Exit Stage Right

It’s been described as a tsunami – the wave of baby boomer business owners (aged 52 to 70) who are planning to exit their businesses once and for all. 

Many already had plans in place when the Global Financial Crisis (GFC) struck in 2008, and were forced to put them on hold while their business rode out the downturn. Now, eight years later, they can hear the clock ticking even louder. Many have already sacrificed precious retirement years.

An Australian Hayes Knight report says 50 percent of business owners are relying on their business sale proceeds to assist in retirement. New Zealand is likely no different.

The big questions being asked are, who will buy all these businesses? And how will this all play out?

Adam Davy, head of business advisory for BDO New Zealand, calls himself a baby boomer business-owner in transition. He recently stepped down as MD of BDO Wellington to mentor his successor.

“What’s likely to happen is that many business owners will end up running their business into the ground,” he says. “This doesn’t have to happen, but the longer they leave to address it, the less chance of a favourable outcome, and the business will simply shut up shop. 

“There are plenty of young people willing and able to learn, but it requires you to coach and mentor them.” 

Davy says the problem with owners who’ve been married to their businesses for many years is that they don’t want to let go. “It’s been their life and while they say they want to sell, they put all sorts of obstacles in the way, until it’s too late. 

“They love their work, but they need to understand that to leave a legacy they must transition properly.”

It may be hard but he believes baby boomers must learn to let go earlier. By that he means run the business as a business; one that isn’t totally reliant on the ‘indispensable’ founding owner. 

“Business owners should put in a robust management structure – and governance structure if they’re big enough – so the business will run regardless. 

“This gives the owner a choice of selling or living off the dividends: and gives any buyer confidence that the business will endure past the owner’s retirement.

The problem, says Davy, is that owners expect too much money. Businesses are normally sold on enterprise value, which will require sustainable normalised earnings (i.e. what can be earned once the seller has gone). If too much goodwill rests with the owner, then the business’s value is likely to be less than they expect.

“If you’ve set it up right you will have a choice on when to sell,” he says. “That being said, you may not get too many chances, so being fit for business or fit for sale is vital. 

“You have to assume the business won’t sell, even if you have an offer. So don’t take your eye off the ball and keep running the business as if nothing’s changed.”

Working out a price

Business coach Zac de Silva agrees that you can never start thinking too early about selling your business. “Have your business set up as if it was going to be sold even if you are still several years away from selling. So when you come to sell, you’ll be in a lot more powerful position to exit – and arguably for a good price.”

Of course, the biggest stumbling block when selling a business is agreeing on price. De Silva says most people know the usual multiplier for valuing a business (how you value it, plus a bit more for some assets) is around 2.0 to 3.0 times EBIT or EBITDA (earnings before interest, tax, depreciation and amortisation). But a lot depends on your business, the inherent risks, and the industry. 

“Make sure you deduct a fair working wage for a manager,” he says. “A potential buyer will ‘deduct’ off your reported profit a fair working wage for themselves, assuming they’ll manage the business.” 

Once you work out the price you want for your business (your gut feel, what you would be happy to retire with, and the value) do the maths re the aforementioned multiples and consider what the value of your basic assets like plant and equipment are worth, he says. Add them together and you’ll have a (very) approximate value of your business. 

“Some people try not to pay extra for the assets, but likely they have some sort of value.” Compare this to your wanted value when you exit and you’ll potentially have a ‘value gap’ – the difference between what you want and what your business is approximately worth today. Then the fun begins!

“Work out how to grow your profitability so that your business is worth what you want it to be worth to make your retirement a happy one.”

De Silva says the sooner you start delegating key work to others (under your mentorship), the more saleable your business will be. 

“This assumes you have capable people who can deliver your identified strategies to close your value gap.”

Being able to just work part-time in your business can actually be a good selling point too, he says. It proves that you’re not the glue holding everything together.

Prepping for sale

There is no shortage of advice available on preparing your business for sale. Christchurch-based nzbizbuysell, a ‘Business for Sale’ website headed by Richard O’Brien, has a lot of useful information (www.nzbizbuysell.co.nz/nz-business/selling) and is a good place to start.

His advice, too, is to go to market ‘sooner’ rather than ‘later’. 

“It’s all about supply and demand, and there will be more people looking to sell in the coming years. Unfortunately the buyers (often 40 to 45 year olds with money) make up a much smaller group.”

In preparing a business for sale, O’Brien says there are three key things to consider: 

• The business has a future (blue-sky),
• It has strong cashflow (it makes money), and
• It has robust systems and processes (the vehicle works).

O’Brien knows a lot of baby boomer business owners in Canterbury and has a good feel for the macro picture. Feedback reveals its now often hard to find buyers with the appropriate skills for a business – especially when it comes to specialised trades (think upholstery).

He says some business owners choose to ‘hang in there’ as a lifestyle choice. “They might be doing less hours, but they still enjoy it and like the cashflow.”

In other cases, age has caught up with them, and there’s no option but to exit. 

“Recently I spoke to the owner of a successful construction business who now wants out as it has all become ‘too-hard’. He’s in his late 60s and the enjoyment has gone.”

Another factor potentially impacting on the business sales scene is concern over the tighter 60 percent LVR lending rules – which can put off buyers.

Zac de Silva points out many things that can hold back the value of your business, and it can take years to address them. Things like being too reliant on one or two big customers, or too reliant on one particular team member with too much IP in his/her head. 

You may also be operating in an industry in a state of change; one that’s being challenged by disruption.

“Consider what hard questions a potential purchaser would ask too,” suggests de Silva. “The sooner you are aware of them, the sooner you can start addressing them and subsequently have a plausible answer for each question.

“Have a proactive think about any related businesses who might consider acquiring your business given the synergies. Start looking at these around two years before you want to sell. It takes that long to build relationships and cement
the deal.”

Of course, there is also the option for baby boomers to retain some shares in their business for future dividend flow (do a partial sell down and maintain a good income flow during retirement). Or you can sell the remainder of the business to someone who’ll assume more responsibility over time, allowing you to step back sooner than later. 

“In these cases, obviously you need to have an agreed pricing mechanism as to how you will value the business,” says de Silva. “And agree on who exits, and how, if it all turns to custard.” 

Retiring with dignity likely means getting the price you think your business is worth.

“The moral of the story is: baby boomers, start thinking today about how you can get the most for your business, and start doing what you need to do in order to give yourself the best chance of selling successfully.”