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Succession Planning – How to maximise the value of your business in preparation for sale or exit.

Posted on 02/26/2013 by cfoadmin

Succession Planning

A survey by CPA Australia has identified that in excess of 1 in 3 of business owners are now over the age of 50 and the rate is increasing each year. With so many business owners nearing retirement and considering selling it’s a buyers’ market!

Consider the following questions:

  • Are you in this category and are you planning to exit your business?
  • Are you planning to use the proceeds from the sale of your business to fund your retirement?
  • What exit options are available to you?
  • What steps have you taken to maximise the value of your business?

In order to structure a business so that it is ‘market ready’ business owners need to address the following issues:

  • Can the business operate without the owner’s personal input?
  • Is there a strategy for the success of the business?
  • Is there a measure of how well the business is doing?
  • What is required to improve the business’ value?
  • What kind of buyers would best suit the business?
  • What is required from the sale to meet their personal objectives?

The most common barriers to businesses not maximising their value are:

  • Business is too dependent on the owner
  • Owners having unrealistic expectations about the value of the business
  • Processes are not documented
  • Lack of potential buyers
  • Business is not achieving a reasonable rate of return on the investment.

The following issues must be addressed in order to enable you to exit your business at the time of your choosing and at a price, which represents the business’ maximum potential:

1. Plan for your exit

As well as having a plan for maximising the value of your business it is important to plan for the actual separation from the business.

Begin with the end in mind and focus on the final outcome. Determine when you want to sell and retire and focus on how the business will need to run to be able to step out at that point. Determine a specific action plan with tasks, due dates and responsibilities.

Have an independent valuation done on the business as it is currently and obtain advice on how to achieve the desired value by the end date.

2. Evaluate your exit options

Once the owner has commenced planning for an exit they need to consider the options available to extract themselves from the business. The future is unpredictable and it is wise to have a range of possibilities available.

There are a number of options available when owners are considering exiting a business and include the following:

  • Sell to another entity
  • Sell to an existing partner
  • Acquire a new business partner
  • Hand over to a family member
  • Management buy-out
  • Sell to a competitor
  • Close the business and sell the assets
  • Close the business and maintain an income stream from the assets (e.g. property).

3. Optimise the financial and operational performance of the business

For a business to have long-term value it must be able to demonstrate sustained profitability over a number of years. The business should be able to generate a profit after providing a salary on a commercial basis to the owners.

In addition, the business should be able to generate a return on the owner’s investment.

The return on investment can also expressed as a multiple of earnings that is the number of years it will take to recoup the initial investment. Well performing businesses are generally considered to have a multiple of earnings between three and four years. A business generating a higher return will deliver a higher value to the owner.

Other key features that will improve the value of the business include:

  • Well developed and documented systems and processes that are followed and regularly tested
  • Documented performance standards and key performance indicators
  • Recognised intellectual property
  • The business should not be reliant on a few key customers
  • The business should not be reliant on one major supplier
  • Clear competitive advantage
  • Retention strategy for key staff

4. Reduce the reliance of the owner on the business

If you have a business, which is heavily reliant on the owner’s personality, then the options for successfully exiting a business are dramatically reduced.

A business, which is heavily reliant on the owner typically, displays the following characteristics:

  • The business typically displays the owner’s name
  • The business is dependent on the owner’s relationship with customers
  • The owner believes they are the only person who can do the job to an appropriate standard
  • The owner spends a majority of time delivering services to clients.

To overcome this situation you need to undertake the following steps:

  • Consider rebranding
  • Replicate what you do well
  • Systemise your processes
  • Recruit and develop the right people.

5. Due Diligence

Due diligence is the process by which a prospective purchaser will check all records, including financial and other, to confirm that what has been represented about the business is correct.

Based on all the available information a good adviser will give their client an independent valuation of the business and the risks associated with ownership of it.

If you consider that you have satisfactorily addressed the deficiencies in all areas of your business then you will have done all you can to maximise the value and attractiveness of your business to a prospective purchaser.

Written by David Slatyer (

David is an experienced CFO and Company Secretary with over 35 years with blue chip companies, publicly listed and private, including Kimberly-Clark Australia, The Greater Union Organisation, Challenger Financial Services Group and Stuart Alexander & Co.

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