It is forecast that 41% of Australian businesses will change hands in the next five years as most owners near retirement age. This would represent the largest shift in business ownership in Australia's history and could have serious consequences for business owners, particularly those relying on the sale proceeds to fund their retirement.
The likely flood of sales also has wider consequences for the Australian community and economy. Given small business employs around 40 per cent of all Australian workers, if a number of small businesses were to cease operation because they were unable to sell, Australia's economy could be directly affected. Struggling businesses may also fall into the hands of overseas buyers which could have an impact on prices and potentially the quality of goods or services.
Many baby boomer business owners will probably find themselves in a very competitive environment because the ageing population suggests there will be fewer buyers in the market. Not only that, the ongoing Global Financial Crisis (GFC) means financial institutions are carefully scrutinising loan applications which is limiting the pool of potential business buyers. Only those businesses with proven financial viability and profitability, together with strong asset backing, will be in the running for loan approvals.
Therefore it is important to think like a buyer. They are looking for things like growth opportunity, wellhoned organisation and management systems, a quality management team, a diversified customer base, acceptable age and condition of plant and equipment and protected intellectual property. It's also incredibly important to structure the sale to minimise tax and if you're looking at a lower sale price than originally expected you must ensure you walk away with the most tax effective outcome.
Only those business owners who are truly prepared are going to achieve the best price. Planning greatly increases the likelihood that you will pass the greatest value (with the least potential liability) to your family and heirs, allow its successful continuation and protect the interests of your employees. It is important to note that planning for the effective transition of a business requires a substantial lead time and if you are contemplating selling the business to an outside party, the actual sale process can take months as the buyer undertakes a due diligence process and negotiates the price and various terms.
So, when should you start planning the sale? The simple answer is, it's never too early for a business owner to engage in advance planning to maximise the value of a business. Similarly, it is critically important that business owners develop and communicate a plan for the effective operation of the business in the event of the owner's sudden absence (due to death, disability or other emergency).
We are living in uncertain times with financial markets and the economy struggling to find some degree of stability. There is little any of us can do to control such global issues but the ‘smart move' is to exercise control over the things we can control. For business owners, this means there is no time like the present for crafting a plan for the future, or revisiting an existing plan to ensure you are still on track.
If you need any help with your business succession plan please do not hesitate to contact our office.
