“How Do I Get Out Of Here?” Exiting a Small Business

Definitely the most asked question at any IKEA store.

And probably the most asked question by those seeking to divest themselves of their business and either gracefully retire or to move on to chase more noble pursuits.

When we started in “small business” over thirty years ago, it was a different world. It was before the boom of global brands and franchises, and “business” was made up primarily of independents, “bricks-and-mortar-style” businesses rather than the online stores we are so familiar with today. Proud business owners who were committed to growing a brand and a legacy, young bucks full of energy and bravado, a lot of whom built great businesses. Fast forward thirty-four years to today, and their hair has greyed a little (or just gone), the energy has waned somewhat, and the flame of enthusiasm doesn’t burn as brightly as it once did.

The kids have grown up in the business, working weekends in the shop over the years, or earning extra cash there while at Uni, but they have no desire to take on the business, preferring pursuits in industries they find fresher, more modern, or just totally different than going into the family business. The margins have become squeezed over the years. There is more competition now than ever before. Rents, wages, transport costs are higher each year. Customers are becoming more demanding, account customers more tenuous in their ability to pay, cashflow is tight, and the control one once had over their patch seems to have evaporated.

So how does one get out? The legacy that the owner has built isn’t going to be a family heirloom, and there isn’t the desire to keep going now that the twilight years are dawning. For many of that generation who are now approaching retirement, the biggest dilemma is not in product, but in how do they move on with their life after business.

The Desire

Once reality hits home that the kids don’t want to take over steering the ship, thoughts turn to selling their business. After all, a lifetime of building a business, a brand, an income stream must be worth a lot of money, right? It’s a great little business. And that stock does have to be worth something, doesn’t it? Well, the reality is not necessarily.

The dilemma in selling the business is how does one get the value they believe their business is worth? There are creditors that need to be paid out once trading ceases, and there are usually far fewer debtors to cover the value of the creditors at the point of selling a business. There are usually leases in place or if the business owner is also the landlord, how does one get a tenant to pay a rent commensurate with what has been paid to date? There is also the issue of getting paid for stock at the value that the owner values it at – new owners will often write down slow stocks or write off stock they perceive is “dead” or in quantities too small to have any real commercial value, without the emotional attachment to the line that sold so well once upon a time.

And if one does get the price they want for their business, gets sufficient cash to cover the gap to pay their creditors once they have collected their outstanding debtors, finds someone to take over the lease, and gets a fair value for their stock, will the divestment deliver them sufficient funds to be able to maintain their lifestyle in a manner they would deem acceptable?

The Problem

Every few years MGI, one of the largest alliances of independent audit, tax, accounting and consulting firms in the world, conducts a Family and Private Business survey, and publishes a report into their findings.  

According to their most recent survey, the family business sector lacks confidence, with family business owners more reliant on the continuity of their business to fund their retirement and they are more concerned over the future of their business. The proportion of family business owners who would seriously consider selling their businesses if approached has decreased, and those who plan to sell their business has also dropped. The desire to sell is still there, but the reality of the ability to sell is driving these attitudes, and more business owners are coming to the realisation that they simply just can’t get off the roundabout. 61% of SME’s would be prepared to sell their business (meaning there would be 1,260,000 small businesses for sale in Australia at any time if this was realised) but few do due to the harsh reality of their business either not being ready for sale, or simply just not saleable.

Some industries are just not attractive to astute investors. Take, for example, the tile industry. Musk, Branson, Buffet, Murdoch, Packer, and Co – how many tile businesses do they own between them? Sadly none, and that says a lot. The tile industry has not been one which astute investors typically turn to for a strong return for their capital, especially when one factors in the risks. And it’s not just the tile industry – there are many others that just don’t get asked to the dance. Figures show investment typically flows to the areas of biotech, software, and media and entertainment. Operate a small business outside the industries that are attracting the attention of investors, and life gets very hard when it comes to exiting.

Distribution industries (including retail) account for 33% of small businesses. The complexity and diversity of many small businesses, coupled with the adverse risk/return ratio makes for some industries less attractive to newcomers. Sure, the risk can be mitigated by joining a group, either through licencing or franchising, but with the upside there comes downside. Groups are perfectly suited to scores of individuals who are new to an industry, but there are those for whom joining a group just isn’t an option. Likewise, some businesses aren’t structured correctly to simply and cost-effectively transition to life as part of a collective.

When family declines the option of receiving the baton of ownership, often the next in line in the thought process is the work family – staff. Whilst it is a delightful thought that the staff can take over what they have helped build, the reality is that, in most cases, staff do not have the asset base or equity to purchase the business from the exiting founder. There have been some cases where this had worked, but they are few and far between and, as such are very much the exception rather than a highly viable option.

As one starts to look outward to find a purchaser for the business, one ventures further into foreign territory. Owners of small businesses have varying degrees of skill in the core competencies of running a small business – purchasing, promotion, merchandising, sales, staffing, etc, but few have the skills, knowledge and experience in business divestment. Selling a business takes time, focus and energy, all of which can take focus away from your “day job”, that of running the core business. A protracted divestment plan can see focus shift from the successful operation of the business they are trying to sell, which leads to a drop in profits, a drop in value, and soon a downward spiral in the proposition of a profitable exit. Finding, vetting and briefing business brokers are also skills which are not at the forefront of those running a small businesses, and venturing into these waters can be fraught with dangers and pitfalls. Add to this the possible disruption to the momentum to the business should the staff become “spooked” by the thought of new business owners, or the regular trade leaving because of a feeling of impending lack of continuity, and one quickly appreciates the potential minefield for managing their divestment.

