The Ageing Small-business Owner Must Face The Task Of Succession Planning

Starting a small business is no picnic; nor is getting out of one at retirement.

AS WITH the rest of the population, small-business owners are ageing and retirement is looming. After years of working long hours, often for little money, their major asset will be the business. Owners who fail to consider properly how and when they will leave the business could find they have nothing to sell, and will be trapped into working for a lot longer than they had intended.

A recent study shows that few owners take the time to look at selling the business. The 2003 Australian Family and Private Business Survey conducted by RMIT University found that 76 per cent of family businesses do not have a written ownership or management succession plan.

There are four main ways the value of a business can be realised: sell it; have family members take it over; arrange for key employees to either fully or partially buy it; or convert it to a publicly listed company. This last option is only open to those whose business is large enough, and is very costly.

Also, depending on the business, not all the remaining three exit strategies will be available. The first step is to determine which of the options is most suitable. This involves establishing when the owner wants to retire, what retirement means, and how much income will be needed in retirement.

The date the owner intends to retire must be established to provide an initial time frame to work to. Depending on what comes out of the rest of the succession process, this date may need to be postponed.

Retirement means different things to different people. For some it will be ceasing work altogether, which limits the options to selling the business. For others, retirement means still working but for fewer hours and with reduced responsibility. The best option then may be to sell part of the business.

To work out how much money will be needed in retirement, the present costs of maintaining the owner's lifestyle must be established. The only accurate way to do this is to draw up a domestic expenditure budget taking into account all the family's costs. These include day-to-day living costs plus the cost of transport, health, entertainment, loans, holidays, education, gifts and travel.

Once present costs have been established, the income required in retirement can be estimated. Depending on when this budget is prepared, a discount can be applied from costs ceasing at retirement, such as servicing a home mortgage or educating children.

The next step is to establish how easy it will be to sell the business and what the assets and liabilities of the owner are. The greater the net assets, including superannuation and investment properties, the lesser the amount needed from the business.

Establishing the saleability of a business requires not only the preparation of accurate financial statements showing the assets, liabilities, income and expenses, but also how much the business is dependent on the owner. For example, a retailing business would normally be less dependent on the owner than a professional or trade business such as an accountancy or building business.

Businesses that depend on their owners must find ways to become less reliant on them. This involves putting in place systems that ensure the correct result is produced no matter who does the work. It may also mean the sale of the business is not an option but having a family member or employee take it over is more suitable.

The family member and employee buy-out options are also the best alternatives when an owner does not want to give up work completely.

The final step in working out how easy it will be to sell the business is to compare its current financial performance with industry averages. A business achieving above-average results will be easier to sell.

max@taxbiz.com.au