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The 5 most expensive mistakes you can make when planning to sell your business

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Many business owners have no exit strategy for their business. Many have given no thought to when they want to retire and have no plans in place to sell their business at the appropriate time. And not ...

Many business owners have no exit strategy for their business. Many have given no thought to when they want to retire and have no plans in place to sell their business at the appropriate time. And not every business will be handed down to the children of the owners.
This presentation details the mistakes most people make and gives some ideas how to rectify them. If you want to discuss the content further please email bob.francis@sgba.co.uk

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  • Good morning/afternoon/evening to everyone who has taken some time out to join us on this one of a series of webinars we are presenting on common business problems. Firstly who are we! MY name is Bob Francis and I will be delivering this webinar along with my colleague Geof Steward who is as they say at the controls! WE are independent business advisers who have set up and run large and small businesses and have a wealth of experience We are with a group of regional business advisors called DGBA. The DGBA is affiliated to UKBA and we are hosting this webinar to call attention to the problems of exiting or succession planning by SMEs. This webinar is based on £ 100’s of 1000s worth of research carried out over the last few years by various bodies and provided to you as free information and education on this subject. We are not selling anything and will not be getting you to commit to anything so sit back enjoy and feel free to participate as you feel inclined.
  • Today we are talking about succession and exit planning (SEP) This is an area where in general most business owners do nothing until it is almost too late typically just before the owner wants to retire. Then there is a range of problems that arise and will cost you money. WE are going to talk about the 5 most expensive mistakes you can make in transferring your business whether this be for retirement purposes or just for succession.
  • During this webinar we are going to cover the following issues: Is your business saleable. Is it in the right condition to attract a buyer do you have all the processes and procedures in place? If it is in a saleable condition who is your buyer? Would you like to keep the business going after you leave or doesn’t it matter. And what about how they run the business and manage your staff and customers. Is your business ready to be sold? Is it maximising its potential, are there skeletons in the closet which might put a potential buyer off How do you go about selling or transferring your business. What is best for you? Finally we will offer you 5 tips to ensure that whatever route you go down you maximise the benefits of the transfer to you.
  • So lets now look at some numbers to put this issue into perspective. According to SME statistics provided by BERR (Successor to DTI) there are now approx 4.5M business in the UK Of these 3.2 M are one person armies shown as no employees on this chart and 1.3M have between 1-249 employees (The accepted definition of SME) Most of these businesses are owned by baby boomers (those born between 1946 and 1964)
  • Based on the state pension age of 65 years, baby boomers will start retiring from 2010. (Of course some will retire earlier than this ) Pensioners are the fastest growing segment of the community As you can see from this chart the ‘working’ population will stagnate during the period of maximum baby boomer retirement but the pensioner population will grow by 5-6M. Indeed there are now more people over 65 than under 16 . Not only will there be a burden on those paying for our sate pension but there will be many fewer potential buyers for our businesses during this time. This will be at a time when many business owners will be looking to transfer their businesses.
  • It is estimated that the ownership of about 70% of SME businesses will be transferred during the next 10years Translated into numbers this means that around 1.5 million businesses will be transferred. Coupled to this the peak company disposal period will coincide with the decline in potential business buyers. This then will be not be a sellers market.
  • So how will this impact disposals. How will this affect you when you try to sell your business. The first result of this is that you might not get what you think your business is worth. Prices will fall in a buyers market. If your business is not in good condition or perhaps even if you are in an industry that appears to be less attractive to a younger buyer then you might not be able to sell your business at all. Many more businesses will liquidate instead of being sold. And all the time costs are increasing reducing the payout to you.
  • What plans do you have for retirement. Perhaps a spot of fishing
  • Or you may want to spend time improving your handicap
  • What about travelling …. This is a shot of the beach at Pt Macquarie in Australia
  • Or maybe you want to spend more time with your family. For a successful and fulfilling retirement you need two ingredients. One is some idea of how you will occupy your time and the other is sufficient money to achieve your goals.
  • We are now all living longer than our parents or their parents. The average life expectancy is now 80 years for men and 85 for women. By the time the last baby boomers retire this is predicted to be about 5 years longer. Therefore assuming a retirement age of 65 you will have to have sufficient income to fund yourself and your aspirations for at least 20years. And the costs of living as we get older are increasing especially the cost of retirement and care homes.
