While small- to medium-sized businesses make up a large and thriving part of New Zealand’s economy, statistics indicate that the majority of SMEs are missing a vital part of business strategy: an exit plan. Research such as that conducted by the MYOB Business Monitor finds that less than 40% of small- to medium-sized businesses have an exit strategy in place, and only 1/3 have an estimate of their entity’s value. There is no doubt that the day-to-day operations of running a business can be so consuming they leave owners with little time to consider and plan for their long-term future. Often it is not until retirement appears on the horizon that owners begin to seriously consider their exit options – and unfortunately this is often too late to achieve their goals or at least fully realise the business’ exit potential.
An exit strategy is a critical part of a well-designed business plan. Even within the most successful of small businesses, the absence of an exit strategy can result in it being unsaleable or unable to be handed over when the time comes. A high proportion of businesses listed for sale do not actually sell for a variety of reasons and result in the owners packing up and closing the doors. This is a heart-breaking outcome from what may have been many years of hard work and dedication.
Experts advise that it is never too early to consider and implement an exit strategy. Despite the fact you may literally be decades away from considering retirement, it is not too soon to plan for both your personal future and that of your business. Beginning an exit strategy early will allow you to maximise the business’ strengths and address weaknesses so it is in an optimal position for sale. Additionally, it is important to remember that circumstances constantly change, and a sudden event such as an illness or accident may mean your exit strategy needs to come into play much sooner than anticipated.
Just as every business is unique, personal exit goals also differ and may include selling the business to retire, selling the business to begin a new venture or succession to a family member.
Identifying your long term goals will allow you to critically analyse and address areas within the firm such as business structure, growth and development strategies, staffing and investment. Key areas to consider include:
- Business systems, which should be well-documented, well-developed and robust.
- Staffing – reducing dependency on key staff, particularly you. Put controls in place to facilitate the business running efficiently in your absence.
- Cash flow, including healthy credit management systems such as reducing debtors older than 60 days.
- Reliable financial records showing a strong and consistent financial performance. You could consider having financial records audited for several years leading up to a sale to add an additional measure of confidence and credibility.
- Critically assess areas of surplus spending in an effort to minimise the cost structure and improve operating surpluses (think reducing spending on discretionary items).
- Analyse inventory management (if applicable) to ensure it is accurate and address old and slow-moving inventory.
- Identify surplus assets belonging to the business and dispose of any non-essential items.
Consulting with a professional advisor regarding exit strategies can provide business owners with a number of benefits. Experienced professionals critically and objectively analyse businesses in relation to achieving an owner’s end goals. They work with owners to develop a detailed plan to make the business sustainably successful and build real core value. An independent valuation will assist this process by providing a beginning benchmark and earmarking key areas for improvement.
Most SME owners put immeasurable time, effort and resources into building up and running their businesses. It is vital to also put time, effort and resources into how to exit those businesses in a way that successfully achieves their end goals, protecting their investment and their future.
UHY Haines Norton Director Kerry Tizard provides expert advice on exit strategies and succession planning, and develops independent business valuations. He can be contacted on (09) 839-0300 or email email@example.com.