Do You have an Exit Plan?
Business under performance and lack of shareholder readiness to exit businesses to maximize the financial returns from a business are major issues facing the growing tide of baby boomer SME owner/operators who are looking to retire in the next decade.
Many owners are heavily involved in the operations of their business and don’t believe employees can deliver their level of commitment or service to their clients. They rarely get the opportunity to pop up out of the trench to connect with customers, gain a sense of market changes or measure themselves amongst their competitors and wider Industry.
The majority of owners have not developed effective exit strategies and many are running business that will ultimately not deliver effective returns on investment from trading or, eventual sale. Many businesses end up being sold as the result of shareholder or relationship breakdowns or through ill health. This provides limited time to secure maximum value for the business.
Tell Tale Signs of Underperformance
There are many signs that indicate a business may be underperforming in current trading or have owners that are not prepared for an exit through a planned business sale process. These can include –
- Inconsistent profitability or losses – lurching from good to bad years
- Cashflow shortages/slow payers/credit impaired
- Operating performance below Industry standards
- Inconsistent or poor service delivery
- Low market reputation
- Late reporting and/or compliance penalties
- Inconsistent market/promotional presence
- Operational incidents/accidents
- Staff turnover
- Not paying market shareholder salaries
- Limited investment in personnel development
These issues can stem from a mix of sources including Owner/Operator skills and experience and a lack of formalized structure in the areas of –
- Organisational structure and role definitions
- Planning processes
- Information systems and management reporting
- Internal controls and,
- Risk management
Not addressing the above issues can lead to long term business conditions that could serious impact long term business financial health, viability and potential exit value.
Issues Facing Owner Managers
The vast majority of New Zealand businesses employ less than 10 personnel and lack resiliency to the impact of change or the loss of key personnel.
Owner/operators typically work long hours and achieve less than market remuneration – balanced by the perception of working freedoms and potential capital gains. They tend to believe they are at risk if they take time out of the business. This can be true and bad business experiences can compound the issues which can limit the potential to grow businesses to a scale that can be readily operated by employees and more readily on-sold.
In many cases owners are unaware of their risk profile from a business and personal (health and relationships) point of view. Many are unaware of the negative valuation impact they have on the businesses due to their close involvement in day to day operations.
Most have no clear understanding of the current market value of their businesses or the funding they will need to generate to exit to a comfortable retirement or next stage of their business career. Generally owners and shareholders have a pair of rosy coloured glasses handy when it comes to their perception of their businesses value or the benefits they achieve by owning and operating their business. Prospective buyers tend to significantly different perceptions of business values and heavily factor perceived risks of ownership transition.
Addressing Under Performance and Preparing to Exit
So how do we address the issues that are confronting our aging SME owner/operators and related shareholders?
As with any issue putting a peg in the ground confirming current positioning is a key factor. This can include determining the current status of business’ commercial positioning, operating performance and its sale value. Overlaying the owner’s vision for the future of the business, their requirements in terms of return on investment and market based shareholder salaries are important considerations highlights misalignments and practical impediments to future business operations and value growth.
To navigate the challenges of the years ahead owners also need to develop, document and communicate strategies around risk minimisation such as structuring businesses for investment generation, resiliency, disaster recovery, effective internal controls, efficient business systems along with adequate business and personal insurances.
With retirement looming for many baby boomer Owner/Operators they must act now to ensure they enjoy some of the hard won fruits of an owner’s career lifetime. Maximizing the trading of their businesses and preparing them for sale will provide a foundation for a long, healthy and happy retirement.
Gerry Rea Partners has recently expanded its range of Business Transformation services to cover client and advisor requirements for support in addressing issues related to retirement and business exits.