  • Will you be able to afford it? Another study shows that about 67% of us have no idea or only a vague idea of how much our pension will be and how that translates into a monthly payment. Most of us have pensions based on stock market performance and we have seen in the last few years how volatile that can be.
  • The same study also shows that half of potential retirees will not have enough to live on for a comfortable life. In addition a sizeable number, approximately 2/3, will be dependent totally on the state. So can you even retire when you want to? Or will you have to work on to earn enough to live. At a time when the value of businesses will decline you may not be able to maximise your retirement funds. Just as an aside and leaving out capital growth to achieve a pension of around £25000 per annum you will need a ‘pot’ of about half a million pounds assuming 3% inflation Do you have that value in your business?
  • Some other startling figures: 80% of opa transfers fail altogether most are just closed with no benefit going to the owner 20% of the others also fail This makes a staggering 1M businesses that will not be sold! If you remember back to earlier in the presentation we indicated that the number of business to transfer in the next 10 years was about 1.5 million. Therefore only 500000 will actually be transferred or sold. Will you be one of the 1M that do not?
  • One of the main reasons for failure is lack of adequate planning in sufficient time before the owner retires. Of course there are many other factors including the fact that some are lifestyle businesses where the owner is the business. When he retires the business retires with him. Our experience is that you should start planning at least 3 years in advance in order to maximise the benefit to you the owner, get the business into state where it is an attractive proposition for someone else to take over and take advice on all the tax planning that may be necessary.
  • So now let us look at the traditional transfer methods typically used. The most common is to close the business and if it has any assets to sell them off. If yours is a knowledge based business then normally there are no assets to sell. Then there is the sale to staff member or members or to a family member. Some sell to a competitor or even a supplier. And finally there is selling to a financial investor (MBO, MBI, etc) We will now deal with the pros and cons of each method
  • This is the most ‘popular’ and I use the word advisedly, method of exiting a business. I said I use the word advisedly because this is often the last resort for some one who perhaps has tried some if not all of the other methods. The outcomes are little or no residual value in the business. By the time you pay off your suppliers, pay the VAT and Inland Revenue and any other debts there is almost nothing left. You may have some equipment to sell but in all likelihood this will be quite old and therefore of little intrinsic value. In addition if you have any employees you will have to make them redundant with all that entails with costs and indeed emotional costs if you have long serving employees. Customers do become friends and is is another outcome of just closing the business. They may have come to rely on you and now it will be as if you are letting them down. After many years of toiling to build a business when you liquidate there is nothing left, no legacy, nothing to show that you were there.
  • The next most popular is selling to staff or a family member. Family companies rarely last beyond the second generation. They may not have the commitment nor the interest to continue the business. If you are passing the business to a family member will the transaction be carried out at arms length or will you sell the business substantially below the market value thus reducing its value to you. Selling to an employee or group of employees is fraught with problems can they afford to buy it. Have they got the credit rating to raise funds to buy you out? Are they as entrepreneurial as you with sufficient abilities to keep the business going. Long term employees by their very nature of being employees tend not to be good business owners. No matter which route, family or employees, will they want you to have a role after the sale even though you might want one.
  • A competitor will not value your business as you do. Often they will not see the value of your business in its own right but the market effect of taking you out of the game and how that will improve their sales and profits. Suppliers see increased profits as they get the end user margin instead of you. Your customers bought from you because they got good service from your company. They liked doing business with you. Will that be the same with one of your competitors at the helm? As with family and employees the buyers may not want to keep you on after the sale. Finally redundancies will play a big part in this scenario. Most managers and supervisors will go as they already have these but also they may take the opportunity to downsize your whole operation which will leave an unfortunate legacy.
  • These are the typical Management Buy in or Out. These people will look for a quick profit typically within 3 years. To make it worthwhile they need double digit profits in this time and therefore will not value the business as highly as you in the initial transaction. They will pare costs to the bone and may even asset strip to achieve their objectives. There is no loyalty to customers or staff in this situation.
  • So in summary Generally these methods provide a poor payout; you have little involvement in the process; you will be unable to influence who runs the company and there will be no protection for your staff. This is not the way to maximise the value of selling your business.
  • These are the three typical routes to get advice on selling a business. All have strengths and weaknesses.
