Useful tips on exit planning, succession planning, business valuation and managing a successful transfer.
Many business owners are great at building businesses but have no idea about handing them on.
The process is actually not unlike guiding a business through a recession and making it ready for the upturn: careful planning is the key to success.
Until they start the sale/disposal process many business owners have very little idea of the value of their business, or indeed whether it has value for a third party at all.
Sellers generally overestimate the value of their firm, aiming for a high earnings multiple like 6-7 times net profit. Buyers tend to aim for 2-3 times net profit (plus asset value), which is the most likely actual final price for the sale of a viable business.
The exceptions are those with unique assets and/or Intellectual Property, or on the leading edge on an under-exploited area. This could command far higher selling prices, although valuation of Intellectual Property could be confused or overlooked.
Since the 2008/9 recession access to finance has become more difficult. Banks apply stricter criteria to loans. This has had the effect of reducing the number of potential purchasers of businesses. Consequently, profit multiples on businesses for sale are generally lower than may historically have been the case. However, a good business with a consistent earnings history and a credible reason for selling will still command a good earnings multiple.
Ideally, you should think about the alternatives and plan your exit well in advance.
There are a range of options available, and each has its challenges:
While each transfer is unique, past experience suggests that the following issues can contribute towards success:
The key to a successful management transition is effective succession planning. This process could start as many as 15 years before the business owner intends stepping down.
It is good business practice to include a written succession plan within the overall business plan.
This should contain:
It's particularly important that you allow your successor an adequate training period.
One way to manage the training programme is for the successor to gain experience in other businesses. This allows them to gain independence and bring fresh skills and ideas to the business.
You might also allow a successor to gain knowledge of all aspects of your business by spending time working in each area of it. A key advantage of this is that the successor also meets - and is possibly trained by - the key personnel.
You should also consider whether it's best to phase in your departure. You might gradually transfer some key responsibilities to your successor, or possibly reduce the days you work in the business.
It is vital to communicate the succession plan to any family involved in the business, and other management. This will help prevent misunderstandings and future conflict.
Article written by Clive Lewis, Head of Enterprise, ICAEW. Last updated in January 2012.