Small Business: Exit strategy trends

James Scollay, general manager for SME solutions for MYOB.

This week, a look into how small to medium-sized New Zealand firms planned to exit their operations.

James Scollay is general manager for SME solutions for MYOB.

What are some of the trends you're seeing from your research in terms of how SME owners are planning for exit?

In our most recent MYOB Business Monitor research on exit strategies, less than half of local SMEs reported having an exit strategy in place. The key factors that seemed to influence whether a business owner has considered an exit strategy were their age and the sector they were working in.

Not surprisingly, the closer a business owner is to retirement age, the more likely they are to have a strategy, and owners in the retail, hospitality, agricultural, professional or property services sectors were also more likely to be planning for exit.

In our March 2015 research, we also asked business owners about their dreams for the future of their business. Fourteen per cent told us they plan to sell their business to fund their retirement, seven per cent want to sell the business to do something else, and eight per cent thought it would be great to build their business up and have someone run it while they spent most of the year on holiday.

But I think for business owners to reach these kinds of goals they need to be considering their exit strategy earlier. As part of an overall business plan, understanding what you want over the long term helps answer some crucial questions around business structure, growth and development strategies, employment and investment.

Succession is another form of exit. What are some trends you're seeing in that regard?

Traditionally, succession played a big part in exit planning for business owners, but many local SME operators are now reporting it's harder to get their children interested in taking over the family firm. The trends are reflected in our research - just 12 per cent are reporting they plan to leave their business to their children. Interestingly, the difference across the industries is quite marked, with 16 per cent of business owners in the professional and property sector planning for family succession, but just three per cent of construction and trades industry operators are planning for that.

In the rural industry, family succession has long been part of the environment, but even here we're seeing the majority of business owners aren't planning to leave their business to their family; just over a quarter of business owners in the agricultural, forestry and fishing industry plan to pass their business down the generations, while 18 per cent want to sell their operation to fund their retirement.

Why should business owners have an exit strategy?

Planning for an exit is essential, even if you intend to hold the business long term. I think it's good practice, even from the earliest planning stages of a business, to focus on your end game, and scenario plan the steps you'll need to take to get there.

Planning for an exit helps you make quality decisions about your business, identifying areas you could improve to get stronger results and setting up systems that make it more efficient. Thinking about how you'd like to sell up or pass your business on is one of the best ways to plan to make it sustainably successful and build real underlying value.

It also gives you opportunities to find ways to make yourself dispensable - doing things like identifying staff who are capable of managing and developing the business, even if you're no longer involved. It also helps you avoid the 'key person' trap of holding all the business knowledge in your head or having responsibility for maintaining all the vital relationships. By creating systems and processes - especially around any intellectual property - you're creating assets of value for a prospective buyer. It also helps if you want a better work/life balance.

Giving yourself a timeframe - a five, ten or even 30-year strategy - helps you measure progress, keep up momentum and balance current investment against future returns. If your business is a key part of how you plan to fund your retirement, it's really important you start planning early to keep on track. I'd also recommend getting your expectations 'sanity checked' by an independent professional, to avoid disappointment close to the point you plan to retire.

COMING UP: Social enterprises balance doing business with doing good. What are some small Kiwi companies doing in this space? If you've got a story to tell, drop me a note.

For owners who don't currently have an exit strategy, where's a good place to start?

Getting good advice is a good way to start. Your accountant or business advisor, or a business mentor, could be helpful. But do some thinking in advance about what you'd like to do in the long-term and what those plans - whether it's another business, retirement or a year-round holiday - might cost. You should also be prepared to set some challenging goals to realistically achieve the value you're after, especially if you're planning to fund your retirement.

Getting an independent valuation is also really important when you're considering selling your business or looking to raise finance or bring in investors. There are lots of factors that make up the value of a business, which are unlikely to be addressed accurately if you're relying on your gut feel or even an average turnover.