Brace yourself for the boomer business sell-down

Are we are on the verge of a massive business transition in New Zealand as baby boomers sell their companies to help fund their retirements? A recent ASB customer survey found that one in four business owners is planning to transition out of their business in the next five years. If even close to a quarter of New Zealand businesses are going to change hands between now and 2023, what will this mean for the small business marketplace?

  1. First, it means opportunity and choice for buyers. There won’t be just one small legal practice or local building company for sale, there will probably be several. Buyers will have the chance to compare and contrast businesses, as well as having more room to haggle. Traditional industry multipliers may fall as supply increases.
  2. Second, will banks need to rethink their lending? Currently banks love real estate, but they’re hamstrung in many ways by lending restrictions. Businesses? The banks are certainly interested, but it’s more like the old ‘cap in hand, please give me a loan, sir’ days of yore. I would like to see more lending to business because I believe it genuinely creates value in our economy, unlike increasing house prices.
  3. Third, business owners will need to be ready for picky buyers who want as much information as they can, who may need help with finance, and who may also need their hands held as they take over. In a competitive environment, you’ll need to make your business stand out from the crowd and spell out what makes it worth buying.

If you are one of the tens of thousands of small business owners who is planning to retire in the next five years, don’t be overconfident. When you do your retirement planning, it would be a mistake to have an inflated view of your company’s value and its saleability. Get your company valued by someone who knows what they’re doing – and I mean really valued, not just somebody saying ‘multiply your annual sales by three’ or some other vague number. Then you need to have a plan in place to step back from your business in order to realise that cash so you can spend it travelling through Asia or collecting art or simply paying for your everyday living expenses for the next 30-odd years.

Don’t leave your succession planning to take care of itself, because it most certainly will not.

What are business buyers looking for?

Business buyers in every industry want to look at your financials so they can clearly see:

  • How your business is making money.
  • What your business owns.
  • What you’re spending money on.
  • Exactly what you’re offering for sale.

Buyers want to know those things so they can work out the answers to these questions:

  • What is this business worth?
  • Will it keep making money after I buy it?
  • How much money is it likely to make in the future?
  • Should I buy it?

Okay, it’s a bit more complicated than that, but in essence those are the basics. But you’d be amazed at how many business owners don’t realise how much of a difference it can make when you present these financials properly.

Take your personal financial situation as an example. When you apply for a mortgage, your broker will tell you ways to make your position look stronger. You’d clear your hire purchase debt before applying and you would definitely make sure your recent pay rise was factored into the application. You’d try to demonstrate that you weren’t spending too much. You show the bank you’re a great bet to repay your loan every month. Any mortgage advisor will tell you that how you present your case can definitely make the difference between being approved and being declined for that loan.

It’s a similar approach to showing your business in a positive light. It’s not about lying or covering anything up, it’s just about presenting your business in a way that highlights its strengths and shows that it’s a great bet. And I’m here to tell you that the way I can present your business can make the difference between a buyer saying yes and a buyer saying no. It can also help you achieve a higher sale price for your business by providing up-to-date figures that show its full earning potential and showing that you’re spending sensibly and selling a really valuable asset.

One of the most important factors is making the financials clear and easy-to-understand, so they answer all the questions the buyer and their advisers have. When a business’s financials are put together in an impenetrable knot of jargon and confusing transactions, it’s enough to make any buyer throw up their hands and say, “Way too hard. Next contender, please.” Transparent financials make it easy for a buyer to see exactly what’s happening and allows them to concentrate on the story rather than spending all their time deciphering your crazy figures.

If you want the right buyer at the right price for your business, make sure you have the right set of financial data available to your potential buyer.

Build a business, buy a house

Young Aucklanders want to buy houses, and that’s a great goal for a rent-free retirement. New Zealanders in general view houses as a safe, reliable investment in their own future. But few young Kiwis buy businesses. They’re seen as risky, unreliable and potentially stressful – and although that’s a worst case scenario it can certainly happen.

House = good, safe investment. Business = not so good, risky investment.

However, I really think that we’re doing young Aucklanders a disservice by promoting this simplistic view of both the housing market and running a business.

A business is more risky than a house. But it also has the potential to make a lot more money. It can provide you with a healthy income, assets, job security, and the possibility of building a valuable saleable company. There’s not necessarily a cap on a business’s profits. And if you want to build up a deposit and buy a house, owning a business could be a great way to make that happen.

