Given every business owner will exit the business eventually, an exit strategy is essential to avoid unnecessary costs and complexity. Creating an exit plan mitigates the risk faced by business owners if they had to leave the business due to illness or death and, with the right advice, can structure the business to make it easier to sell, pass on, or wind up without incurring undue costs or taxes, according to RSM Australia.
Peter Saccasan, national head of business advisory, RSM Australia, said “An exit strategy can include succession to family members as well as selling the business, selling shares in the business, or winding the business up altogether. This year’s thinkBIG survey found that just 36 per cent of respondents had an exit plan in place, compared with 46 per cent in 2016. This may indicate a general lack of understanding about the value of planning.
“Despite the low number of business owners with an exit plan, 66 per cent of respondents have a contingency plan in place in case they’re unable to run the business, with 61 per cent having told their business partner about this plan and 57 per cent having told their life partner. 17 per cent of respondents have kept the contingency plan to themselves, creating a lack of understanding for family members and dependents if they become incapacitated.”
RSM Australia has identified six key steps leaders can take to prepare their business for an exit:
1. Create a clear plan
Business owners need to create a plan, and the earlier they do this, the more successful the exit is likely to be. It should account for the organisation’s legal structure, funding arrangements, and whether the current owner will continue in the business, as well as how existing employees will be provided for.
2. Attract buyers
If selling the business, owners should do everything in their power to make it attractive, from keeping accurate records to being able to articulate what makes the business successful now and what will drive growth into the future. If necessary, owners should invest cautiously in improvements that may add exponential value to the business.
3. Understand the current market environment
The current market environment may not be favourable to a sale, or there may be mitigating factors that complicate the exit. For example, the business may rely on favourable terms from a supplier based on a personal relationship. If the owner leaves and that personal relationship disappears, the benefits may no longer be available.
4. Minimise tax
There will be tax implications for business owners regardless of whether they sell the business outright, give it as a gift, establish a family trust, or remain an investor or partner. Business owners should seek professional advice to avoid a large tax burden when exiting the business.
5. Value the business
thinkBIG 2017 found that nearly three-quarters of respondents believe their business has increased in value this year, despite only 29 per cent of respondents completing a recent business valuation. Knowing what the business is actually worth is important when negotiating a sale price. Valuing the business regularly lets owners build a picture of trends in the marketplace, which they can potentially leverage to time their exit and get a better price for the business.
6. Communicate plans early
When business owners fall ill or pass away without an exit plan, the business can fall into disarray or need to be wound up. This can create unnecessary distress for family members and dependents who must step in, often without a clear idea of what the owner wanted or where the business is headed.
Exit plans should be regularly updated to reflect changes in the business’s circumstances, with all key stakeholders aware of the exit plan. Discussing exit plans is essential to avoid complexity.
Peter Saccasan said, “Regardless of when a business owner plans to exit the business, whether that’s in the next few years or decades from now, it’s never too early to seek advice on an exit strategy. Structuring the business correctly now can yield dividends in the future, maximising the value of the organisation.”