Is your Business Going to Fund Your Retirement?
What is the sale price of the business you require?
When your business is your major source of income and wealth, growing and realising your business value is a key outcome of effective succession planning. In simple terms, you want to get the most money for your business.
Recent research indicates there are certain issues that could potentially impact the value of your business. These issues include:
- Owners complacent about their need for succession planning
- Owners fail to compare the benefits when choosing their exit options
- Sale prices are usually below owner's expectations
- A shortfall in business value exists pre-retirement
- Generation Y don't aspire to be business owners
- Increases in house prices will restrict successor funding
Why has this not been an issue before?
When today's business owners started out in business they had low entry costs and little competition and owners were able to fund business growth through increases in their house prices. This is not the case today, as business owners face different circumstances including; high acquisition costs, increased competition and high barriers to entry. Many successors are also heavily mortgaged due to home ownership aspirations, and funding opportunities are limited as banks are not willing to lend solely against the business.
In summary:
- There will be more businesses for sale, which may result in lower prices
- There will be fewer qualified buyers
- Buyers will be selective with many businesses to choose from
When supply exceeds demand, you need to plan your sale so that your business is sale ready. Part of planning for sale is optimising business value by concentrating on the following key value drivers:
- Not being proprietor reliant
- Loyal clients
- Innovative and different
- Benchmark performance
- Good systems
- Loyal and committed staff
- Succession planning
Optimising your business value allows you to choose your retirement lifestyle. In optimising your business value, you need to know what your business value needs to be at retirement.
Do you know what your business value gap is?
Business value gap refers to the difference between what your business is worth today and what it needs to be worth at retirement. A simple business value gap calculation can be made by following these 3 steps:
- What is your current business value?
- What does your business value need to be so you can afford to retire?
- What is the difference?
A more detailed business value gap calculation can also allow you to calculate 'profit needed at retirement' or 'number or years to retirement'. Please see the 'Business Financial Solutions' section of our website for more information (www.sgapl.com.au).
Once you determine your business value gap and your number of years to retirement, you need to have a plan in place to achieve your desired sale price. The steps involved in achieving your desired sale price are:
- Optimising your business value - which allows you to choose your retirement lifestyle
- Ensuring a future buyer - a popular option is staff investment which not only provides buyer certainty but also staff commitment. This also allows for continued control with optimum lifestyle benefits.
- Selling on your terms - by ensuring your business is ready for sale and all information is in order.
Where do I start?
Succession planning is a strategic process that allows you to smoothly transition your business. It involves the transfer of ownership and/or management of your business. Skeggs Goldstien Associates located in Norwest Business Park is a wealth management practice specialising in growth, succession and transition planning for small to medium businesses.
Who should plan for succession?
- Owners relying on their business sale to fund retirement
- Owners whose business is the major source of income and wealth
- Businesses with a number of key individuals who are reliant on the business
By planning for succession you are protecting the future of your business. The best time to start succession planning is when you buy your business. Smart businesses plan years in advance to transition their business.
To discuss your individual business and to find out more about developing a sound succession plan, contact Skeggs Goldstien to make an appointment.
by Jonathan Reynolds, Financial Planner - Skeggs Goldstien AssociatesGWP Magazine Issue #28, Jan-Feb 2010
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