I have several millennial clients who are café owners or electricians, for example, and they have used their business income to help them buy a home. As your business grows and starts to make more money, provided you can prevent your style of living from escalating concomitantly, you can put aside your additional earnings to help grow your 20% deposit. Saving your extra income when you’re an employee can be more difficult. Once you’ve been building your company for several years and you can prove a reliable cashflow, a bank will probably feel reasonably comfortable that you can service a mortgage.

Banks simply don’t believe in business the way they believe in real estate. The ease of borrowing for houses is one of the contributing factors to high levels of housing unaffordability. Banks won’t always lend to a millennial to buy a thriving business, even if the bank would lend that person hundreds of thousands of dollars to buy even the most decrepit property. There are ways to work around this, which I’ve used with my clients on occasion. One option is a combination of bank and vendor financing, which can help an owner transfer ownership of their business to a fresh young face (often a very talented staff member). I’ve helped facilitate this in the past and it can be an excellent alternative to full bank funding.

If you can get past the hurdle of financing your way into the business, the business may be able to get you past the hurdle of financing your way onto the housing ladder.

Geoff in the latest issue of NZ Retail magazine

Last month I spoke to NZ Retail magazine about succession planning for their cover story: 'Don't leave it too long'. It's a great feature by Jai Breitnauer with insights into selling your business before it passes its sell-by date, and making your business sale-ready. 

You can read my full comments below:

Geoff Hamilton from SME Financial in Auckland calls this having a ‘sale-ready’ business, and says one of the most common factors that devalues a business is too much dependency on the owner.

“If the owner is so important to the business they’re limited to being able to sell to someone like themselves. They’re not going to be able to sell to an investor who wants to buy a business that will operate itself and produce a passive income.” Hamilton says a good business will have systems and processes in place so the business can be run by the staff with the owner absent. This will ultimately increase the value of the business to a prospective buyer, or make it easier to hand the business on to children who don’t necessarily have the right skills.

Succession planning early can also assist business structure and growth - something Hamilton believes is hugely overlooked.

“People get so involved in the everyday, every decision, micro managing, they haven’t put their head above ground to see how they could organise things so they don’t have to be there all the time,” says Hamilton. “I ask business owners, if they freed up 20 hours a week, how much more new business could they generate? Usually SME owners say, ‘We could double the turnover!’ so why don’t they get someone in to give them that 20 hours? Because it means they have to go without things.”

Hamilton notes that businesses with good cashflow often invest in the trappings of success, like a new car or the latest mobile phone, when they should really be investing in training and developing staff, and on infrastructure.

You wouldn't sell your house like that, would you?

Selling a business has a lot in common with selling a house or a car. When you want to sell your house, you need to get it in order. You don’t just put up the For Sale sign without tidying up a bit. You don’t do that because the buyer will turn up and start adding up the discounts: $15,000 to fix the hole in the driveway, $6,000 for the new carpet, $5,000 to replace the fences.

That’s exactly what happens when you start negotiating the price for a business that isn’t sale-ready. The price starts out high, then the buyer begins to see all the places he or she is going to need to spend money. Is it working capital that will need to be cashflowed? Is it new staff members who will need to be hired and trained? Is it plant or other equipment that needs updating?

When it comes to finding a price for your business, a buyer will tend to start high and negotiate you down. There are cases where a buyer puts in an offer and ends up paying a lot more, but it’s rare for small local operations. Like real estate, the first offer is often the best. Ideally you’ll have a strong bargaining position in order to prevent yourself from being pushed too low. A strong bargaining position means eliminating as many of those cash-traps as possible.

Now, at the risk of sounding exceedingly boring, the best way to achieve this is to have your business ready to sell. Maintenance is usually cheaper and more efficient than waiting until a problem starts having a big impact on your company’s value. Just like fixing that hole in the driveway would have been cheaper when it was just a crack, it’s far better to maintain your plant and equipment, keep your staff happy and sort out your cashflow issues right now (more on that in a later blog).

Even if you don’t intend to sell right now, your business should be reasonably ready for a buyer to inspect. If it isn’t, think why not. Anything that’s liable to be a problem for a potential buyer will also cause issues for you as the operator of your business. Think about how you’re allocating your time and your money, and do what you can to get your business sale ready this year.

Working On Your Business, Not Just In Your Business

The number one reason the average Kiwi business isn’t ready to sell? Because its owners are so busy working in the business that they’re spending almost no time working on it. Just last week some new clients admitted that they had worked with a business strategist but the poor strategist gave up after six months because they kept cancelling the meetings.

Why? Well, it wasn’t because they had the strategy all figured out and running smoothly, that’s for sure. They cancelled the meeting because they were busy dealing with customers and effectively filling orders. I guess it’s better than ignoring customers and failing to fill orders, but in general it’s pretty short-term thinking. It’s the equivalent of drinking a coffee every time you feel hungry and never stopping to cook dinner.

