In the next five years more than 40% of New Zealand's small and medium-sized businesses will come on to the market as baby boomers seek to cash out and retire.
With small businesses making up 97% of all New Zealand enterprises, this represents a significant number of business sales and a boom for would-be business owners. But, what does this mean for sellers? In the minds of many soon-to-be retirees, a picture of retirement happiness is likely to be something that resembles a permanent summer break provided for by a lifetime's worth of hard work invested in their former business. Yet for most, this vision of family time spent by the bach could likely be shattered when the business value is tested on the open market.
So, assuming a business is profitable, has a low debt-to-equity ratio and good growth prospects, what's driving its value down?
Firstly, there'll be a glut of ready-made businesses being offered for sale at the same time, creating something of a fire sale for investors. Imagine a pick'n'mix where buyers will be able to sift straight past the green jet planes and sour fruits because there will be a few chocolate pineapple lump prizes to pick from first.
Secondly, consider the value of the business without the owner. A business may have long history of success, have a good reputation and be making lots of money, but in many cases, this is dependent upon the owner: the owner's reputation, relationships, knowledge and expertise. Cashed-up buyers will be quick to recognise when a duck is being offered for sale as a swan.
Then finally, sprinkle on lashings of economic uncertainty, poor business confidence, plus a dab of unrealistic seller expectations and the expected value of a business has plummeted.
Suddenly, retirement plans either look a long way off or like no holiday park anyone would ever wish to visit.
So, will this be the reality for today's business owners planning to retire in five or even 10 years' time?
Most leaders of privately-owned businesses are focused on successfully growing their business, but unfortunately, very few really look at growing that business' value, unless it's in preparation for a sale or ownership transition.
In our experience, many owners delay planning for the eventual sale of their business because they are caught up in day-to-day operational demands, or because they find it difficult to acknowledge the time has come to think about letting go. As a result, many businesses are reactive when it comes to planning for an ownership transition. At best, this can mean failure to maximise value and at worst, can see the sales process fail and their business assets liquidated.
Selling or readying a business for sale is one of the most difficult challenges a business owner will ever face. The tough decisions today will affect customers, employees and, most importantly, the business owner, for years. This is why planning needs to start early.
Ironically, critical ownership transition decisions are among those for which owners are often least prepared, often being faced just once in a lifetime.
Owners often have little or no experience with the monumental task surrounding a sale.
There is a golden rule: getting the best outcome depends on having a carefully thought-out and well-planned exit strategy.
So, get some advice, think about your retirement and exit early. A fun-in-the-sun future can be yours.
Richard McKnight is a partner at PwC in Dunedin advising small and medium-sized businesses.