Often business owners work on the premise that they make money whilst running their business, and then again on exiting their business. However, a divestment invariably takes longer than initially planned, and yields a lesser return. Some businesses prove near impossible to sell. Some are too big for many to consider purchasing, as they require the skills and capital beyond the reach of most who are looking to buy a small business. And some businesses are too small to be considered part of the expansion plans of groups looking to acquire stores. Then there are those businesses that have been built around the founder. These businesses often carries the founder’s name, such founders are the ones who are the custodian of the key relationships, the businesses often lack defined and established processes in favour of “flying by the seat of the pants” worn by the owner. These businesses are the hardest to sell, as the owner is the business, and once they walk out the door, the new owner is left having purchased something which has evaporated. 

Solutions

Ideally, when starting a business one should start with the end in mind. Be mindful of how you might wish to exit and build your business accordingly. From the name of the business, to staff selection, to establishing the processes, targeting certain markets, and identifying early the potential path to exit or possible purchaser, one can maximise not just the profitability from trading the business but enjoy a relatively simple and lucrative exit.

A number of business owners reading this will already have an established business, so the horse has already bolted in terms of starting with the end in mind. For them, the options need to be carefully explored and the solutions developed to match the desired outcomes.

Adopting a well-known brand with existing market awareness is one way of structuring an exit. Some see joining a group and changing the shingle out the front of the shop as being a way out. Such a move surrenders custodianship of the brand, which may be a good thing for many, but be mindful that any negative actions of the franchisor or rogue franchisee may have adverse effects on your saleability. Franchising, or licensing, addresses the business issues raised in the 1980’s classic book The E-myth, by allowing the operator to get on with their skill and passion of making sales, while having support and systems to take care of the other processes like buying, advertising, training, etc. There are short term costs in rebadging, but the benefits around ease of exit and the price one ultimately achieves for their business may be worth it. Just understand that there are additional costs along the way, and perhaps even on exit, but costing out the two scenarios will quickly give you a snapshot as to the nett difference between joining a group or going it alone. With our company, Time Masters, having been closely involved with assisting groups franchise, growing franchised networks, and converting or setting up dozens of individual franchised sites for a number of major groups in Australia, we realise first hand that franchising is great for some people, but it definitely doesn’t suit everyone, and is not workable for some existing business structures.

An alternative option to achieving a successful divestment is to call in the skills of those with experience in evaluating the pathway to exit, and in developing an exit blueprint. Business brokers do this sort of thing every day with varying degrees of effectiveness and success. Some tell you what your business is worth, and they go about advertising your business in a long list of other businesses. How your business fares alongside multiple listings of fruit shops, McDonalds franchises, Jim’s Mowing licenses, and a host of some really attractive small businesses then largely remains up to chance. Other divestment agencies will asses your business, give you a realistic current market value (which you may or may not want to hear), suggest ways in which the owner can add value and make their business more saleable, then they will present the business to select potential buyers who have been carefully curated and identified as suitable. Recognizing the difference between the different types of brokers can be difficult, briefing them even harder, and then keeping them on track to achieving their promises on a timely basis can introduce the business owner to a whole new world of angst. All of it made much harder by the “cloudiness” created by some very flattering valuations offered by brokers in the outset, which appeals to the owner who wants to get the most for his business and will go with something that would be too good to be true if looked at without the promise of an easy out.

The catchcry of some small to medium operators is that they plan to sell to a foreign manufacturer, wanting to establish a channel to market in Australia. The reality in such cases is quite often vastly different to what might seem like a great idea at the time. With a population of just 24 million people, and the largely fragmented Australian market (in many businesses) is less attractive to plans for mass distribution than we would otherwise wish to believe. Over the years, there have been several overseas companies, usually manufacturers, who have made the move into acquiring small businesses in both Australia or New Zealand, but there have been very few who have made a success of the venture. With our heavy regulation, relatively low population, vast distances, and with our business and market mindset being quite different to many foreign ways of doing business, acquisition of Australian businesses by foreign entities is not as attractive or as simple as it may seem on the surface. Carefully constructed strategic sales do offer an option here, but they are usually quite complex, protracted, and need careful and sensitive management to deliver the desired outcome for both parties.

Most sell their business based on a multiple of EBIT (Earnings Before Interest and Tax), but there are loads more options (and much more lucrative ones) when one thinks of a strategic sale. Selling a business is not the time to be bound by conventional thinking and the most successful exits have come about for those who think outside the square. Our company, Time Masters, was once involved in an acquisition of a group of businesses which returned the single site operators seven times their EBIT as opposed to the multiple of two to three which they were looking to achieve before we assisted with the solution architecture.

When selling a business, one must be realistic. Start early and allow more time than you would initially expect. Explore all options and don’t be bound by conventional thinking. Be clear on what you want to get out of it and be even clearer on what you are willing to accept. Patience, planning, and reality are the keys to exiting safely without the exit door hitting you on the behind on the way out.

Good luck!