The ‘baby boomers’ are rushing towards retirement. Many are business owners hoping to sell the firm to fund their future. Who will buy their businesses? Are they ready to sell? Are you? Dwight Whitney discovers not enough entrepreneurs are planning their succession. But there’s hope ahead
When Graeme Croydon first thought about selling his chain of panel beating shops it was almost too late. A heart attack laid him flat out in a hospital bed, life support systems a constant reminder that mortality was only one bleep away.’
For the first time since I got into business 27 years ago I couldn’t do anything in the workshop, with customers, or staff. I was stuffed, basically, says the 59 year old.
For Croydon and his wife Shirley it could have been disastrous. To fund Graeme’s ongoing treatment and a longer than expected retirement, they were forced to sell the business. Thankfully it wasn’t a fire sale. In the five years before the cardiac arrest the couple had been working hard with their accountant to ensure they weren’t needed every day at work passing on responsibilities to staff and ensuring there were proper financial systems.
In the end the business wasn’t all just about Graeme and his contacts, says Shirley, there were actually some tangible assets like the brand name and a very good client list.
The Croydon’s got a good price from a competitor and now have their feet up in the sun somewhere near Tauranga.
If only the story were true.
The Croydon’s are fictitious because the reality is that so few stories like theirs have a happy ending, reflects Craig Fisher, a partner with accounting firm Hayes Knight. The firm has experience in hundreds of business sales and acquisitions and has seen how disastrous a hurried or badly managed sale can be for the seller, the family, employees and the customers. The norm, sadly, is for business people to only start the succession process when opportunities are disappearing through the rear view mirror, says Craig.
What’s more, the situation is about to get a whole lot worse thanks to the baby boom phenomenon.
In the late 1960s someone wrote that the post World War II baby boom (1946-64) would pass through society like a pig through a python. Within the next two-to-five years we will be witnessing the first part of the pig making the exit into retirement millions upon millions of souls world wide entering their golden years with everyone expectantly uttering, as comedian George Carlin has described the boomer mantra: “It’s mine! Give it to me!”
Given the many New Zealanders who hope their businesses will be a solution to retirement income, the market based on the python analogy will soon be fat with companies putting the “For Sale” sign up.
Using comparable Australian data, researched by Hayes Knight, 50% of these business owners will rely on the proceeds of the sale of their ‘baby’ to assist in retirement. Nationally, that’s anticipated to be 300,000 enterprises on offer with close to 105,000 located in Auckland alone. If you conservatively assume the average businesss sale is $80,000, that equates to $24 billion ($8.4 billion in Auckland) changing hands in the biggest wealth transfer in the SME market since Eve was selling apples.
Staggeringly, only 38% of these people have any semblance of planning in place to turn their business into bucks. Not surprisingly 33% expect to have difficulty in selling.
Against this background, the billion dollar question being asked is will there be enough buyers to go around? The short answer (and it is short): no, nyet and non.
To make matters worse, all of this is starting to go down in a matter of months. Banish, therefore, any baby boomer predilection for making love, not war. Victory will come to those whose businesses are fully prepared, coiffed and groomed for succession.
A process, not an event
As the concept implies, succession planning is a process not an event. It comes in all shapes and sizes from the grandiose tomes in the Harvard Business Review highlighting how to seduce a Fortune 500 ‘rock star’ replacement, through to a down-to-earth discussion about how to sell the corner dairy.
Fundamentally, succession planning is all about transferring control and ownership to others with, ideally, a ‘win/win’ outcome. Left to your own devices, the process can seem daunting especially when you face some of the more meaty decisions on how your decisions will affect you, your family, other shareholders and, of course, the business on your exit.
It’s typical though that New Zealand business people don’t invite the experts in until the last minute the old ‘she’ll be right effect.’
John Kirkwood, a commercial lawyer with Hesketh Henry, says complacency can be disastrous on two levels. Suddenly there are more businesses for sale here and overseas; at the same time the number of buyers are dwindling, becoming more astute and picky. If buyers don’t like what they see you offering they can go next door, across the street, down town, or even overseas.
