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The majority of businesses are exposing themselves to unnecessary risk by failing to plan their exit strategy, warns John Edwards, CEO of the Institute of Financial Accountants
John Edwards, CEO, Institute of Financial Accountants
The majority of businesses are exposing themselves to unnecessary risk by failing to plan their exit strategy, warns John Edwards, CEO of the Institute of Financial Accountants
With the average micro business worth £90,000 to £100,000, that’s money left behind through a lack of proper planning, if you fail to secure a sale.
In the UK, 25% of business owners fall into the 35 to 44 age bracket, 31% have owners in the 45 to 54 bracket, and 25% are in the 55 to 64 bracket. A further 7% are owned by people over the age of 65. This means that 32% of business owners are already at, or approaching retirement age within the decade, representing potentially thousands of businesses that have the potential to be sold.
What’s more, these statistics don’t account for the increasing number of people seeking early retirement, which according to a labour report by The Lords, has seen an additional 550,000 exit the workforce early in search of a different lifestyle since the start of the Covid-19 pandemic. Accounting for this upward trend could see as many as 63% of businesses with an owner-exit expected via retirement in the next 10 years.
So, if we’re all planning to retire, what next for those businesses? We would like to think that every business can realise the potential of the time and effort put in by their owners over the years, but the reality suggests otherwise.
Of those businesses available for sale, just 30% successfully sell each year, an indicator of the saleable quality of the businesses, rather than the number of buyers in the market.
For a business to be saleable, it needs to be able to operate without the owner or founder, and in the majority of cases, it cannot. People buy people, and a significant proportion of businesses struggle to then transition clients away from their original contact, leaving the business with unrealised potential at the point of sale.
As a result, buyers or successors struggle to value the acquisition, with concerns that clients will exit once the takeover is complete. As a result, they do not take the risk, and most owners – around 70% each year – are forced to close the business and strip the assets without ever finding a buyer. I think that’s a real shame, because it downgrades the hard work and effort these owners put in, leaves clients to find a new trusted adviser for their own business, and leaves owners without a financial boon for their retirement.
Forward planning
Planning is the single biggest factor for whether a business is saleable. The consensus from business surveys is that only around 10% of businesses have a formalised exit strategy that is ready to execute.
Of the remaining 90%, 30% have a semblance of a plan, but it is not formalised, and the remaining 60% have no strategy at all. While the strategy itself is valuable in supporting an unexpected sale through circumstance for example, most of the value comes from the steps that businesses take in preparing for a sale. These include:
• Planning and documenting practices: by being deliberate in your processes, striving for efficiency, and documenting your practices, you make it easier for a potential buyer to visualise what they are buying. They know that the business can run seamlessly during the takeover, which makes it easier to perceive value. It can also help ensure continuity of care for clients, which is pivotal in ensuring client retention during the inevitable turbulence from a sale.
• Adopting best practice: there are plenty of businesses that lack innovation and do what they have always done. A buyer or successor will expect any business to be adopting best practice and the latest technological advances to help demonstrate a business that is relevant and progressive. If you plan to run your business forever then you can do whatever you like, but the reality is you will exit at some point, and that means making your business a credible investment.
• Maximising the value: in exactly the same way that you advise your clients on how to grow their business, maximise profit, and maximise market attractiveness, you need to do the same for your own. It’s as simple as that.
While we all hope that exiting from our business will be in our control, there are plenty of reasons that it will not be. That is why planning and having contingencies is essential, and it can be helpful to assume that you need to exit in the imminent future.
Thinking about the type of buyer you need can help you to position the business for future sale, and it will also help to determine whether succession to an existing employee or family member is a viable option. Keeping an eye on the saleable value of your business can also support your future, helping you to understand and realise the financial prospect for your retirement.
What are the options?
There are three core options for business exit: succession to an employee or family member; sale to another provider; or business closure through a member’s voluntary liquidation.
Succession and sale both offer you the chance to reap the financial rewards of your efforts and provide a transfer and peace of mind for your clients, while closure wastes the time and knowledge you have invested and the reputation you have built.
Ultimately, the choice is yours, but developing a credible exit strategy seems a simple but effective course of action.
The IFA has a webinar on succession planning on 19 July. Please visit the website to register your interest and for more information.
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