There needs to be a way for you to keep your customers happy, fill orders, and still have some time to work on your business. In some ways, it seems that the harder it is for you to find time to strategise, the more essential it is for your company.

How does strategic planning and structuring get overlooked when it’s so important? I believe there are three main reasons:

  1. It’s not urgent. There are always more urgent jobs that need to be done. Strategic planning keeps being sifted to the bottom of your to-do list by more pressing matters.
  2. It’s not easy. Dealing with a routine, but urgent, problem usually requires you only to use your day-to-day skills at your normal level of effort. Strategic planning is full of difficult questions that aren’t easy to answer and the solutions can be both complex and expensive in the short term, even if they’re a no-brainer in the long term.
  3. It’s not a quick win. Most jobs on your to-do list can be crossed off in a very satisfying way once completed. Strategic planning and implementation, on the other hand, is never finished and can take years to pay off. It doesn’t give you any instant gratification.

Strategic planning falls into the same category as other regular activities that aren’t urgent, easy or quick – like healthy eating, saving for retirement and exercising. You’ll notice that these are the types of long-term strategies that pay dividends in the future or gradually over time. They’re not necessarily fun, but they’re good for us. They keep us healthy, and secure, in the future.

That’s what strategic planning does for your business: keeps it healthy and secure into the future. That’s what makes it valuable and saleable. So don’t let it get sifted down your to-do list every month – make the time and you’ll thank yourself.

Are you building a business or simply self-employed?

Are you building a successful business or merely self-employed? There’s a world of difference between the two: one is a long-term money-making freedom-creating asset. The other is essentially still a job. It might be a great job, and it might be both profitable and flexible – it might be everything you want – but it’s not a readily saleable business.

New Zealand is full of entrepreneurs, but thousands own businesses that couldn’t run without them for more than a few days. If you are one of those Kiwi business owners, unfortunately your company isn’t worth as much as you might think. You could be growing a somewhat valuable client database, or even a slightly more valuable portfolio of assets – that could be enough. But you’re not growing a desirable, saleable business.

I’ve spent years – decades, in fact – creating a business that still runs when I’m not there. This has an array of benefits that go beyond saleability. One of the biggest bonuses? I can go on holiday with my wife without having to telecommute from the beach. Surprisingly few small business owners in New Zealand actually manage to do this. Feel like you can’t take a holiday from your business without causing chaos? You may fall into this category.

I don’t like being the bearer of bad news, but it’s best you find out now, so you have time to remedy this problem if you’d like to (not everyone wants to, and that’s fine too). Think about what you would want to see if you were buying a business. It’s very much like what you want to see if you’re planning on buying a parcel of shares. You’re looking for good management, strong and reliable profits, and a sustainable underlying business model. You’re not looking for one person who’s really good at what they do.

So what can you do to make your company run independently? There’s a lot of strategic thinking involved, and often some short-term pain. You need to have systems in place to help your team follow the correct processes without requiring your input. You need to show your customers the processes work without you there. If you’re in a service industry, you may need to specialise in one specific area and start creating packages to sell. Manage your cashflow so customers pay up front and your forecasting becomes predictable. (For a great case study, read Built to Sell, despite the fact that the author paints the accountant in rather a bad light!)

Making the right decisions now puts your company on track to be more valuable, more saleable, and a serious asset in your portfolio. If that’s what you’re trying to achieve, don’t keep on working away in a job where you just happen to be your own boss.

Need some help? Give me a call.

 

BUSINESS SALES: Helping the bank say 'Yes'

When you’re selling your business, your buyer will often need finance. If your buyer is in their 30s or 40s, it’s quite likely that they already have a massive mortgage. Banks like owner-occupied and will lend you a much larger proportion of a house’s value than you can get on almost every other asset – plus they’ll charge you lower interest rates. New Zealanders in their most productive years are steered firmly towards buying their own houses, which is probably a great idea in principle, but leaves them with little to invest in even a highly profitable business.

If your heavily-mortgaged buyer then wants to buy your business, the bank’s default answer will be ‘no’. That’s because saying no requires no risk, almost no paperwork, and very little effort. This is a shame, because there are private businesses available for sale that are superbly profitable and would deliver higher returns than any rental, with total returns even higher than the equity growth in the average homes.

With money being pumped into real estate as a priority, it makes it difficult for younger New Zealanders to invest in business. This problem is here to stay and has the potential to hamper business growth – which is, after all, what really drives economic growth and prosperity for everyone.

