Can your established small business adapt to change or is it time to move on?

Many of my clients are facing rapid change in their businesses due to the deflationary forces of globalisation, labour market challenges and technological change. It doesn’t help that consumers are demanding high quality products and services at ever lower prices and trying to meet that need is squeezing margins and slowing growth in many industries.

Digital disruption has also played a role as people buy more products and services online. Entire sectors like the taxi and hotel industries have been transformed by the likes of Uber and Airbnb in a few short years and it’s unlikely to stop there. Even those of us who provide highly qualified, high-touch services like accounting, legal advice or health services face consumers with greater access to information than ever before. This leads some to take a DIY approach to aspects of life that really need careful planning and professional expertise.


In the second of our eight-part series, we examine key questions business owners should consider to tackle changing markets and keep their future plans on track.
 

How can I adapt to market challenges?

For those who’ve run successful businesses for decades, the speed of change can be overwhelming. So what can you do to steady the ship in the face of economic transformation? In my view it’s about having a plan to ensure your businesses is profitable in the short term, while considering how you can adapt your business model to meet demand and provide future income. It you’re thinking about the path to retirement, it may be through the sale of the business – which means you need to make sure your business is saleable first, by creating an ongoing income stream via an automated product or service, or by remaining a salaried employee of the business in some ongoing capacity.
 
In the meantime, strengthen your business by reviewing productivity and input costs, ensuring you have the right financial KPI’s in place and boosting your digital marketing capabilities to drive sales growth. Of the 1000 Australian businesses recently surveyed for the bi-annual MYOB Business Monitor, those who have an active website (36%) or social media platform (38%) say they’re confident of getting more work in the next three months.


How can I slow down and work less?

A common thread in many conversations I have with business owners in their 50s and 60s is they envisaged retirement at age 65. Most now find that due to consistently low rates of return, this simply isn’t possible and they need to remain in the business a few more years. Sometimes gradually reducing hours until retirement is an option provided there’s a plan to help the transition go smoothly. This can also give you a chance to top up your super balance with optimal tax concessions.


How do I know if my business is saleable?

It depends on what your business is worth, and whether there’s buyer interest. I often talk to clients who are considering selling their business. Sometimes after obtaining a realistic valuation, they realise it makes more sense to hold on to the business a bit longer, and review the situation after making business improvements or in reviewing demand in 6-12 months. Interest rates are low, but business confidence remains fragile (See trend figures below) so it’s hard to predict whether there will be a buyer when you need one.
Image source: Ray Morgan Business Confidence Index August 2016
 
Source: Ray Morgan Business Confidence Index August 2016
A useful exercise is to obtain a valuation on your business and compare this with the likely return if that amount was invested elsewhere at the current market rate. i.e. a business worth $1.5 million might earn say 15 percent or $225,000 a year. If the same amount were invested at the current interest rate of around 4% it would only return  $60,000. Even taking into account tax concessions by holding the money in a superannuation fund the net return would be significantly less than that obtained by continuing with the business. Of course other aspects need to be considered, including your lifestyle requirements, health, and other assets under your control.


How early should I start planning my exit strategy? 

It’s important to plan your exit strategy, especially if you hope to move on in under 5 years. Consider what you want to happen after you leave: Will a family member or colleague take over? Will you close the business and sell assets? If someone will take over the business, your plan needs to include succession arrangements.


Succession planning is a complex exercise requiring significant financial and legal planning. Every situation is unique, and careful consideration must be given to preserving and transferring the wealth. The best results come from a bespoke succession plan. We have devised a number of unique plans that are working exceptionally well.
 

What you can do now 

Rapid change and uncertainty can make it difficult to plan long term. We won’t always know the outcome, but as business owners we can’t afford to do nothing. My advice is to keep planning, but review and adapt your plans more often. Seek professional advice where needed and be willing to consider new possibilities for your business and your retirement.
 
It’s important to note that succession arrangements are unique and require careful consideration. If you need further help organising a succession plan for your business, please contact us.  
Posted by Doug Mitchell
<p>With more than 40 years in the industry, Doug has seen just about everything there is to see in business and draws on that unique insight to benefit his clients. As owner and Partner at Michell Wilson for over 30 years Doug is renowned for his calm efficient and professional approach to business.</p>