For John, the answer is simple to say but hard to do. Don’t go it alone. Assemble a team based on expertise to help design a blue prin’ exploring different succession scenarios. This team, he says, should be led by a savvy and qualified accountant and an equally skilled lawyer. The other participants in your succession ‘story’ (like finance, business selling or broking and so on) will come into play as needed.
I would guess that well over 90% of people that I see look at the numbers and structuring as an afterthought and don’t have their fingers on any or all the skeletons that might be lurking from memory or within the business taxation issues, compliance issues, failure with regulatory issues, shell companies and so on that, when uncovered, could be deal breakers and also dollar diminishers.
Three easy starts
As you’ll read in this magazine, succession is not impossible and plenty of business people just like you are making it work (see the case studies that follow). And there’s plenty of help available. A good process might look like the flow chart on page 14-15 of this magazine.
In terms of getting the process started, however, John’s advice is threefold.
First, stick to your knitting. Do what you do best, which is managing and growing the business. Second, once you have any inkling that you want to consider a succession strategy, get a good accountant or lawyer on board. That may mean someone who is not currently your accountant or lawyer. Last but not least, sign nothing until a lawyer has looked at the ‘big picture’ of what you have and what you want to achieve. So often we are asked to become involved when the deal is largely already done and the opportunity to maximize the revenue on the sale is already lost.
What buyers want
The buyer’s experience makes a sobering lesson for anyone selling their business. One buyer we spoke to, who did not want to be named, said it took much longer than he thought it would to find the right business. My background in investment banking and marketing has given me a fairly critical view of what’s good and what’s bad in a business. But I was amazed at how badly companies presented themselves even quite good ones.
What made the experience so difficult? The buyer lists five factors:
Brokers were a mixed bag: Some were less than helpful. The quality of information that many gave me was often poor and the business valuations were sometimes way off. He felt some brokers were simply representing the unrealistic views of their vendor-clients, rather than trying to add value by assessing the real worth of the business. Of course, not all brokers are equal. Many do an excellent job. But the lesson is: be watchful!
Quality information was hard to get: Often the owners were their own worst enemies. They wouldn’t provide the kind of information I wanted. A rule of thumb is that the more transparent a business, the more trustworthy it is. Hayes Knight’s Craig Fisher says a good succession process will bring any skeletons out of the closet and get all the business down on paper. Buyers won’t make decisions where there is low quality information to deal with. So ensure that your process makes everything as clear as day, says Fisher.
Sales collateral and business presentation were poor: Even the good companies let themselves down through bad presentation. Once the succession process is near completion, start investing in a decent marketing plan and well designed collateral. Employ a graphic design company to make it look flash. The buyer we spoke to says the best companies presented their information in a branded information pack. It was backed up by a formal and clear process for handling enquiries and sorting out the serious from the mere tyre kickers.
Price expectations out of whack: How many times does a real estate agent inflate a vendor’s expectations? Business people aren’t exempt from the same trip into unreality. Almost all the sellers I dealt with believed their businesses were worth more than anyone was prepared to pay. In one case, their accountant laughed at me but in fact I know that the business was sold at a lower price still.
The answer to flights of fancy is in a decent process. Your banker and your accountant have the tools to help you accurately estimate the value of your business. Do it early. You can always improve on it!
Expect to stay involved: Too many owners expected their involvement to cease after they heard the words ‘its a deal’. But that’s the just beginning. I can’t imagine any situation where the owner should not stay involved they have all the knowledge, all the relationships, and all history, says the buyer. That’s where it’s not at all like selling a house, says John Kirkwood of Hesketh Henry. You can’t just walk away from a business, and the buyer won’t let you even if you wanted to, says Kirkwood.
The most important lesson in all this and from this magazine is that selling the business should be one step in a long and fruitful process.
So many people that I see have it fixed in their mind that they want to sell their business. But for one thing selling may not be the best thing to do. And if it is the sale will not be the last step in the process, says Fisher. Succession is really about creating options. And there’s nothing so liberating as having choice.