I’ve recently been helping a client find ways to finance a staff member who wishes to purchase the business. By working with the bank, the buyer and the vendor, together we’ve pulled together a way to make it happen – matching a happy vendor with a highly skilled staff member who will do a fantastic job.

This has been a challenge, but I believe it’s worth putting in the time and effort to show the bank that it will work. The default answer from the bank will always be ‘no’ if you don’t take the time to really build your case. It’s the easiest, least risky option for the lender. You need to make it easy for the bank to see the ‘yes’. That means lots of number crunching, lots of forecasting and a compelling story. The right business, the right deal and the right lender can be the ultimate win-win-win story – more jobs, more money and the bank makes a profit. You can help the bank see the ‘yes’, but don’t expect it to be quick or easy.

What’s your small business worth?

I get this question often, but unfortunately there’s no simple answer. Let me break down some of the aspects of your business you need to think about when considering its value:

1. Does your business have fantastic potential?

Trick question: buyers are far more interested in a track record of strong profits, or solid high-value contracts, than in your sales pitch about ‘Uber for landscape gardening’ (and no, I don’t know how that would work). Obviously your business will be more valuable if buyers can see a strong path towards growth, but pie-in-the-sky businesses are available very cheaply on TradeMe – ideas are much easier than execution when it comes to building a valuable business.

2. How much profit does your business generate each year?

The company’s revenue and assets are the best guide to its value. If your business generated a profit of $50,000 last year and you can show that’s likely to continue for at least another two years, you could value the business at $100,000. You’ll also need to add in the value of any assets, like machinery or vehicles. But there are several caveats to this rough estimate.

What's business worth.jpg

3. Are you the absolute lynchpin of your business?

This is common in small New Zealand businesses – the owner has built up superb loyalty from his or her customers but this loyalty won’t necessarily extend to the new owner. The result is a business where the only value is in the assets. Similarly, quite a few small business owners are not being paid a market salary by their own companies; they just draw out any profits as cashflow allows. This type of business isn’t likely to be valuable to a new owner unless that cashflow is demonstrably excellent and reliable.

4. Is your business in an industry that’s easy to value?

Companies in the professional services sphere are easier to value: law and accountancy firms, property management companies and other similar companies have a book of fees or a rent roll or some other easily measured way of seeing projected cashflow. Other businesses are much harder to put a price on – think online businesses, new businesses, consultancy services and so on. They’re worth exactly what someone is prepared to pay for them. Finding that someone can be the tricky part.

5. How many buyers are interested in your business?

Unfortunately, there are more businesses for sale than buyers. Many New Zealanders love the idea of starting their own businesses and would rather take a chance on a new venture than spend money on an existing one (even when this may be both costlier and riskier in the long term).

Whatever type of business you have, you need to be able to show it to a prospective buyer in a positive light to get the maximum price. This means having all your accounts in order, demonstrating your revenue and track record, and showing where the value lies. Your accountant should be able to help you with all these documents – or give me a call and I’ll help you put together a full presentation pack to help you maximise the value of your business. 

How can you step back from your business? Part 1: family

When you’ve been running your own business for many years, at some point you’ll want to step back. You may just need a break from the daily grind and frustrations of the workplace. Perhaps you’re looking for a new challenge. It could be time to travel the world and enjoy the spoils of your labour. Or possibly a health issue needs your attention, whether its yours or someone else’s.

There are so many reasons you might want to step back from your company – and there are plenty of options, too. The obvious exit strategy is to sell the business through a business broker or similar. But that’s far from your only choice. You might like to consider other possibilities. This is a trio of ideas for stepping back from your business, starting with:

#1: Passing your business to the next generation

When you sell your business outright to a fresh face, it’s a relatively clean break. In contrast, passing on your business to your children or other relatives is more of a gradual process. It requires tact, generosity and negotiation on all sides.

I’ve helped business owners work through this transition before – it’s never without its ups and downs. That includes taking into account the company’s financial position and the finances of all the people involved. Younger generations may be highly indebted and take time to be able to shoulder all the financial responsibilities of the company. Hasty decisions can be costly.

Step back 1 family.jpg

But it’s not merely financial. As the owner, it’s easy to insist on doing everything the way that works for you. However, at some point you’ll need to let the new owner make his or her own mistakes and discover new innovations. You can’t be forever offering unsolicited advice at every family dinner – nor should the new business owner be constantly calling you for help when you’re out sailing.

Having a plan to follow, and taking the time to do thorough training, helps the handover go as smoothly as it can. Get it right, and you can build a legacy company with considerable heritage and experience. You can go sailing and your kids can continue building the business you started.

