Business Ownership Succession Planning

It is a well-known fact that the generation known as the 'baby boomers' (i.e. those aged between 50 and 70 years today) are rushing towards retirement. Many are business owners hoping to sell their company to fund their future. Who will buy their businesses? Are they ready to sell?

Succession planning is all about transferring control and ownership to others, ideally with a 'win/win' outcome. The process can seem daunting especially when you face the fact that some of your decisions will affect you, your family, other shareholders, your staff and, of course, the business customers.

At present, 20 per cent of New Zealand business owners are currently planning to sell within the next two years, it is estimated that up to 10,000 businesses could change hands over the next five years. The number of small enterprises with staff (those with 1-19 employees) has reached 487,602 representing 97 percent of all businesses in New Zealand (according to Business Demography Statistics, Statistics New Zealand). Together, small businesses employ 30 percent of New Zealand’s working population and produce around 27 percent of New Zealand’s Gross Domestic Product.

With 61 per cent of business shareholders aged 50 plus years old, and almost a quarter (23 per cent) 60 plus years old, it is clear that we have a situation that is unique in New Zealand’s history and its significance should not be underestimated. A flood of businesses on the market will further drive down business sale prices.

While it is inevitable that aging baby boomers will begin to transition into retirement in large numbers, it seems that selling, rather than passing on a family business, is the preferred option – just 30 per cent of business owners believe their family are capable of taking over their businesses. With little or no capital to invest in their businesses, these companies’ growth is inhibited, and little or no value can be generated.

Given New Zealand’s changing demographic profile, the pool of potential buyers of SME businesses will naturally be younger, less experienced budding investors who may have an even harder time gaining access to credit. This creates a further set of complications for baby boomer owners - a smaller pool of potential buyers results in lower business valuations, all else being equal.

Business owners need to be prepared to realise the maximum value from their business and they need to begin planning for an eventual sale now so that they’re not left holding the can.

Four important questions every business owner should answer:

Before making plans to sell your business, you need to be very clear about what the business is, what it’s worth and who’s best to take over. Can you answer these four questions?

1. What does your business need in terms of succession management?
2. What is your business worth?
3. When is the right time to sell?
4. What sort of person or team would be best to take over?