  • Most Bank managers have never run a business. They have often spent all their careers at the bank and while in normal circumstance they will help it is doubtful what they can provide in terms of getting a business ready for sale and the sales process itself.
  • Similarly most accountants have no expertise in getting a business ready for sale – they have little knowledge of sales and marketing and general business development. They can of course help with the due diligence that will need to be undertaken.
  • Business transfer or sales agents are being increasingly used to sell businesses. Many of them sign you up on a contract for which you pay on a monthly basis for the duration. The downside is they do not guarantee to sell your business and you still have to pay them whether they succeed or not. Often the contracts are lengthy and can be a considerable cost.
  • So far during this seminar we have leaned the 5 most expensive mistakes: No enough preplanning to maximise value Underestimating the value of the business by liquidating rather than engaging in the sales process No matter which way the sale proceeds the danger that you will not generate enough income for retirement. In most cases you have little or no control over the process and this will lead to issues of drift as you wait for the new owners to complete the process. Ultimately you may end up for the quickest easiest solution not necessarily the best for you.
  • What can you do about all these issues and still maximise the benefits. PLAN Improve the business by strengthening cash flow, reduce your costs, increase sales and strengthening balance sheet. This all takes time and cannot be done quickly. Get independent advice. This can be in addition to your normal advisors If you are planning to sell to staff or family members sound them out now and if necessary get them involved now.
  • Now here comes the commercial break. We have developed a 6 point plan that we feel overcomes most if not all of the issues we have highlighted. Preparing the business for sale includes a range of financial and business development activities. Our associates have experience in all these areas and we work with the business owners to prepare the business for sale.
  • Through our resources we will locate a suitable buyer. This will typically be a younger person who wants to make this business a long term proposition. We will take soundings and make measurements of his or her abilities including personality profiling. This will be discussed with you prior to further approaches to the target person.
  • Some of the most important ingredients in developing and growing businesses is the ability to not only manage the business but also to provide leadership. We assist the new owner in developing these skills through training programmes, personal development and mentoring.
  • We also help to develop a fair value for the business that both parties agree to. Payment for the business is usually a combination of cash and earn outs over a number of years. We will help in this process. As part of this we will also work with other advisors particularly legal and financial to create the agreement and have it agreed by all parties.
  • You have built up your knowledge of the business customers and markets over numbers of years. This knowledge needs to be transferred to the new owner to provide maximum benefit for the company as a whole. We will help to identify knowledge gaps and work with you to plan the best approach to transferring this knowledge.
  • Finally once the transfer of the business has taken place we will remain with the business to help the new owner develop the business further to increase sales and margins and to ensure that costs do not get out of control.
  • Geof and I would like to thank you for attending this seminar. Happy to answer any questions you may have now and for those who are shy our contact details are on the screen. We would also be grateful if you could return the simple questionnaire which we will be sending you later.

The 5 most expensive mistakes you can make when planning to sell your business Presentation Transcript

  • 1.
    • SGBA
    • … practical advice that works from the independent experts
  • 2. Introduction Geof Steward & Bob Francis
  • 3. “ The 5 Most Expensive Mistakes You Can Make When Selling Your Business”
  • 4. Areas Covered
    • Can you sell your business?
    • Who is your buyer?
    • How to make your business attractive?
    • Looking for and evaluating choices
    • 5 tips to protect your sale
  • 5. Huge Numbers of Businesses
    • 4.5M SMEs
    • 3.2 Million one person armies
    • 1.3 Million with up to 249 employees
    Source: BERR Small Business Service SME Statistics 1994 to 2006
  • 6. 50’s & 60’s Population Boom Leads to Business Selling Glut
    • By 2010 baby boomers start retiring
    • In 2006 there were more pensioners than children
    • By 2029 there will be 5M more BB pensioners
    Source: Office of National Statistics – Pension Trends 2005
  • 7. It’s A Buyers Market
    • Around 30% will transfer ownership in next 10 years
    • That means up to 1.5 Million businesses will be transferred !
    • There will be fewer ‘younger’ entrepreneurs as buyers
  • 8. What Impact on Sales?
