Succession Planning for Aging Business Owners in Australia
Given Australia’s ageing population and challenges around retirement funding, succession planning becomes an increasingly crucial consideration for business owners who entering their golden years. Planning for retirement is a complex task that requires careful and strategic thinking.
Australia’s economy is built on the SME market. However, less than 20% of businesses have a formal succession plan. A succession plan is essential for a family business to transition the business value and skills to the next generation to manage and grow.
To ensure that equity value is realised, it is vital that planning begins 3-5 years out from the sale of the business or the transition to the next generation of the family.
Lucrative capital gains tax concessions exist for small business owners who meet the criteria. Planning in advance is required as the business may need to be restructured to meet the criteria.
A reoccurring issue with succession planning is that the business owner stays in business too long, and equity value declines. This could result from not keeping up with technology, not having the foresight to change with the changing market and becoming too set in their ways.
Understanding the cycle of the market
Selling optimally in the business’s lifecycle will positively affect the sale price.
A soft drink post-mix syrup business got an offer for the business, which was rejected as the business owners got cold feet and decided to hold onto the business for longer for income purposes.
At the time, the business was very profitable. However, business margins started to decline due to a change in the market, not expanding the geographical supply of the product when the Sydney CBD lock-out laws were introduced. The business was sold 3 years later for 40% less than the original offer. Holding onto the business for too long and not keeping up with market changes resulted in a lower price, resulting in less income to live off in retirement.
Adapt to the new market and know your potential buyers
A media advertising business had a 3-year plan to sell the business. The owners wanted to exit the business and explore other business interests outside the media. There were falling revenues due to market changes.
The business invested in staff who had digital media skills in niche markets. This introduced new clients to the business, which increased turnover and margins. An employee profit share plan was introduced, which resulted in decreased costs and increased productivity, and staff began thinking and acting like business owners.
The business owners consciously decided to know and understand potential competitors that could create synergies by acquiring their business.
The result – 3 to 5 years later, the business was sold to a larger competitor for a high industry multiple.
The 3 business owners also qualified for the small business capital gains tax relief, so the after-tax result was excellent.
Implementing a successful succession plan requires time, meticulous planning, a keen awareness of the business cycle, and a thorough understanding of competitors in the market. Don’t hesitate to contact us to plan for the exit from your business.
Written by our guest writer Preston Foster, who specialises in succession planning in the SME space.
Kreston Stanley Williamson Team
*Correct as of April 2018
*Disclaimer – this article has been produced by Kreston Stanley Williamson as a service to its clients and associates. The information contained in the article is of general comment only and is not intended to be advice on any particular matter. Before acting on any areas in this article, you must seek advice about your circumstances. Liability is limited by a scheme approved under professional standards legislation.
