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TRANSCRIPT
EXIT SMART SURVEY REPORT 2015
A WILLIAM BUCK PUBLICATION
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Over 270,000 mid-market businesses are expected on the market in the next five years, as the Baby Boomer and Builder generations prepare their businesses for sale. However, with a limited pool of buyers, competition is expected to be fierce.
Introduction — About this Survey 2
Introduction — About William Buck 2
01 Tight Market for Baby Boomers Looking to Exit 3
02 Leaving a Legacy 4
03 The Time Conundrum 5
04 Redefining Retirement 6
05 Exit Smarts 8
06 Understanding the Tax Implications 11
07 Take Action: Are you Exit Ready? 12
CONTENTS
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ABOUT THIS SURVEY Drawing on the observations of over 150 mid-market business owners, the results of William Buck’s Exit Smart survey provide a measure of exit readiness in the private sector.
Respondents have been categorised by generation based on the following definitions:
— Builders: born pre 1945
— Baby Boomers: born from 1946 to 1964
— Generation X: born from 1965 to 1979
— Generation Y: born from 1980 to 1997
Data was collected between March and April 2015 via an online survey.
ABOUT WILLIAM BUCKEstablished in 1895, William Buck is a leading network of Chartered Accountants and advisors, with offices across Australia and New Zealand.
With a dedicated focus on the middle market, we help over 13,000 clients to reach their goals every year. Providing 360 degree support, our team’s expertise spans a full range of services including corporate advisory, business advisory, tax, audit & assurance, wealth advisory and business recovery.
We‘re more than just advisors; we aspire to create a positive change in the lives of our clients.
INTRODUCTION
Few business owners undertake sufficient planning ahead of an exit. Considering all the issues upfront could mean the difference between a successful exit at maximum profit, and a difficult exit where value is given away.
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Over 270,000 mid-market business are expected on the market in the next five years, as the Baby Boomer and Builder generations prepare their businesses for sale. However, with a limited pool of buyers, competition is expected to be fierce.
THE MOVE TO MARKETThree quarters of business owners surveyed intend to sell their business over the next ten years, with 65% of these expecting to exit in the next five years.
Applying these statistics to the current number of mid-market businesses across Australia (those with between 3 and 200 employees), we could expect to see approximately 270,000 businesses on the market by 2020.
And expectations are high, a third of business owners are seeking a sale price above their business’s current market value.
A LIMITED POOL OF BUYERSWith a rush of businesses on the market, vendors are expected to outweigh purchasers.
Demographics play a major role. A trade sale is the most popular exit option with a majority of survey respondents believing their business will be bought by a competitor.
However, with 77% of business owners aged 51 and above, there’s a likelihood that the most obvious purchasers may also be considering their exit strategies.
This begs the question; where are the Generation X and Y entrepreneurs? In the current financing environment banks and other lenders require substantial collateral to secure a loan. This is a luxury that many in the younger generations do not have.
The end result is a potential downward pressure on price; unwelcome news for our business owners who have worked in their business since inception.
01. TIGHT MARKET FOR BABY BOOMERS LOOKING TO EXIT
Number of mid-market businesses expected on the market in next 5 years.
Percentage of business owners expected to exit by 2020.
270,000
48%
BUSINESS OWNERS AGED 51 & OVER PLANNING AN EXIT COMPETITOR MOST LIKELY PURCHASER
COMPETITION FOR CAPITAL | COMPETITION FOR DEBT | COMPETITION FOR MANAGEMENT
77% 87%
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A large proportion (59%) of survey participants started their business from scratch and a further 21% inherited their business from a family member.
It’s little surprise that our business owners are keen to leave a legacy. Almost half of business owners feel that it’s important for the business to continue as a going concern after they’ve exited and almost 25% would like to sell their business to current management or a family member. Only 4% expect the business to die with them.
The desire to leave a legacy is at odds with many businesses’ current operating model. Over a third of business owners believe that the business couldn’t operate in their absence.
Without a strong management team to run the business post-sale, it is unlikely that a business will be sold as a going concern. Indeed, anecdotally, only one in eight mid-market businesses will be sold as a going concern.
A high dependence on the business owner is also suggestive of a high level of personal goodwill attached to the owner, resulting in a lower business value and potential difficulty finding an appropriate buyer.
