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Achieve a rewarding business exit

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Simon Rutherford


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Achieve a rewarding business exit

Posted 11 Mar 14 by Simon Rutherford

Business owners are often so focused on running their enterprise that they neglect to plan for a rewarding business exit.

You may not have a target date or value in mind, but it is important to begin your exit and succession planning as early as possible. Most corporate advisors agree that grooming a business for a personally and financially rewarding departure should begin at least three years prior to sale.


An objective look at your business

Consider the current value of your business to an arm's length investor - this is almost invariably lower than your own expectations due to the risks inherent in most business acquisitions. Reflect on the financial and personal impact that an immediate business exit would have on you, your family, your employees and your clients. You may wish to consider the security of a family succession plan and whether they have the capability to continue operating the business successfully.

In addition, many business owners feel responsible for their employee's job security and career progression opportunities. Also consider whether there are particular employees who are willing and capable of operating the business successfully following your departure. This exercise, while confronting, defines your preparedness for exit.

Business improvement

Consider the business improvements you could make to maximise and protect its value and boost its attractiveness to investors. If your business is mature, be realistic about what changes can be made given your exit timeframe, financing constraints and the industry in which you operate. If your business is in a start-up or growth phase, you have greater scope to create a bold vision for the future and integrate exit planning into its strategic direction.

Look at your team

The adage 'in business your most valuable assets are your people' holds particularly true when grooming a business for exit. A significant consideration for any potential acquirer is whether your business has a diversified and stable management team, and if there is management continuity once you are gone. Concentrated key person risk can discount the sale consideration of even a moderately sized business by as much as 15 to 30%.

Mitigating the risks associated with key employees is vital as you approach exit. Establish a management succession plan early to ensure that the business can
continue without key individuals. This involves identifying and equipping capable staff to take on key business roles or recruiting with the intention of filling gaps. If a family member intends on taking over the business it is essential to honestly assess their capability and willingness to assume ownership. Locking in key employees with minority equity ownership or share options is an available, but often costly, strategy. Diversification of employee roles and responsibilities
is also an advisable strategy to reduce key person risk.

A frequently overlooked benefit of an effective staff succession plan is that you can focus on the strategic direction of the business and the all-important sale process, rather than being consumed by day-to-day business operations.

Consider the tax implications

Different business structures result in different tax consequences, particularly with regard to capital gains tax. Selecting the appropriate business vehicle can have a profound impact on the tax implications of sale. This should be considered as far in advance as possible, ideally prior to establishment of your business, because once a business structure is in place the tax consequences are often fixed. Tax consequences may also impact your decision to sell the assets of the business or the shares in the entity, when arranging your exit.

If you would like assistance in achieving a personally and financially rewarding business exit, please contact Director, Simon Rutherford on (02) 4962 2688.


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