A guide to planning your retirement from your business
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:
- You may want to keep your business in the family. But you need to be sure you have a suitable successor
- You may want to sell your business to the management. But are they capable of running the business? And can they raise the finance?
- You could decide to carry on yourself, but this only postpones the succession problem. And working on after you want to retire is unlikely to be in your best interests or the business's
- You could bring in new management from outside, but you would still own the business and retain ultimate control over how it is run
- Perhaps the most common method of exiting a business is a trade sale to another business. But this can be time-consuming and disruptive, and involves disclosing confidential information to competitors.
- You might decide that the business is worth more if you close it down and sell off the assets. But this means that employees lose their jobs, and your reputation could suffer. A management buyout can sometimes save a business in this position.
While each transfer is unique, past experience suggests that the following issues can contribute towards success:
- You should engage specialist intermediaries with experience of business transfer. You should be able to trust them to perform well, and be made aware of costs and a projected timescale at the outset.
- You should be realistic and flexible over your asking price, and honest and objective in your assessment of your own business.
- The process should be standardised and streamlined as far as possible. The use of intermediaries with experience of business transfer facilitates a transfer.
- Anonymity during the initial part of a sale is important to protect performance. An intermediary can identify potential purchasers during the earlier stages.
- Good networking and word-of-mouth are the preferred routes to selling, and most transfers seem to be initiated by this route.
- Internal disputes, such as whether family members will remain involved with the business, need to be resolved before a business is offered for sale
- Businesses in unopposed or less competitive markets, with a niche position or unique assets, are more likely to be sold successfully.
- The deal needs to stick to agreed timescales and deadlines. This includes ensuring that intermediaries provide a reasonably fixed timetable.
- The more you learn about the transfer process before initiating a sale, including research on intermediaries, tax issues etc, the more likely the sale is to be successful.
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:
- The key goals
- A timetable of the transition stages - from identifying a successor to the staged, and then full, transfer of responsibilities
- Contingency plans in case the unforeseen happens, such as the intended successor declining the role or realising that they are not suited to it.
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.