02. LEAVING A LEGACY
HOW DO YOU BECOME AN OWNER OF THE BUSINESS?*
ACQUIRED AN EXISTING BUSINESS
49% WOULD LIKE TO SEE THEIR BUSINESS CONTINUE AS A GOING
CONCERN AFTER EXIT
25% WOULD LIKE TO SELL THEIR BUSINESS TO CURRENT MANAGEMENT
OR A FAMILY MEMBER
1 IN 3 BUSINESSES DO NOT HAVE THE MANAGEMENT CAPABILITY TO RUN THE BUSINESS IN THE OWNERS’ ABSENCE
TOOK OVER AN EXISTING FAMILY BUSINESS STARTED BUSINESS FROM SCRATCH
21%18% 59%
SELLING THE BUSINESS AS A GOING CONCERN
*2% acquired the business in another manner.
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When asked what would improve the value of their business, the number one factor cited was more time to develop it.
Over 54% of respondents are, however, currently working over 40 hours a week in their businesses.
Having strong management team in the business does little to alleviate this tension. Our survey results indicate that business owners who believe their business can function in their absence, actually work marginally more hours than those without a strong management team.
This begs the question; is the business owner’s time being spent in the right areas? With a capable management team in place, the business owner’s time and energy ought to be focussed on the core value drivers of the business.
03. THE TIME CONUNDRUM
HOURS WORKED PER WEEK BY BUSINESS OWNERS
Under 10 hours
10 – 20 hours
20 – 30 hours
30 – 40 hours
40 – 50 hours
Percentage of business owners that need more time to develop their business.
38%
Builders Baby Boomers Generation X
7% 7% 8%15%
21%
52%
4%11%
18%
68%
7%
27%20%
40%
Strong management team Absence of strong management team
6% 8%13% 17%
4%12% 13%
21%
54%55%
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04. REDEFINING RETIREMENT
With the majority (77%) of respondents being aged 50 and above, retirement is a driving force behind the desire to exit. Yet, our respondents’ definition of retirement is somewhat different to their parents’.
Over two thirds of business owners aged 69 and above are happy to continue working in the business post-sale. Taking a reduction in hours and responsibility can provide a way to slowly ease into the next stage of your life, as one respondent put it “working in my business is a beautiful way to retire.”
This is consistent with our experience of business divestments which indicates that a post-sale transition of between 6-18 months is common.
Business owners may be able to keep working while drawing down some of their superannuation benefits by making use of the Federal Government’s Transition to Retirement pension scheme.
A further 27% of Builders expect to keep their business for another 5-10 years, and 10 years plus before exiting.
The prevalence of older Australians in leadership positions is consistent with the latest study by McCrindle Research. Australians aged 65 and over currently comprise just 3% of the total workforce, but over 20% of all management roles and 21% of professional positions.
It should come as little surprise that business owners are continuing to work later in life. With a rapid increase in life expectancy over the last 60 years, the demographic middle-age has been pushed back. Today’s 65 year old is the equivalent of a 54 year old in 1945.
BUILDERS THAT INTEND TO CONTINUE WORKING IN THEIR BUSINESS POST-SALE
65 IS THE NEW MIDDLE AGE: 1945 VERSUS 2015*
1945
30,000Number of 68 year olds
66Average life expectancy
54Middle age
2015
200,000Number of 68 year olds
81Average life expectancy
65Middle age
* McCrindle, “The Downaging Generation
66%
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AN UNCERTAIN FUTURE? For some business owners the desire to keep working (in a full or part time capacity) may not be a lifestyle choice.
Surprisingly, given the age profile of respondents, only 51% are confident that they have an adequately funded retirement plan.
Thankfully, few business owners (just 25%) are dependent on their business to fund their retirement. This is a positive, as it indicates that they have accumulated assets outside of the business, however, it does suggest that the underlying uncertainty around retirement funding lies with their superannuation or other investments.
DO YOU BELIEVE THAT YOU HAVE AN ADEQUATELY FUNDED RETIREMENT PLAN?
YES 51%
NO 29%
UNSURE 20%
04. REDEFINING RETIREMENT
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Navigating the sales process and ensuring you realise maximum value on sale can be complex; and business owners are relatively inexperienced in this area.
