2. 1
Over 270,000 mid-market businesses are
expected on the market in the next five years,
as the Baby Boomer and Builder generations
prepare their businesses for sale. However,
with a limited pool of buyers, competition
is expected to be fierce.
Introduction — About this Survey 2
Introduction — About William Buck 2
01 Tight Market for Baby Boomers Looking to Exit 3
02 Leaving a Legacy 4
03 The Time Conundrum 5
04 Redefining Retirement 6
05 Exit Smarts 8
06 Understanding the Tax Implications 11
07 Take Action: Are you Exit Ready? 12
CONTENTS
3. 2
ABOUT THIS SURVEY
Drawing on the observations of over 150 mid-market business
owners, the results of William Buck’s Exit Smart survey provide
a measure of exit readiness in the private sector.
Respondents have been categorised by generation based on the
following definitions:
— Builders: born pre 1945
— Baby Boomers: born from 1946 to 1964
— Generation X: born from 1965 to 1979
— Generation Y: born from 1980 to 1997
Data was collected between March and April 2015 via an online
survey.
ABOUT WILLIAM BUCK
Established in 1895, William Buck is a leading network of Chartered
Accountants and advisors, with offices across Australia and
New Zealand.
With a dedicated focus on the middle market, we help over 13,000
clients to reach their goals every year. Providing 360 degree support,
our team’s expertise spans a full range of services including
corporate advisory, business advisory, tax, audit & assurance,
wealth advisory and business recovery.
We‘re more than just advisors; we aspire to create a positive change
in the lives of our clients.
INTRODUCTION
Few business owners undertake sufficient
planning ahead of an exit. Considering all
the issues upfront could mean the difference
between a successful exit at maximum profit,
and a difficult exit where value is given away.
4. 3
Over 270,000 mid-market business are expected on the market in
the next five years, as the Baby Boomer and Builder generations
prepare their businesses for sale. However, with a limited pool of
buyers, competition is expected to be fierce.
THE MOVE TO MARKET
Three quarters of business owners surveyed intend to sell their
business over the next ten years, with 65% of these expecting to
exit in the next five years.
Applying these statistics to the current number of mid-market
businesses across Australia (those with between 3 and 200
employees), we could expect to see approximately 270,000
businesses on the market by 2020.
And expectations are high, a third of business owners are seeking
a sale price above their business’s current market value.
A LIMITED POOL OF BUYERS
With a rush of businesses on the market, vendors are expected to
outweigh purchasers.
Demographics play a major role. A trade sale is the most popular
exit option with a majority of survey respondents believing their
business will be bought by a competitor.
However, with 77% of business owners aged 51 and above,
there’s a likelihood that the most obvious purchasers may also be
considering their exit strategies.
This begs the question; where are the Generation X and Y
entrepreneurs? In the current financing environment banks and
other lenders require substantial collateral to secure a loan. This is
a luxury that many in the younger generations do not have.
The end result is a potential downward pressure on price;
unwelcome news for our business owners who have worked in their
business since inception.
01. TIGHT MARKET FOR BABY BOOMERS LOOKING TO EXIT
Number of mid-market businesses expected on the
market in next 5 years.
Percentage of business owners expected to exit
by 2020.
270,000
48%
BUSINESS OWNERS AGED 51 & OVER PLANNING AN EXIT COMPETITOR MOST LIKELY PURCHASER
COMPETITION FOR CAPITAL | COMPETITION FOR DEBT | COMPETITION FOR MANAGEMENT
77%
87%
5. 4
A large proportion (59%) of survey participants started their
business from scratch and a further 21% inherited their business
from a family member.
It’s little surprise that our business owners are keen to leave a
legacy. Almost half of business owners feel that it’s important for
the business to continue as a going concern after they’ve exited and
almost 25% would like to sell their business to current management
or a family member. Only 4% expect the business to die with them.
The desire to leave a legacy is at odds with many businesses’
current operating model. Over a third of business owners believe
that the business couldn’t operate in their absence.
Without a strong management team to run the business post-sale,
it is unlikely that a business will be sold as a going concern. Indeed,
anecdotally, only one in eight mid-market businesses will be sold as
a going concern.
A high dependence on the business owner is also suggestive of
a high level of personal goodwill attached to the owner, resulting in
a lower business value and potential difficulty finding an appropriate
buyer.
