The right way to exit a business
Q: I’ve just turned 55 and thinking about what I need to do to make sure I can exit my small plumbing business with some value down the track, especially having seen an older peer struggling to get out so he can retire. What do I need to be doing? A: Without knowing more about your business, I’d start by saying learn to let go as early as possible. One of the main issues I see with business owners in their 50s and 60s thinking about getting out, is that they don’t know how and when to let go.
It’s often been their life and they hold on as long as possible and while they say they want to sell, they put all sorts of obstacles in the way, till it’s too late.
They love their work, but they need to understand that to leave a legacy they need to transition properly.
So, if you’re wanting to extract maximum equity you need to be preparing your business for sale now.
That means being willing to let go and by that I mean running the business as a business that isn’t totally reliant on you as the founding owner who has made themselves indispensable.
A business that won’t run without the owner is not saleable.
A good test: if you’ve not had a holiday for the past five years because you think your business won’t run without you, then you need to make some changes and start taking holidays.
So put in place a robust management structure (and a governance structure if you’re big enough) so that the business will run regardless.
This gives you a choice of selling or living off the dividends, but any buyer will have some confidence that the business will endure past the retirement of the owner.
That said, make sure you’ve got realistic expectations. Often people in this situation expect too much money.
Businesses are normally sold on enterprise value, which will require sustainable normalised earnings – in effect, what the business will earn once you have gone.
If too much goodwill rests with you as the owner, then value is likely to be less than you expect.
If you have set it up right you will have a choice as to when to sell. That being said, you may not get too many chances, so being fit for business or fit for sale is vital.
You have to assume the business won’t sell, even if you have an offer, so keep running the business as if nothing has changed.
My personal experience as a baby boomer business owner is that letting go can be empowering. I’ve recently handed over the reins as managing partner of BDO Wellington to my successor, Mark Bewley.
It was something I knew I had to do, but when the time came I didn’t want to let go.
But the outcome has been fantastic, freeing me up to work more on advisory while still being around to mentor Mark and help shape the firm’s future.