Taking more time to pass the baton

Jim Tabak runs a company called Seasons, which helps people buy and sell businesses. Photo / Dean Purcell

Successful retirement poses some challenges. Going from "hero to zero" may not be as breezy as it sounds. Business owners need to ask themselves why they are selling before unloading the business completely.

Maybe they just need some downtime, rather than making a complete exit. Jim Tabak, who has over 20 years' experience as a business broker, has observed one recurring theme: business owners who sell outright can find themselves trapped in boredom very soon after.

"Some owners think the only way they can go sailing is to sell their business," he says. "What they are actually looking for is some sailing time."

Armed with a fat cheque, many a former business owner gets under their wife's skin after they have spent six months playing golf. "A high number of business sellers come back and say, 'I need something to do now'."

This has provided food for thought in Tabak's current business venture. Under the Seasons brand - reflecting the constant need for business to adapt and regenerate - Tabak is an evangelist for what he calls the "business transfer model", as opposed to the traditional business sale approach. Under the business transfer model, the seller does not offload 100 per cent of his or her company.

Instead, a transitional period is built into the deal whereby the seller maintains an interest in the business and stays on for a fixed period while passing the baton to the buyer.

This approach helps meet the needs of a businessperson who buys some time while deciding whether to opt for full retirement, partial retirement, or to retain part of the business.

It also helps the buyer, who gets the existing owner's expertise to ensure a smooth transfer of the operation.

This strategy offers several compelling advantages: the buyer gets some risks covered (by the owner retaining equity), the bank also reduces some of the risks it faces in financing the deal, and the seller can get a better valuation of the business, Tabak says.

An old hand in business broking, Tabak started Seasons in February and has done one major deal based on the transfer model. He is sole owner of Seasons but works with a partner, Tom Wilson, who brings to the table his expertise in structuring capital and finance.

There is definitely a place for the business transfer model among the more traditional means of selling a business, says Graham Turley, managing director, ANZ National Commercial.

He says while the traditional outright sale model will still have its place, succession and continuity are critical to sustaining and growing an existing business. In today's environment, this is a more realistic option to sell a business, he says. The knowledge a business owner has and the staggered exit provides a less risky lending proposition for banks, Turley adds.

ANZ National's survey - the Privately-Owned Business Barometer - highlights the fact that the baby boomers who own businesses are getting older. Some 62 per cent of business owners are over 50 years old and 23 per cent over 60 years of age.

Turley says wealth is certainly held by the older generation and that while many of the people who manage businesses are able to fund a buyout, "a lot of management don't have the capacity".

That is why Tabak says intergenerational transfer of wealth is going to become more difficult.

Generation Y business buyers - roughly speaking, those born from the beginning of the 1980s - are increasingly finding it difficult to meet the financing demands required of them, he says. "This is a group of people with enormous ability to grasp technology and ways to do business. One thing they don't have is sufficient equity."

The business transfer model provides a mechanism whereby the Generation Y buyers can ease themselves into the purchase over time, with the seller retaining partial equity.

"Buyers of businesses generally understand the value of this," Tabak says, adding, however, that some owners will still prefer the outright sale route.

Business buyers have traditionally used their assets - most likely properties - as security for loans. With property values having dropped so dramatically, financing has been harder to come by.

"The values of businesses have also dropped - one could argue businesses have been overvalued in the past due to the ease of financing," says Tabak, adding that current business values are more realistic.

As an example, a business transfer model can start with the seller retaining 50 per cent of the equity in the business, the bank lending 25 per cent and the buyer providing 25 per cent in equity.

The buyer then buys the rest of the business over three years.

Tabak says that, starting about three years ago, there has been an expectation that a huge pool of business owners - the baby boomers - would be taking their business to the market.

"The next 10 years is going to see an intergenerational change of wealth," he says. "These baby boomers are going to want to exit or retire."

With the global credit crunch, banks are highly focused on the ability of new business owners to keep their business sustainable through the uncertain times ahead.

Tabak says banks have been trimming cashflow lending, from 70 per cent previously to about 40-50 per cent at the moment.

Most business buyers need to be inducted into running the business they are buying, says Tabak.

In a business there are structures, processes, systems and know-how. There are staffing relationships, supplier and customer relationships to build and maintain.

Tabak cites the case of a farmer who bought into a medium-sized business. Within 18 months of taking over, the business failed.

"In my opinion, this would not have happened with the business transfer model. The leap was just too large not to involve any transition," Tabak says, adding that the buyer in this case lacked experience and knowledge of the staff, the customers and suppliers.