02. LEAVING A LEGACY
HOW DO YOU BECOME AN OWNER OF THE BUSINESS?*
ACQUIRED AN EXISTING BUSINESS
49% WOULD LIKE TO SEE THEIR
BUSINESS CONTINUE AS A GOING
CONCERN AFTER EXIT
25% WOULD LIKE TO SELL THEIR
BUSINESS TO CURRENT MANAGEMENT
OR A FAMILY MEMBER
1 IN 3 BUSINESSES DO NOT HAVE THE
MANAGEMENT CAPABILITY TO RUN THE
BUSINESS IN THE OWNERS’ ABSENCE
TOOK OVER AN EXISTING FAMILY BUSINESS STARTED BUSINESS FROM SCRATCH
21%
18%
59%
SELLING THE BUSINESS AS A GOING CONCERN
*2% acquired the business in another manner.
6. 5
When asked what would improve the value of their business, the
number one factor cited was more time to develop it.
Over 54% of respondents are, however, currently working over
40 hours a week in their businesses.
Having strong management team in the business does little to
alleviate this tension. Our survey results indicate that business
owners who believe their business can function in their absence,
actually work marginally more hours than those without a strong
management team.
This begs the question; is the business owner’s time being spent
in the right areas? With a capable management team in place, the
business owner’s time and energy ought to be focussed on the core
value drivers of the business.
03. THE TIME CONUNDRUM
HOURS WORKED PER WEEK BY BUSINESS OWNERS
Under 10 hours
10 – 20 hours
20 – 30 hours
30 – 40 hours
40 – 50 hours
Percentage of business owners that need more time
to develop their business.
38%
Builders Baby Boomers Generation X
7% 7% 8%
15%
21%
52%
4%
11%
18%
68%
7%
27%
20%
40%
Strong management team Absence of strong management team
6% 8%
13%
17%
4%
12% 13%
21%
54%55%
7. 6
04. REDEFINING RETIREMENT
With the majority (77%) of respondents being aged 50 and above,
retirement is a driving force behind the desire to exit. Yet, our
respondents’ definition of retirement is somewhat different to their
parents’.
Over two thirds of business owners aged 69 and above are happy
to continue working in the business post-sale. Taking a reduction
in hours and responsibility can provide a way to slowly ease into
the next stage of your life, as one respondent put it “working in my
business is a beautiful way to retire.”
This is consistent with our experience of business divestments
which indicates that a post-sale transition of between 6-18 months is
common.
Business owners may be able to keep working while drawing down
some of their superannuation benefits by making use of the Federal
Government’s Transition to Retirement pension scheme.
A further 27% of Builders expect to keep their business for another
5-10 years, and 10 years plus before exiting.
The prevalence of older Australians in leadership positions is
consistent with the latest study by McCrindle Research. Australians
aged 65 and over currently comprise just 3% of the total workforce,
but over 20% of all management roles and 21% of professional
positions.
It should come as little surprise that business owners are continuing
to work later in life. With a rapid increase in life expectancy over the
last 60 years, the demographic middle-age has been pushed back.
Today’s 65 year old is the equivalent of a 54 year old in 1945.
BUILDERS THAT INTEND TO CONTINUE
WORKING IN THEIR BUSINESS POST-SALE
65 IS THE NEW MIDDLE AGE: 1945 VERSUS 2015*
1945
30,000Number of 68 year olds
66Average life expectancy
54Middle age
2015
200,000Number of 68 year olds
81Average life expectancy
65Middle age
* McCrindle, “The Downaging Generation
66%
8. 7
AN UNCERTAIN FUTURE?
For some business owners the desire to keep working (in a full or
part time capacity) may not be a lifestyle choice.
Surprisingly, given the age profile of respondents, only 51% are
confident that they have an adequately funded retirement plan.
Thankfully, few business owners (just 25%) are dependent on their
business to fund their retirement. This is a positive, as it indicates
that they have accumulated assets outside of the business, however,
it does suggest that the underlying uncertainty around retirement
funding lies with their superannuation or other investments.
DO YOU BELIEVE THAT YOU HAVE AN
ADEQUATELY FUNDED RETIREMENT PLAN?
YES 51%
NO29%
UNSURE 20%
04. REDEFINING RETIREMENT
9. 8
Navigating the sales process and ensuring you realise maximum
value on sale can be complex; and business owners are relatively
inexperienced in this area.
Half of all respondents have never bought or sold a business, and
while 42% have been approached by a potential acquirer, they
have either chosen not to, or have been unable to complete the
transaction.