However you want to transition your business, it starts with planning and good advice. Give me a call if you want to talk.

 

How can you step back from your business? Part 2: staff

There are so many reasons you might want to step back from your company – and there are plenty of options, too. The obvious exit strategy is to sell the business through a business broker or similar. But that’s far from your only choice. You might like to consider other possibilities.

This is the second in my series of options for stepping back from your business, following on from #1: Passing your business to the next generationwhich you can also find in my succession planning blog.

#2: Transitioning your business to a staff member

 Do you have a senior member of staff who is keen to take over your business? This can be a fantastic way to sell to someone who really understands the industry, the customers and your aims for the growth of the business. Done right, it can be a relatively straightforward sale with a smooth transition. It can also ease you out of the business gradually.

When I’ve worked on these transitions in the past, I’ve helped put together all the paperwork for an independent valuation of the business. The employee will rarely have the money to match the price immediately, but usually we’re able to work on a profit payout system over several months or years, buying the business on a kind of payment plan.

You may not get absolutely top dollar when you sell to a staff member (or to the next generation, for that matter) but you’re less likely to see the business quickly run into the ground or sold off. The brand you built may remain strong, or grow even stronger – and you may still retain an interest in the company if that works for both parties.

 However you want to transition your business, it starts with planning and good advice. Give me a call if you want to talk. 

How can you step back from your business? Part 3: Winding up

There are so many reasons you might want to step back from your company – and there are plenty of options, too. The obvious exit strategy is to sell the business through a business broker or similar. But that’s far from your only choice. You might like to consider other possibilities.

This is the third in my series of options for stepping back from your business:

 Closing down the business

Not every business is saleable as a going concern. One-person owner-operator businesses are notoriously hard to value and sell. For some business owners it will be easier and less stressful to sell the assets individually, and possibly the customer database, to other owner-operators or small businesses in the same field.

This can be a great way to get a cash injection to set you up for retirement or the next adventure. One of the most important factors is to maximise this cash by ensuring you meet all your tax obligations without paying more than you need to. In the past I’ve worked with lots of business owners in this position and the right advice can put thousands, or even hundreds of thousands, of extra dollars into your pocket.

Aside from the financial aspect, you have probably spent many years building strong customer relationships. If you can pass your customers onto someone else in the industry whose work you trust, you can boost that person’s business while doing your best to see your customers get the level of service they’re accustomed to.

However you want to transition your business, it starts with planning and good advice. Give me a call if you want to talk.

Looking for more options for selling your business? Read earlier blogs in this series at my succession planning blog.

Succession planning: stepping back

I’ve spent a lot of time thinking about succession planning, both as an adviser to my clients and as a business owner. New Zealand’s economy is underpinned by small and medium-sized businesses: 

  •  97%, over 473,000, of Kiwi businesses have fewer than 20 employees and 69% of Kiwi businesses, over 338,000, have zero employees.
  • 43% of self-employed people are over the age of 40, which includes over 40,000 people aged 60 to 65 and over 23,000 people aged over 65 – the biggest wave of Baby Boomers.

This means there are tens of thousands of New Zealand business owners who will need to think about succession planning, but there’s surprisingly little out there to help them. If you’re starting a business, you can access business mentoring, grants and other encouragement relatively cheaply or even for free. This is despite the fact that the failure rate for start-ups is high: some estimates put it has high as 80% over the first 18 months.

How does this compare to businesses where the owner/manager is trying to step aside? Surely if these companies manage to successfully move to new ownership, their success rate is likely to be much higher? Yet the amount of help available for those trying to find a way to step back from their business is minimal. It’s certainly far less exciting to buy or move into an existing business than to start a new one from scratch, but I would argue that the existing business is far more likely to succeed because it already has a track record of profitability.

It’s true that many of New Zealand’s smallest one-person businesses simply can’t be sold; they depend so heavily on the personality of the owner/manager and the specific service provided.

For those businesses with employees, however, there needs to be some kind of succession planning. Selling a business can take months, or years, and the right type of buyer can be hard to find. Once you have found a buyer, the transition period can be bumpy.

I think there’s a real gap in the market when it comes to succession planning in New Zealand, so I’m going to be aiming to provide some case studies and ideas about it in this blog over the next 12 months. I’ve had a substantial amount of experience over the past 30 years in getting businesses ‘sale ready’, finding buyers for businesses, and transferring ownership (including, I should add, to family members, which is an extremely tricky process and requires expert handling). If you know someone struggling with the challenge of stepping back from a business, pass on my name – let’s get this conversation started.

 By Geoff Hamilton, CA