Getting ready to go

The recession has forced many businesses to cut costs, refocus on core markets and to maximise efficiency. As a result they are lean and mean – and ready for the upturn.

This process is similar to the grooming that many retiring business owners put their business through prior to a sale. For those who have had enough and want to sell, they need to think about their options, weigh up the alternatives and plan their exit well in advance.

Many business owners are great at building a business but have no idea about handing it on.

There is a bewildering array of options. Each has its challenges and, unless you’re closing your business down, you need to plan carefully for the transition to a new management team.

This process could start as much as 15 years before the business owner intends to step down. The succession plan should be communicated to the management team as well as any family involved in the business to help prevent misunderstandings and possible future conflict.

It’s useful to have a written succession plan, which should contain the key goals, a timetable of the transition and contingency plans in case the intended successor declines the role or you realise they are not suitable.

The plan should cover how the successor is to be introduced and trained. This could be a mixture of on-the-job and more formal training. It should also include time for the development of business and leadership skills.

It may include gaining experience in other businesses so they can bring fresh skills and ideas to the business. It could also be a structured programme within your business so they spend time working in each area of the business.

One major consideration is how to phase your departure. This can be achieved by gradually transferring some key responsibilities to your successor or by reducing the number of days you work in the business.

Many business owners have very little idea of the value of their business. There is a ready market in accountancy practices and selling prices are reasonably predictable based upon a formula linked to gross recurring fees.

However, if the business is in a niche market or heavily identified with the current owner, establishing a realistic price might be difficult, especially during the economic climate at the moment.

Owners generally overestimate the value of their firm at, say, six or seven times net profit, while buyers tended to aim for two or three times net profit (plus asset value).

The latter is the most likely actual final price for the sale of a viable business. However, businesses with unique assets and intellectual property – or on the leading edge in an under-exploited area – could command far higher selling prices.

Businesses in unopposed or less competitive markets, with a niche position or unique assets, are more likely to be sold successfully.

In some business sales, the owner of the firm remains for some time post-transfer to ease the transition. This is a more common scenario than the purchaser working in the business pre-transfer and mostly applies to specialist niche businesses rather than straightforward, generic firms.

Despite making it through the recession, many will take this opportunity to reassess both their business and their work/life balance overall. Careful planning will help ensure that you get the sale and handover that you want so that you can relax in the next stage of your ‘career’.

Clive Lewis is head of enterprise at the ICAEW