Don’t leave your exit to the last minute

You laboured to build your business; don’t give it away, writes Hannah McQueen.

Amajor change in the business landscape is looming, as businessowning baby boomers seek to retire.

According to an ASB survey, one in four customers who are business owners are considering retiring or transitioning out in the next five years.

If you’re one of them, you need to get on to it.

Too often I meet business owners on the verge of giving their business away for next to nothing because they haven’t planned for this transition, or they’ve simply burnt out.

With one client, we’re on track to get them five times what they were originally willing to accept, simply by putting in the time and implementing the right strategy.

The trouble is, many smallbusiness owners are only looking ahead to the next year (or sometimes the next provisional tax payment) while selling requires looking further ahead.

Although quick wins can be achieved with short-term focus, the big wins that drive profitability through the roof take thought, strategy and effort.

All of which takes time – which is a commodity in short supply for most small-business owners.

In some instances, it can take up to a year to implement changes to improve the business, and another year for that to show up as profit.

It can sometimes take a year to actually sell the business, and you may be required to stay on, depending on the sale conditions.

There are many ways to value a business, but in New Zealand we typically determine what a small business is worth by looking at normalised profit (adjusting for personal costs going through the business, lower than market owner-salaries and other things).

That adjusted profit is then multiplied by anywhere between 1 and 50. So if your profit was $50,000 and the industry multiplier was 3, then your business would be worth $150,000.

The multiple increases where the business can scale more easily, has intellectual property and assets (including a brand), is in demand from other businesses, and the banks are feeling generous.

If the banks’ willingness to lend drops due to the stage in the economic cycle, so too will the multiple most businesses can sell for.

You also need to consider how reliant your business is on big customers, one market, or at risk of disruption – all of which could reduce the value.

However, valuation is an inexact science – the price is ultimately determined by how much someone is prepared to pay, and can borrow.

Selling your business should reward you for all the years you worked huge hours, and paid yourself a pittance, to ensure your business survived. If you plan on doing that in the next five years, you need to start planning now.