )                          4,646

 Approx 7 % of these businesses exit each year ( through all means ) – 53,398 businesses ( this includes failures – bankruptcy, death of the owner etc ) . Importantly there are marked differences in successful exits based on size and business age, with larger and longer established businesses more often able to secure a “successful” exit. Medium and large businesses tend to “fail” at a rate of almost half ( 49.2 % ) that of small businesses ( 3.0 % cessation rate versus 6.1 % for small business ) and if an exit was to occur then there was  a better than 45 % chance of that being a business harvest rather than the alternative – business failure ( again more than double that of small business at just 20.8 % ).

A documented business exit strategy ( Succession Plan )  is the first step to ensuring a successful exit and turning these statistics around.

Several recent studies have shown a direct link between financial education and the propensity to save,( Lusardi 2005 ) further a 2006 OECD policy brief supports the notion that financially educated individuals are more likely to challenge financial service providers to provide products and services that meet their investment needs.

Research also indicates that employers use educational resources, such as seminars and workshops , written communication, websites and financial counselling to educate employees about retirement saving ( Krajnak et al 2008 ). Importantly it has been shown that these educational resources can influence an individuals retirement savings intentions and behaviour ( Nyce 2006 ) and that as an individuals financial knowledge increases, so will their ability to plan better and save for retirement ( Lusardi and Mitchell 2007 ).

My own research into ESOP’s and their use in business succession planning has already highlighted lack of education and awareness of the types of plans available and their potential benefits to both business owners and employees is one of the stumbling blocks to implementing what is widely agreed to be a desirable succession planning option.

55 % of all business exits are due to death, disability, bankruptcy, liquidation or simply owners walking away and closing the doors.

To avoid this type of exit a business exit and succession plan is a vital part of business management. Business owners typical go into business with 3 key outcomes; increased freedom & flexibility, improved income and to build equity. Whilst the first two are generally possible the third outcome to build equity or wealth is not without a valid strategy.

 There are many and varied exit strategies available to SME’s though with varied complexity, costs and risks:

Exit Options

Recent research, and our work with clients over the last 6 years, has shown a significant increase in the adoption of Employee Share Plans as a valid strategy with a substantial side benefit of attracting and retaining key employees within the business.

Approx 440,000 employees ( 5 % of the workforce ) now participate in these programs and the value of employee held shares or options exceeds $10billion. A recent study of the top 350 listed companies showed that 89.4 % had some type of plan in place compared to only 3 % of private companies.

The recently released National Australia Bank survey showed considerable improvement in business conditions among small  to medium businesses – the NAB’s SME business conditions index improved by 15 points and is now in positive territory with 25% SMEs reporting good or very good conditions. Moreover SMEs are optimistic about the twelve-month profitability outlook with customer confidence/demand, seasonal conditions and more favorable competitive factors the key drivers of trading conditions. For SMEs in the lower turnover band [annual sales of $2M to $3M] the best conditions prevailed in health and wholesale, finance and property services were outstanding performers inthe  midsize range [annual sales of $3M to $5M].

The twelve-month profit outlook for SMEs has also improved significantly following on from record lows reported last quarter this reflects strong optimism about prospects for the coming year and importantly SMEs are now the most optimistic about the annual outlook since December 2007. In terms of the twelve-month profit outlook, SMEs are most concerned about weak demand; and to a much lesser extent government policy, wage costs, labor availability, tighter competition, drought and funding costs.

We are certianly seeing evidence of this “upturn” amongst clients who are again focusing on growth plans and strategies to expand and develop business opportunties.

According to the businessowner column in yesterday’s Telegraph,  prices of businesses for sale are dropping based on a number of scenarios: “Baby boomers hard hit by the downturn”, “Average business values were being dragged down by the  significant number of small businesses on the market at low prices”, “putting back their retirement because their superannuation funds had taken a hit”  and ” the value of their businesses has dropped substantially.”

This all highlights a lack of long term / strategic business exit and succession planning.

We have been working closely with Bruce Guthrie of Systemflow ( who was kind enough to forward yesterdays article to me ) to avoid this scenario by implementing a strategic plan within the business to maximise value and ensure the business is not focused solely on the owner ( that’s called a JOB ) . Businesses with a strategic plan can work over a number of years towards the exit strategy they have chosen to ensure maximum results – both for the exiting owner and for the incoming shareholders ( family, employees, trade buyer etc ) and the plan should provide for a viable business model that ensure the ongoing success of the business into the future.

The article concludes with advice that owners should ” review their succession issues carefully and plan ahead if they are to optimise their realisation price, given the likely increase in supply of established businesses coming to the market in the next few years “. This advice is a good start but in our view, business owners must have a strategic exit plan and succession ( passing onto family ) is just one option. Other exit options are far more suitable in the current climate if your goal is to extract maximum whilst leaving a viable and well managed business.