A growing number of Australia’s SME owners and leaders are aged 60+, and alarmingly 76% don’t have a formal succession plan or transition strategy in place to ensure business continuity. Given our ageing population, many economists and demographers predicted a mass sell-off of SMEs that would deflate prices in the second half of this decade.

What they failed to predict is that business owners who saw their Super funds fall in value after the GFC would hold on to their businesses for longer than ever before. The number of Australian business owners aged over 65 grew by 6.6% in 2015 and while some may have caught the entrepreneurial bug late in life, many are staying in business to fund their lifestyle while they wait for business sale prices to improve.

Prior to the GFC, businesses sold in the range of 2.5 to 3.5 times EBIT, yet since the range has been 2-3 times EBIT. Banks have remained reluctant to lend on the value of businesses and with a sustained period of lower growth anticipated in traditional sectors, waiting for sales prices to improve without innovating or growing your may not change the outcome, but careful planning might. 

• The current owner/vendor will work in the business for a period of three to five years. In one case the plan covers ten plus years, particularly as there are two exiting owners.
   
• A valuation formula is attributed. The value is determined at the beginning and the end of the transaction period and any increase or decrease in the value is shared equally between the vendor and the purchaser. This keeps the vendor motivated and ensures the purchaser does not appear to be working hard to increase the price he or she has to pay.
   
• There is some upfront money to get the situation moving.
   
• At some point the vendor will decrease from being the majority shareholder to being the minority shareholder, and therefore decision making methodology needs to be agreed.

Our model works extremely well where there is an existing employee whom the vendor thinks could continue the business. If there is no such employee the first step may well be to find the right person and provide them with a two to three year period to prove themselves in their role as an employee. Other issues that we consider in such a strategy include insurance arrangements to protect the vendor, the purchaser and the business.

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.