Half of all respondents have never bought or sold a business, and while 42% have been approached by a potential acquirer, they have either chosen not to, or have been unable to complete the transaction.
In light of this, 92% of owners intend to seek external advice on the business sale. Previously business owners would typically assemble a trio of advisors comprising their accountant, lawyer and bank manager, it seems, however, that bank managers are falling out of favour. Less than 1% of owners would now turn to them for advice.
While business owners are keen to seek advice from their accountants (who have emerged as their preferred advisor), there is a perception that professional advice extends only to the mechanics of the sales process. Just a small percentage (12%) believe that professional advice is a major contributor to improving business value. Our experience is that, accountants skilled in business divestments ensure a higher realisable value and increase the probability of completion. Clients often comment that independent advice was critical to the negotiation phase of the transaction.
FINDING A BUYERA trade sale is the most popular exit option with 29% of respondents believing their business will be bought by a competitor. However, with a majority of business owners in Boomer and Builder generations, there’s a likelihood that the most obvious purchasers may also be considering their exit strategies rather than take on additional risk through an acquisition.
Through our experience of working with thousands of mid-market businesses, we’ve found that the majority of businesses are sold to a purchaser that was unknown to the vendor at the commencement of the process.
With a limited pool of purchasers, it is important to have a clear understanding of your target buyers. This will allow you to position your business as a relevant and attractive investment.
A full appraisal of your business and the current market can assist.
FLEXIBLE AND PRAGMATIC ATTITUDES TO SALE CONSIDERATIONBusiness owners have a flexible approach to sale consideration. Sixty eight per cent of all respondents would consider taking shares, deferred cash, or contingent cash based on performance. The most popular consideration option is deferred cash paid out over time. This is consistent with the large proportion of business owners planning to retire or partially retire on exit; there appears limited urgency to access funds to reinvest.
This flexibility extends to owners’ attitudes towards working in the business post-sale. Eighty five per cent of business owners are willing to continue working in the business; 35% of whom would stay for up to 24 months.
The willingness of an owner to consider various consideration options and flexible working arrangements can greatly improve the probability of selling their business. It can alleviate the possible deal impasse that often arises over “price.” The ultimate price paid will be determined by future results which reflect any improvements that the existing owners have implemented and which may not otherwise be reflected in past results.
Who would you see advice from on preparing your business for exit?
1% Bank manager
70% Accountant
7% Lawyer
7% Stockbroker
05. EXIT SMARTS
HAVE YOU EVER BOUGHT OR SOLD A BUSINESS?
HAVE YOU BEEN APPROACHED BY A BUYER?
YES 49%
NO 51%
YES 42%
NO 58%
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FORMS OF CONSIDERATION ACCEPTED PERCENTAGE OF BUSINESS OWNERS WILLING TO CONTINUE WORKING IN THE BUSINESS POST-SALE FOR:
0-6 MONTHS 24%
31%
30%
6-12 MONTHS
12-24 MONTHS
Shares in a public company 3%
A deferred cash portion sold over time 25%
A contingent cash portion based on performance post sale 2%
All of the above 38%
Cash only — even if it means receiving less 32%
With a limited pool of purchasers, it is important to have a clear understanding of your target buyers. This will allow you to position your business as a relevant and attractive investment.
05. EXIT SMARTS
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05. EXIT SMARTS
Percentage of business owners would not be happy to sell their business at its current sale price.
71%
DO YOU UNDERSTAND WHAT’S REQUIRED TO MAXIMISE BUSINESS VALUE?
EXTRACTING VALUEIn spite of the fact that almost half of all respondents plan to exit their business in the next five years, few would be happy to sell their business at its current market value.
Of those owners who have had their business valued, 70% stated that the value was as expected and 11% received a valuation higher than expected, yet only 28.5% would be content to sell their business at this price. There’s a clear gap between owners’ expectations and the current market value of their business.
Almost 50% of business owners believe they have a clear understanding of what’s required to sell; this number increases to 62% when an owner has conducted a business valuation.
Building value within the business takes a structured approach. It involves understanding your target purchasers, their objectives and how they might value the business. An independent valuation is often the first step.
