Less than half of SMEs have an exit strategy

Regardless of the number of years New Zealand SME owners have been their own boss, the majority don’t have a clear strategy for exiting their business and little more than one third have established its value. 

With succession planning at the core of building a saleable business, these MYOB research results beg the question: do our local operators love their work so much they plan to never leave or are they behind on planning for the future?

The study found only 39% have an exit strategy in place and 36% have established the business’s value. Surprisingly, start-ups (less than two years old) were more likely to have an exit strategy than establishing businesses (two to five years), at 36% compared to 27%. Unsurprisingly, the proportion was higher amongst maturing (five to 10 years) and established businesses (more than 10 years), at 41% and 44%.

MYOB New Zealand national manager Enterprise Division, Allison Fairkettle, says planning for an exit is essential, even if you intend to hold the business long term. 

“Planning for an exit helps you make quality decisions about your business, identifying areas you could improve to promote stronger results and setting up systems that make it more valuable,” she says. “Thinking about how you’d like to sell up or pass it on is one of the best ways to plan to make it sustainably successful.

“It also gives you opportunities to find ways to make yourself dispensable. This is important for not only establishing lasting value in the business, it’s a good practice if you want a better work/life balance.”

The age of the business owner also plays a significant role in the level of exit planning. Those aged 65 plus were most likely to have an exit strategy (59%), followed by Baby Boomers at 39% and Generation X at just 31%. Only 4% of Generation Y business owners surveyed have an exit strategy in place.

 

Business owners in Otago/Southland are the best future planners. 52% of business owners in the region have a plan in place for exiting their businesses, with Canterbury and the Waikato at 41%, followed by Auckland at 40%. Surprisingly, Wellington business owners are the least likely to have an exit strategy, at just 27%.

“It’s interesting to see considerable regional variation in the data. This could point to the influence of a range of localised factors, like age of population and the prevalence of more established businesses in the regions – or perhaps a greater representation of start-up businesses in the Capital,” says Fairkettle.

According to the survey, retail business owners were the most likely to have an exit plan (49%) closely followed by the agriculture, forestry and fishing sector (45%) and business professionals and property (43%).

“Succession planning has been part of the fabric of the rural sector, quite literally for generations. And while those in agribusiness were more likely than most to have an exit strategy the research shows the majority don’t have a formal plan in place,” says Fairkettle. “Regardless, it’s great to see that so many in that sector and almost half of the owners in the retail sector – an area that has experienced considerable volatility over the recovery – are making long term plans.” 

In construction and trades, only 31% had a plan, as had only 28% of manufacturing and wholesale businesses.

“Business in the trades and in manufacturing can be quite cyclical, so we encourage these business owners to get some advice on what they can do to derive the full value of their business over the long term.”

 

With the 36% of respondents who had ascertained the value of their business, the most common way they determined the value was by comparative market value (44%). Another 30% based their valuation on average turnover and 14% relied on ‘gut feel’.

Only 29% had obtained independent valuation from an accountant or specialist, which Fairkettle says is the best option. 

“Getting an independent valuation is extremely important when you’re considering selling your business or looking to raise finance or bring in investors. There are many factors that make up the value of the business – from brand and reputation to the level of input from the owner. These are unlikely to be addressed accurately if you rely on your gut feel or even an average turnover,” she says. 

“As with any major business decision, we strongly encourage consultation with your business advisor. You could be doing yourself a big favour.”