KEY POINTS:
Your are over 55, have a strong business turning over more than $10 million per annum - built up over 30 years of hard work. You are making a good profit and you own your own house, a yacht and a wonderful holiday home. Surely, this is the Kiwi version of bliss.
Maybe not. Many owners of businesses of this size are trapped in a vicious cycle, working up to 70 hours a week, with limited holidays, untold stress and retirement nowhere in sight.
A Colmar Brunton survey funded by ANZ in 2006 brought these privately owned businesses and their owners into sharp relief. There are more than 3500 owners who fall into this category. They are the true SME powerhouses of the economy with combined annual turnover of $3 billion. The survey found that many of these owners wanted to exit their businesses or scale down their involvement over the next five years. The problem is, many do not know how to go about achieving this simple goal.
Most run their businesses without the assistance of a board and have generally poor governance systems and procedures. These owners do not have a succession plan and time is running out for them, mentally and physically.
Unless these owners start engaging in strategies now, they have little hope of exiting their business any time soon. The result may be that they either sell the business for next to nothing or close it.
However, there are strategies that can allow these owners to exit the business or, even better, keep the business so it can continue to produce handsome dividends for the owner well into their retirement, and continue to serve the interests of the economy.
So what are the options?
Sell the business. This allows the owner to get out with no further involvement and a lump sum.
Sadly, businesses of this type are discounted in value for a number of reasons, such as poor historical financial reporting and lack of governance procedures. Owners are so integral to the business that it may only be viable if the owner comes with the business, defeating the purpose of the exercise.
Also, these owners, looking to exit the business in the near future, typically engage in short-term strategies which expose the business to greater risk. Older owners are less likely to invest in long-term initiatives that would make the business more competitive or sustainable. The result is that these businesses, while profitable, require potential purchasers to invest in new systems, infrastructure and plant - further discounting the final sale price.
Management buyout. Selling the business to the existing management, who should have a good understanding of how it really works, is another option. Unfortunately, many owners never allow mid-level managers to have a global perspective of their business.
Floating. Listing the company could be a feasible method of releasing equity in the business, but the cost and time needed generally prevents this solution. Owners see this as an option they should have taken long ago and are generally skeptical of this route and the costs involved.
Keeping the company and putting in a CEO/MD. This solution offers potential salvation. Implemented correctly, it will lead to greater returns over a longer period. It allows the owner to keep the company but enjoy significantly more free time. By putting in place professional management and a board (or advisory board) structure, it may lead to a more profitable sale in the future.
The steps that are taken are as follows: review of the business and its structure by a business adviser; review and documentation of tasks that the owner performs; a programme to transfer owner tasks to others, over time; setting up an advisory board; hiring a CEO/MD; setting up KPIs and reporting for the owner to manage the business remotely; annual budgeting, cash-flow forecasts and other risk management processes.
Ultimately, the only way an owner can have more time away from the business is if the tasks they perform are done by someone else. Good reporting will give the owner the confidence to spend time away. While this is often the best solution, it is a challenge for owners to really relinquish their authority. When it comes to exiting the business in this way, the owners are their own worst enemies.
Owners are so habitually tied to the business that they often do not have any other outside interests.
There are costs associated with this option. In reality, though, new ideas and management styles can breathe new life into these companies. It is not uncommon for the performance of the company to grow significantly. Owners discover new-found interest in their business as new opportunities are exploited that were beyond their own capabilities. Sometimes, they are so enthused that it is hard to keep them away.
This option provides the potential for owners to retain the business and operate effectively in a chairman of the board role after some time. Income is generated from owning the business, not necessarily working in the business.
It all starts with an owner wanting to stop the vicious cycle and start down the road to enjoying the fruits of their labour.
Craig McIvor is the managing director of Corporate Management Advice, which works with owners to develop strategies to help them exit from their businesses.
www.managementadvice.org