At the core of a business valuation is an assessment of the likely future returns that can be expected from the business and the risks associated with achieving those returns. As a result, a valuation not only estimates the existing value of the business but also highlights those aspects of the business that may be improved in order to increase its value.
Taking this approach allows you to identify where the business is now, where it needs to be, and what is required to fill those gaps.
0%
Yes
No
Not sure
10% 20% 30% 40% 50% 60% 70% 80%
Have not conducted a business valuation
Have conducted a business valuation
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06. UNDERSTANDING THE TAX IMPLICATIONS
Three quarters of business owners do not know how much tax they will pay on the sale of their business.
Surprisingly only 25% of respondents know how much tax they will have to pay on the sale of their business. Given that the after-tax consideration received is generally more important to owner’s than the pre-tax price, the responses represent a critical “hole” in an owner’s exit planning.
For businesses in the mid-market, the Small Business Capital Gains Tax (CGT) concessions could provide an opportunity to reduce the CGT on the sale of their business considerably; reducing the liability to zero in some situations. Two thirds of business owners, however, do not know if they qualify for the concessions.
Tax is also an important issue in family succession. Over 54% of those seeking to pass the business onto family members would gift it, or part gift it. For CGT purposes, the consideration paid for the business (in the case of a gift this is usually zero) is ignored and the market value of the business is used to determine the value for any CGT payable. Obtaining a valuation at contract date allows for tax matters to be appropriately addressed, this may result in accessing the CGT small business concessions.
It is critical for business owners looking to exit in the next five years to obtain comprehensive advice. Implementing the most effective tax structure for your personal and business circumstances takes time to avoid the possibility of negative tax consequences.
PERCENTAGE OF MID-MARKET BUSINESS OWNERS WHO DO NOT KNOW IF THEY QUALIFY
FOR SMALL BUSINESS CGT CONCESSIONS
66%
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Yes No Maybe
FINANCIAL
Do you have quality financial and management reporting systems?
Are your cashflow and profit forecasts supportable and aligned with your business strategy?
Do you have a plan to invest the proceeds of the sale?
TAX
Are you aware of the tax implications of the sale?
Do you have the corporate structure in place?
STRATEGIC
Have you developed a strategy with key growth milestones?
Are there growth opportunities in your market and industry?
Have you analysed the market and identified competitors and acquisition opportunities?
EMPLOYEES
Can the management team operate the business in your absence?
Do you have an appropriately skilled and flexible workforce?
Have you considered a management incentive scheme?
OPERATIONAL
Is there a stong pipeline of work across a broad client base?
Have you documented and registered all intellectual property and trademarks?
Is your property plant and equiment well maintained?
LEGAL
Are your customer contracts and leases transferrable?
Do you have documented risk management and corporate governance policies?
Have you prepared ‘sale ready’ agreements?
ARE YOU READY TO EXIT?
While the vast majority of respondents are seeking to exit their business, few are positioned to gain maximum value.
This is not uncommon, in our experience few business owners undertake sufficient planning ahead of an exit. They only seek advice when they are actually ready to sell, at which stage it is often too late to implement the strategies required to maximise value.
We work with business owners as early as possible to ensure they achieve optimal value on the sale of their business.
The checklist below outlines some of the fundamental issues to consider when planning your exit strategy. If the answer is no or maybe to any of the following questions we recommend that you seek advice from your local William Buck advisor.
07. TAKE ACTION: ARE YOU EXIT READY?
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HOW WILLIAM BUCK CAN HELP
The decision to sell your business can be a very difficult and emotional one, particularly when it represents the culmination of a lifetime’s work.
Our advisors will support you throughout this transition, ensuring you realise the maximum value for your business. With a team of specialists from business advisory, corporate advisory and tax, we provide complete end-to-end transaction support. Our business sale process typically includes:
— Establishing your objectives
— Assessing the value of the business
— Restructuring the business & reviewing its operations to optimise value and maximise your after tax position.
— Identifying and approaching prospective buyers
— Sale negotiations
— Post-sale wealth management strategies
Taking a project management position, we can also co-ordinate other advisors such as lawyers and technical experts.
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williambuck.com
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WA
Robin Judd [email protected]
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SA
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