In light of this, 92% of owners intend to seek external advice on the
business sale. Previously business owners would typically assemble
a trio of advisors comprising their accountant, lawyer and bank
manager, it seems, however, that bank managers are falling out of
favour. Less than 1% of owners would now turn to them for advice.
While business owners are keen to seek advice from their
accountants (who have emerged as their preferred advisor), there is
a perception that professional advice extends only to the mechanics
of the sales process. Just a small percentage (12%) believe that
professional advice is a major contributor to improving business
value. Our experience is that, accountants skilled in business
divestments ensure a higher realisable value and increase the
probability of completion. Clients often comment that independent
advice was critical to the negotiation phase of the transaction.
FINDING A BUYER
A trade sale is the most popular exit option with 29% of respondents
believing their business will be bought by a competitor. However,
with a majority of business owners in Boomer and Builder
generations, there’s a likelihood that the most obvious purchasers
may also be considering their exit strategies rather than take on
additional risk through an acquisition.
Through our experience of working with thousands of mid-market
businesses, we’ve found that the majority of businesses are sold to a
purchaser that was unknown to the vendor at the commencement of
the process.
With a limited pool of purchasers, it is important to have a clear
understanding of your target buyers. This will allow you to position
your business as a relevant and attractive investment.
A full appraisal of your business and the current market can assist.
FLEXIBLE AND PRAGMATIC ATTITUDES TO SALE CONSIDERATION
Business owners have a flexible approach to sale consideration.
Sixty eight per cent of all respondents would consider taking shares,
deferred cash, or contingent cash based on performance. The most
popular consideration option is deferred cash paid out over time.
This is consistent with the large proportion of business owners
planning to retire or partially retire on exit; there appears limited
urgency to access funds to reinvest.
This flexibility extends to owners’ attitudes towards working in the
business post-sale. Eighty five per cent of business owners are
willing to continue working in the business; 35% of whom would stay
for up to 24 months.
The willingness of an owner to consider various consideration
options and flexible working arrangements can greatly improve the
probability of selling their business. It can alleviate the possible deal
impasse that often arises over “price.” The ultimate price paid will be
determined by future results which reflect any improvements that the
existing owners have implemented and which may not otherwise be
reflected in past results.
Who would you see advice from on
preparing your business for exit?
1%
Bank manager
70%
Accountant
7%
Lawyer
7%
Stockbroker
05. EXIT SMARTS
HAVE YOU EVER BOUGHT OR SOLD
A BUSINESS?
HAVE YOU BEEN APPROACHED BY A BUYER?
YES 49%
NO51%
YES 42%
NO58%
10. 9
FORMS OF CONSIDERATION ACCEPTED PERCENTAGE OF BUSINESS OWNERS WILLING TO CONTINUE
WORKING IN THE BUSINESS POST-SALE FOR:
0-6 MONTHS
24%
31%
30%
6-12 MONTHS
12-24 MONTHS
Shares in a public company 3%
A deferred cash portion sold over time 25%
A contingent cash portion based on performance post sale 2%
All of the above 38%
Cash only — even if it means receiving less 32%
With a limited pool of purchasers, it is important
to have a clear understanding of your target
buyers. This will allow you to position your
business as a relevant and attractive investment.
05. EXIT SMARTS
11. 10
05. EXIT SMARTS
Percentage of business owners would not be happy to
sell their business at its current sale price.
71%
DO YOU UNDERSTAND WHAT’S REQUIRED TO MAXIMISE BUSINESS VALUE?
EXTRACTING VALUE
In spite of the fact that almost half of all respondents plan to exit
their business in the next five years, few would be happy to sell their
business at its current market value.
Of those owners who have had their business valued, 70% stated
that the value was as expected and 11% received a valuation higher
than expected, yet only 28.5% would be content to sell their business
at this price. There’s a clear gap between owners’ expectations and
the current market value of their business.
Almost 50% of business owners believe they have a clear
understanding of what’s required to sell; this number increases to
62% when an owner has conducted a business valuation.
Building value within the business takes a structured approach. It
involves understanding your target purchasers, their objectives and
how they might value the business. An independent valuation is often
the first step.
At the core of a business valuation is an assessment of the likely
future returns that can be expected from the business and the risks
associated with achieving those returns. As a result, a valuation not
only estimates the existing value of the business but also highlights
those aspects of the business that may be improved in order to
increase its value.
Taking this approach allows you to identify where the business is
now, where it needs to be, and what is required to fill those gaps.