    • Prices will fall
    • Less attractive businesses will not sell
    • More liquidations
    • Costs continue to increase
  • 9. You may have a retirement plan in mind
  • 10. You may have a retirement plan in mind
  • 11. You may have a retirement plan in mind
  • 12. You may have a retirement plan in mind
  • 13. Average Life Span
    • NOW: men 80 years, women 85 years
    • By 2031: men 85 and women 90
    • You will need to fund yourself for 20+years
    Source: Age Concern Ageing Population Key Facts and Statistics 2007
  • 14. Will you be able to afford it? Approx 67% either have no idea or only know vaguely how much their pension will be Source: Office of National Statistics – Pension Trends 2005
  • 15. Can you even Retire? Nearly half of all potential retirees think they would not have enough for a comfortable life Source: Office of National Statistics – Pension Trends 2005
  • 16.
    • 80% of all one person business transfers fail
    • 20% of all transfers of business with more than one employee fails
    • Will yours be one of the staggering 1M businesses that fail to transfer
    Will you be able to sell at all? Source: DTI SBS Report Passing the Baton 2004
  • 17. The main reasons for failure
    • Lack of adequate planning in plenty of time
    • At least 3 years in advance
  • 18. Traditional Transfer Methods
    • Close the business – sell the assets
    • Sell to staff or family member
    • Sell to competitor or supplier
    • Sell to financial investor
  • 19. Closing the business
    • No or little residual value
    • Redundancies
    • Letting down friends
    • Tax issues?
    • No legacy
  • 20. Selling to staff or family member
    • Is the family member interested?
    • Can you maximise value?
    • Can they afford it?
    • Are they as entrepreneurial as you?
    • Your role after the sale?
  • 21. Sell to competitor/supplier
    • Do they see value or are they just taking you out of the game?
    • Will they offer the best value to your customers?
    • Will they keep you on to help in the transition stage?
    • Redundancies (especially at management and supervisory level)
  • 22. Sell to financial investor
    • MBO, MBI etc.
    • Lower valuation than yours
    • No loyalty to staff or customers
    • In for quick returns
    • Asset stripping
  • 23. Summary
    • Poor payout
    • Little or no involvement in process
    • No choice who runs company
    • No protection for employees
    All of which costs YOU money
  • 24. Where to go for advice?
    • Bank Manager
    • Accountant
    • Business transfer agents
  • 25. Bank Managers
    • Many have never run an SME business
    • Useful for information on loans and funding for the purchaser(?)
  • 26. Accountants
    • No expertise in getting a business in a position to be sold.
    • Useful for helping to put together, in conjunction with others, detailed figures for potential buyers
  • 27. Business Transfer Agents
    • No guarantees they will sell your business
    • You pay whether they succeed or not
    • Lengthy contracts
    • You have no say
  • 28. So the 5 most expensive mistakes are
    • Lack of adequate planning
    • Underestimating value of the business
    • Not enough income generated for retirement
    • Lack of control of the process
    • Settling for quick/easy solution
  • 29. What Can You Do To Protect Your Business Value?
    • Plan ahead- at least 3 years
    • Maximise value by:
      • Improving Cash Flow
      • Reduce costs
      • Increase Sales
      • Strengthen balance sheet
    • Get independent advice
    • Sound out staff/family
  • 30. Our 6 Point Succession & Exit Programme
    • Prepare business for sale
  • 31. Our 6 Point Succession & Exit Programme
    • Prepare business for sale
    • Locate suitable buyer
  • 32. Our 6 Point Succession & Exit Programme
    • Prepare business for sale
    • Locate suitable buyer
    • Help develop future owner’s leadership & management skills
  • 33. Our 6 Point Succession & Exit Programme
    • Prepare business for sale
    • Locate suitable buyer
    • Help develop future owner’s leadership & management skills
    • Determine fair value for business
  • 34. Our 6 Point Succession & Exit Programme
    • Prepare business for sale
    • Locate suitable buyer
    • Help develop future owner’s leadership & management skills
    • Determine fair value for business
    • Plan knowledge transfer
  • 35. Our 6 Point Succession & Exit Programme
    • Prepare business for sale
    • Locate suitable buyer
    • Help develop future owner’s leadership & management skills
    • Determine fair value for business
    • Plan knowledge transfer
    • Assist new owner to increase sales & margins
  • 36. Thank you for your time! Any Questions?
    • Bob Francis & Geofrey Steward
    • SGBA
    • Tel:0845 4562394
    • Email: [email_address]