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  Ideas and Advice
   
FAREWELL RECESSION,
HELLO SUCCESSION?
  As more and more businesses are taking the first tentative steps out of the recession, what does this mean for those thinking about selling—or buying—a company? ASB’s latest Succession Planning Monitor reveals a new sense of certainty among business owners
   
 

As the recession eases, surviving business owners are turning their thoughts to the perennial question: Is now the best time to exit my enterprise? Particularly with the aim of achieving optimum value and beating to the market the anticipated flood of hundreds asking the same question.

While the latest ASB Succession Planning Monitor reveals the ‘good time to sell’ index remains fairly static—with most business owners surveyed believing now is not a good time to sell— respondents are changing their perceptions about what drives the value of their business.

ASB’s chief executive, relationship banking, Stewart McRobie says the impact of the economic recovery could well be influencing the results. “For the past year we have seen business owners battening down the hatches and putting off selling their businesses for the foreseeable future, or at least for the next five years” he says. “In the March quarter, the focus of this survey, we have seen a six percent increase in the number of business owners saying they are considering selling their business in the short term. Almost 20 percent now say they may sell within two years, as opposed to 14 percent last quarter.”

This shift in sentiment is significant, he says, but also cautions that the next six months will be crucial to really gauge whether forward momentum is sustainable.

Sellers, and more importantly buyers, seem to have a more realistic notion of the value of their businesses and are seeing indicators of prices improving. Over the past six months, the number of owners indicating the market value of their business is less than $250,000 has been dropping and is now down to 33 percent.

This could be a result, says Stewart McRobie, of the recovering economy generating more certainty that business values are increasing again.

A record 24 percent of owners indicated that the market value of their business lies between $250,000 and $500,000 (up from 18 percent). Other values cited in the findings include prices between $500,000 and $999,000 (14 percent); $1 million to $5 million (14 percent); and more than $5 million (five percent).

While opinions on the value of businesses have changed, so too have the drivers of that value.

For the first time since the survey began, profit is now considered the most important factor determining business value at 89.2 percent of respondents, a rise of seven percent. This could be a result of profits stabilising as the economy improves. Customer base is the second most popular determinant of value at 88.8 percent. The state of the economy also increased in importance by seven percent to 70.8 percent.

If information and advice-seeking are signposts of an increased renewal of activity, then succession planning seems to have returned to the corporate dance card. It is not just any type of advice that is now being sought—the study’s findings show a renewed level of certainty about just what sort of guidance is needed when it comes time to sell. Larger businesses tend to consult with a lawyer as part of the advisory mix while smaller businesses ask accountants to lend them their ears.

Sellers and buyers are seeing

indicators of prices improving.

The number of owners indicating

the market value of their business

is less than $250,000 has been

dropping, and a record 24 percent

of owners indicate the value of their

business lies between $250,000

and $500,000

The reasons for seeking a helping hand are varied. Business owners are likely to accept that potential purchasers are now more discerning and they certainly have greater choice in their targets. The more a seller’s affairs are in order, the higher the value they might hope to secure. Even though a sale is not on the immediate horizon if business-related issues are not managed well, or contained, then the window of opportunity down the track may be missed.

The key is to work with advisers early, rather than postpone attention to a later stage. Bank managers can help work through matters related to borrowing, cash flow management and foreign exchange contracts.

The survey also reports that:

  • There has been a large increase (12 percent) in the number of business owners who are planning to speak to their accountant for advice on exiting their business.
  • The main driver of this trend is small business owners, with 80 percent saying they will consult their accountant (an increase of 14 percent). Their lawyer came second at 45 percent.
  • In larger businesses there was a ten percent increase in respondents saying they will speak to their lawyer, at 69 percent. Accountants still ranked first at 80 percent.

There was also a decrease of five percent in those business owners who said they did not know who they would seek advice from, and a three percent decrease in those who would have sought advice from sources other than their accountant, lawyer, business broker, bank relationship manager or commercial real estate agent.

Encouragingly, the results show a significant drop in business owners planning to close down and sell their assets (11 percent), and an increase in those with plans to sell to a current staff member (12 percent).

The most popular means of realising the value in a business was through selling to an unidentified buyer, at 27 percent, followed by sale to a targeted buyer outside of the business, at 22 percent.

In a nutshell

  • The ASB Succession Planning Monitor
  • reflects the economic recovery
  • Businesses are increasingly looking to sell in the shorter term
  • Owners’ perceptions of business value are changing
  • Profit is now considered the main driver for business value
  • Owners more likely to look to their accountant or lawyer for advice, and more certain of where they will seek advice
  • Business owners can reap rewards if they plan early. Businesses with their plans in order can seize opportunities and realise the best value from their business sale

Whose advise will you seek? Business seller's index Timeframe to sell business