Gradual sell down now the preferred option for SME owners

21 September 2011

Gradual sell down now the preferred option for SME owners wanting to sell their business

82% of business owners feel the current conditions are not right for selling

Private business owners looking to sell their enterprises now prefer a gradual sell down to an outright sale but most lack a formal succession plan to achieve it, according to a survey by Deloitte and Moyle Consulting.

The survey of privately owned businesses throughout the country found that the climate of economic uncertainty, global recession and restrictions on access to capital in the local market had swung business owners away from the outright sale option.

In fact, 82% of business owners feel that now is not a good time to sell. Yet with the average age of business owners in New Zealand estimated at 58, there needs to be a renewed focus on planning for a successful succession process.

Deloitte partner Bill Hale says that one of the survey’s key findings is that identifying appropriate successors and establishing a gradual succession plan is more important than ever to allow for a smooth transition of the business to the next set of owners.

“With more business owners heading towards retirement there simply isn’t a great surplus of buyers out there, and some of those that are interested are often looking at paying below market rates,” Mr Hale says.

“So business owners really need to invest in planning for a successful ownership transition which may involve management or family members assuming ownership otherwise they may become prey to some of these buyers adopting vulture-like tendencies. Taking a ‘she’ll be right’ attitude in this market won’t cut it”

Unfortunately two-thirds of survey respondents don’t have any formal plan in place around how they will achieve a transition of ownership of their business, Mr Hale says.

One key element of preparing a business for an ownership transition is having a remuneration policy in place, clearly outlining remuneration, incentive schemes, performance pay and shareholder options, as this can increase buyer options during any sale.

Jarrod Moyle, managing director of Moyle Consulting, says the survey found that the lack of clear remuneration policies could be a hindrance in any sale process because buyers were unclear as to how employees were rewarded or incentivised.

While most businesses aim to provide employees with above market remuneration, this is often achieved through informal discussions with competitors about market rates. However, this wasn’t always the case with family members working for the business, Mr Moyle says, with only 2% of business owners prepared to pay above market rates to their own family members and a fifth were paid at a level below the market.

“Time and energy on a well thought through remuneration plan could boost the motivation and loyalty of key employees, as they could well be the future owners of the business. Ultimately this could lead to a better exit outcome in terms of ease, price and cultural fit, which is what most business owners are after following years of hard work.”

Another starting point for a succession plan is trying to identify likely successors for a business. The survey found that most owners identify successors from within their current network of contacts and usually identify people within the business, by either grooming management or employees (38%) or family members (22%).

But Mr Hale questions whether business owners are casting the net wide enough to maximise value and also to identify for the right person to maintain and enhance the culture and heritage that have been built up over time.

ends

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