In how many years do you plan to exit your business?
Overall, 89.1% of respondents indicated an intention to sell their business, either to a third party buyer or (surprisingly) to another family member – refer further below to the responses in respect of:“Who do you consider the most likely buyer of your business?”
A significant number of respondents (46%) plan to exit their business within five years, with a further 24% expecting to exit their business in five to 10 years. This profile is consistent with the high proportion of respondents being from the WWII or baby boomer generation. In 10 years’ time the WWII and baby boomer generation business owners will all be aged between 58 and 83 years of age.
Significantly, applying these statistics to the total number of operating businesses in Australia would result in the owners/operators of up to 1.4 million businesses planning to exit their business over the next 10 years. Whilst a number of these may be sole proprietor businesses that will not be sold, the likelihood is that a significant number of businesses will be up “for sale” over the next 10 years. Opportunistically, this may coincide with the release of significant funds needing to be invested as a result of low M&A activity during the recent global financial crisis (GFC) affected years.
Eleven per cent of respondents stated that they did not plan to exit their business. The overwhelming reason for this was that they saw the business remaining within their family and did not regard this as an exit. Interestingly, a similar percentage did regard the transfer of the business to a family member as constituting an exit.
Has the GFC caused you to delay your exit from the business?
A significant majority (74%) did not regard the GFC as having a delaying effect on their plans to exit the business. Determining the reasons for this response is speculative but may include that the respondents believe the global and Australian economies will have recovered from the impact of the GFC by the time of their planned exit.
Is it important to see your business continue as a going concern after you exit?
Given the personal investment that owners make in their business, it is not surprising that 62% of respondents regarded the continuity of the business as a going concern after their exit as important. A further 17% of respondents were undecided as to the importance of this issue. Twenty-one per cent of respondents did not regard the business continuing as a going concern after their exit as being important.
Who would you seek advice from on preparing your business for exit?
Given that a majority of respondents had not previously purchased or sold a business, it would be expected that a high percentage of owners would seek external advice to assist them in preparing their business for a sale or other exit transaction. In most cases there existed a clear appreciation that advice would be sought from a number of advisors.
The majority of respondents (54.6%) would consult an accountant when preparing to exit their business. Legal advice would be sought by 17.3% of respondents, followed by business brokers (11.1%), bank manager (1.8%) and other (8%). Just over 7% of respondents said that they would not seek external advice.
The “other” sources of advice that owners would consult included business consultants, mentors, other owners who had exited their businesses and financial advisers.
The strong preference for seeking advice from an accountant would appear to be based on a combination of factors including:
- the accountant’s familiarity with the commercial and financial operations of the business; and
- the fact that financial, valuation and taxation issues are likely to be at the heart of assessing the feasibility of exiting the business and that accountants tend to be perceived as being well placed to assist in all these areas.
By contrast, legal advice tends to be regarded as more important in the latter stages of entering into and completing a transaction rather than in the initial stages of preparing to exit the business.
Who do you consider the most likely buyer of your business?
The largest proportion of respondents (39.7%) viewed competitors as the most likely buyer of their business. This was followed by family members (12.8%), management (7.1%), customers (4.5%), private equity firms (3.8%) suppliers (1.3%) and other (14.1%). A relatively high 16.7% of respondents were unsure of who would be the most likely buyer of their business.
The view that a competitor would be the most likely buyer of their business may reflect the trend towards industry consolidation that has been seen in many sectors of the Australian economy. In these sectors, growth in market share within the industry has been as a strong driver of business acquisitions.
The profile of the likely buyer can have significant implications for a number of aspects of a business sale, such as the amount of attention that needs to be invested in explaining aspects of the business and the industry in which it operates. More importantly, the profile of the likely buyer can significantly impact on the valuation and pricing strategy that would be applied in selling the business.
A competitor is often interested in growing market share and is likely to be able to derive synergy benefits from an acquisition. The value of these benefits and the extent to which they form part of the price at which the business is sold is likely to result in a higher return to the current owner, when compared to the sale of the business as a stand-alone going concern.
The issue of a sale to a family member was explored further in another survey question – refer section 4 . Business succession planning within families is often not as easy as it appears, something which the maxim regarding the third generation family business owner’s role in diminishing the value of the family business anecdotally supports.
Further indicators that family business succession may become more difficult include the fact that there have generally been fewer children born into more recent generations than in past generations. Accordingly, the availability of suitable successors may be limited. This is likely to be further complicated by the number of family breakdowns, the increased incidence of ex-nuptial births and the increase in “blended families”. If family succession issue are as significant as some suggest, the number of business owners looking for exits outside the family can be expected to increase significantly.
The relatively low rating of management as likely buyers may indicate that, whilst existing owners may have been successful in ensuring that there is a management team that can look after the business in their absence, the management team is either not aspirational enough, or talented enough, to be considered a potential buyer of most businesses.
Whatever the cause, business owners may be under-nurturing a valuable group of potential buyers of their business. Generally, the nurturing of management as a potential acquirer of a business is a function of (i) the right management and (ii) the gradual transition of management from custodians to stakeholders through appropriate incentive plans. Whilst this nurturing process can take a considerable time to implement, the benefit of having management as a potential buyer of a business on exit can be substantial.