0%
Yes
No
Not sure
10% 20% 30% 40% 50% 60% 70% 80%
Have not conducted a business valuation
Have conducted a business valuation
12. 11
06. UNDERSTANDING THE TAX IMPLICATIONS
Three quarters of business owners do not know how
much tax they will pay on the sale of their business.
Surprisingly only 25% of respondents know how much tax they will
have to pay on the sale of their business. Given that the
after-tax consideration received is generally more important to
owner’s than the pre-tax price, the responses represent a critical
“hole” in an owner’s exit planning.
For businesses in the mid-market, the Small Business Capital Gains
Tax (CGT) concessions could provide an opportunity to reduce the
CGT on the sale of their business considerably; reducing the liability
to zero in some situations. Two thirds of business owners, however,
do not know if they qualify for the concessions.
Tax is also an important issue in family succession. Over 54% of
those seeking to pass the business onto family members would gift
it, or part gift it. For CGT purposes, the consideration paid for the
business (in the case of a gift this is usually zero) is ignored and the
market value of the business is used to determine the value for any
CGT payable. Obtaining a valuation at contract date allows for tax
matters to be appropriately addressed, this may result in accessing
the CGT small business concessions.
It is critical for business owners looking to exit in the next five years
to obtain comprehensive advice. Implementing the most effective
tax structure for your personal and business circumstances takes
time to avoid the possibility of negative tax consequences.
PERCENTAGE OF MID-MARKET BUSINESS
OWNERS WHO DO NOT KNOW IF THEY QUALIFY
FOR SMALL BUSINESS CGT CONCESSIONS
66%
13. 12
Yes No Maybe
FINANCIAL
Do you have quality financial and management reporting systems?
Are your cashflow and profit forecasts supportable and aligned with your business
strategy?
Do you have a plan to invest the proceeds of the sale?
TAX
Are you aware of the tax implications of the sale?
Do you have the corporate structure in place?
STRATEGIC
Have you developed a strategy with key growth milestones?
Are there growth opportunities in your market and industry?
Have you analysed the market and identified competitors and acquisition
opportunities?
EMPLOYEES
Can the management team operate the business in your absence?
Do you have an appropriately skilled and flexible workforce?
Have you considered a management incentive scheme?
OPERATIONAL
Is there a stong pipeline of work across a broad client base?
Have you documented and registered all intellectual property and trademarks?
Is your property plant and equiment well maintained?
LEGAL
Are your customer contracts and leases transferrable?
Do you have documented risk management and corporate governance policies?
Have you prepared ‘sale ready’ agreements?
ARE YOU READY TO EXIT?
While the vast majority of respondents are seeking to exit their
business, few are positioned to gain maximum value.
This is not uncommon, in our experience few business owners
undertake sufficient planning ahead of an exit. They only seek advice
when they are actually ready to sell, at which stage it is often too late
to implement the strategies required to maximise value.
We work with business owners as early as possible to ensure they
achieve optimal value on the sale of their business.
The checklist below outlines some of the fundamental issues to
consider when planning your exit strategy. If the answer is no or
maybe to any of the following questions we recommend that you
seek advice from your local William Buck advisor.
07. TAKE ACTION: ARE YOU EXIT READY?
14. 13
HOW WILLIAM BUCK CAN HELP
The decision to sell your business can be a very difficult
and emotional one, particularly when it represents the
culmination of a lifetime’s work.
Our advisors will support you throughout this transition, ensuring
you realise the maximum value for your business. With a team
of specialists from business advisory, corporate advisory and
tax, we provide complete end-to-end transaction support. Our
business sale process typically includes:
— Establishing your objectives
— Assessing the value of the business
— Restructuring the business reviewing its operations to
optimise value and maximise your after tax position.
— Identifying and approaching prospective buyers
— Sale negotiations
— Post-sale wealth management strategies
Taking a project management position, we can also co-ordinate
other advisors such as lawyers and technical experts.
research@williambuck.com
—
williambuck.com
CORPORATE ADVISORY DIRECTORS
NSW
Mark Calvetti
mark.calvetti@williambuck.com
Daniel Coote
daniel.coote@williambuck.com
VIC
Tony Hood
tony.hood@williambuck.com
Liz Smith
liz.smith@williambuck.com
QLD
John Feddema
john.feddema@williambuck.com
WA
Robin Judd
robin.judd@williambuck.com
Chris Brown
chris.brown@williambuck.com
SA
Grant Wilson
grant.wilson@williambuck.com
Adrian Chugg
adrian.chugg@williambuck.com
NZ
Martinus Naude
martinus.naude@wbcg.co.nz
