Many businesses, especially family businesses, invest so much time and intellectual capital in operational matters that they neglect to develop a succession plan and establish an exit strategy for the owners. This makes the business very vulnerable if a sudden sale or exit becomes necessary through unforeseen circumstances. Many otherwise viable businesses have collapsed or disappeared after stubborn owners failed to prepare for their inevitable departure.
In developing an exit strategy, the business structure, the timing of the exit and the financial expectations of the owners must be considered as these may affect decisions about which approach to take. The two most common options are the staged sale and the outright sale, with the staged sale the one most favoured by family businesses.
Staged Sale the Slow and Steady Approach
Often equity based, the staged sale suits family businesses because it allows people already in the business the opportunity to buy shares in small parcels over time. Issues of funding need to be considered so this transition can take place without causing financial hardship. Affinity Accounting Plus can provide advice for family businesses in this situation.
There are two advantages to this approach for the exiting owners of a growing business. Even though they hold fewer shares with the transfer of each parcel, they are not dramatically reducing their income while the remaining shares continue to increase in value. Secondly, they are able to make a structured and orderly exit out of the business.
This approach is most successful when the right person to take over has already been identified. The challenge in a family business is that not everyone may agree on the chosen successor, as emotion and family rivalries rise to the surface. In this situation, the best outcome to preserve family harmony is often an outright sale to a third party.
Outright Sale may Produce Tax Efficiencies
Often the buyer who will get the most benefit from an outright sale is a direct competitor. Such a buyout can quickly increase market share, create product synergies and expand the customer base for which they will pay a premium. On the other hand, some qualified tax accountants may suggest selling the business for less than originally planned to secure better after-sale tax outcomes for the vendors.
Setting aside the time and energy for an outright sale while still running the business may seem difficult, but the effort will be rewarded with a much better financial outcome than a staged sale.
Regardless of the approach chosen, every business should be in a state of sale readiness, even though it is not currently for sale. The business owners will receive increased profits from an efficient business and its state of readiness will enable them to maximise any opportunity that comes along.
The professionals at Affinity Accounting Plus are experienced at assisting businesses to develop exit strategies. Visit their website at www.affinityplus.com.au for more information.
