Succession Planning and Management Blog

Interestinmgly, in the US 56 % of all closely held companies provide equity awards to at least some employees at all levels. This number is obviously much lower here in Australia.
The majority of survey respondents ( 81 % ) had been in business for more then five years – mature and established businesses.
Over half the companies (56 % ) see their exit strategy as a sale to another firm and only 10 % plan to IPO.
72 % of the companies have outside venture or angel investors.
The mean percentage of equity held by non founders under the plans was 15 %

I was sadly, not surprised to read only last week in my local paper the story of a family owned business with the owners planning to retire in November and have simply chosen to close the doors despite trading for over 40 years. The story includes the very familiar comment “our son and daughter have worked here for 15 years but they didn’t want to take it on” a trend which has been emerging for the last five years and is typical of family businesses unfortunately.

The owners also state that they have been unable to have a holiday since 1995 and have attended the business every day to feed the fish!

Importantly, the article also recognises business owners fear (often well founded) that whilst they may be able to transition the ownership by selling transitioning the management was more of an issue and may well cause them to have to return to their business – “we are quite passionate about what we do and are wary of people coming in and not being able to support it with the rent money” the owner said “we thought if the new owners failed we would have to come back in.”

Sadly this has led to the decision to close the doors after 40 years retire in November and walk away.

This report ( prepared by the Industry policy and economic analysis branch in the Industry and small business policy division of the Department of Innovation, Industry Science and Research and released this week) highlights the importance of small businesses to the Australian economy and also adds some interesting detail in respect of size and entry and exit ratios for business owners.

SME’s ( defined by the Australian bureau of statistics as employing less than 200 people ) contributed 57% of industry value added in 2009 to 2010 compared with 43% contributed by large businesses.

Over 85% of the total small-business contribution to industry value added is attributable to small businesses in the services sector.

Small businesses provided employment for almost half of total industry employment in 2009-10 which equates to almost 4.8 million people and again 85.1% of that represents the services sector.

There were 2,051,085 actively trading businesses in Australia as at June 2009, around 96% were small businesses (1,961,337) i.e. employing less than 20 people, 4% were medium-sized businesses (employing less than 200 people ) and less than 1% were large businesses.

In terms of entry and exits the report states that in total small-business there were 313,448 exits in the 2008-09 financial year, with only 6,419 exits in medium and large businesses – overall this represents an exit rate of 15.4% per annum. And whilst there were a similar number of entries during the year at the end of the year there were 20,729 fewer small businesses in operation.

The number of small businesses in arts and recreation services experience the greatest decline (3.3%) closely followed by manufacturing falling by 3% and other services which also declined by 2.9%

Detailed analysis also shows that small businesses generally had a much lower survival rate than medium and large businesses within every state and territory – this probably reflects the greater susceptibility of small businesses to the major economic downturn during the survey and research period.

According to the report Doing Business 2011: measuring business regulations by the World Bank and International Finance Corporation – Australia ranks in the top 10 of 183 economies in the world in terms of starting a new business, getting credit and ease of doing business. When it comes to closing a business, Australia is ranked in 12th position.

Since Steve Jobs’ death, plenty of entrepreneurs, employees and notable industry folks have been finally able to reveal anecdotes of interacting with Jobs and the company, many of them a testament to Jobs’ work ethic and dedication.

One new story this week surrounds the popular start-up Dropbox, which had caught Apple’s eye. In a meeting with Steve Jobs, the company was offered a nine-digit acquisition offer – an incredible opportunity for a start-up.

However, the founders declined and held on for something better. This week, it’s reported the company is now valued at over $US4 billion.

Getting a buy-out offer from Apple seems like a dream come true for any entrepreneur. But it wasn’t true to the founders’ vision, and certainly wasn’t the best move for the company at the time.

Just because you get a buy-out offer, or are presented with an opportunity that seems too good to be true, doesn’t mean you should take it. Don’t sacrifice the vision of your company for some short-time financial gain. In the end, you’re passing up the real opportunity to realise the full potential of your business.

…But don’t pass up an opportunity

Last week department store giant DealsDirect made its biggest acquisition ever, purchasing the corporate shopping network Shoppers Advantage. It’s a very significant move that will combine some of the companies’ key strengths and enable them to grow even faster.

Although you should be careful, considreed and strategic about getting involved in acquisitions, you should also be open to the fact they can expand your business faster than you expected.

If you have a particular weakness and an acquisition opportunity presents itself, be willing to consider it. In the long run, it’ll make things much easier.

Patrick Stafford – SmartCompany

The latest bizexchange index report on Australian private business value is show some interesting results and highlights the need to keep a close eye on the market for business sales in Australia. Before we analyse the numbers a couple of key findings shed light on key issues for business owners as they prepare for an exit or succession plan, which includes selling their business. The rebound in market sentiment in the second half of 2009 looks like more of an aberration as the net sentiment heads back into negative again. The volume of businesses advertised for sale in June 2011 has skyrocketed to a record high unfortunately at the same time the value of the index simultaneously reached a new record low. The rapid growth in listing volumes is predominantly at the smaller end so for the first time three out of four listings during the quarter have EBIT ratios below two. Also for the first time there are an equal number of listings with and EBIT ratio of less than one as there are with EBIT ratios greater than two.

The premium paid for larger businesses, particularly those in the middle market ($5-$15 million turnover) remain strong. This end of the market is strongly influenced by equity markets with mergers and acquisitions the primary source of buyers. While retiring micro business owners flood the smaller end of the market dragging these prices lower. Over the last 12 months there’s been a steady convergence in the values of business below $5 million in turnover. This reflects the divergences value to businesses seeking private buyers compared to those more likely to be purchased by other businesses and again strongly reinforces the need for strategic exit and succession planning in preparation for sale.

Larger business owners preparing to retire should, if well-prepared, have far more success than those smaller businesses. Australia equity markets are underpinned by the constant flow of superannuation contributions of Australian workers. With the equity raising requirements of the larger Australian businesses readily met by these funds and Australian & international business loans there is a surplus of investment funding. This surplus translates into higher P/E ratios for respected listed companies. Consequently, listed Australian businesses will continue to have the opportunity to profitably finance their expansion by acquiring privately owned businesses at lower P/E ratios and they have themselves. It is this practice which will underpin the value of larger privately owned businesses. Accordingly businesses in the medium and middle market need to actively consider how to increase their appeal as a potential acquisition target as part of their exit planning and succession strategy.

The numbers are also interesting in terms of the middle market businesses – retail trade for example are seeing very low EBIT multiples of 0.87 turnover below 5 million turnover and 1.39 for turnover between five and 15 million, whilst at the higher end property and business services are achieving multiples between 3.35 and 4.12 for larger businesses. Many micro businesses (turnover less than 500 K) are failing to achieve a multiple of one with several industry sectors between 0.58 and 0.92. Again the premium for size becomes lastly important.

The percentage of distribution of listings by EBIT value also reveals an interesting trend with over 24% listed at less than 1, 50% between one and 2, 20% between two and three and only 6% above three times multiple. In terms of business value as a multiple of EBIT the vast majority of businesses during the quarter sat between two and three times multiple of EBIT.