Time to get out
Tuesday, 11 September 2007
Last Updated: Wednesday, 19 September 2007
In this section:
It is always tempting to keep feeding more capital into a losing business but there comes a time when a decision must be made to close its doors.
Closing down simply involves closing the doors, selling all the assets, paying off all the debts and returning whatever is left to the owners. This is not a usual choice of exit for a business, unless the business is not doing very well. If it is successful the owner will obtain a far better price by adding goodwill to the value of the net assets. Goodwill is probably the most valulable component of the business.
The scenario for closing will often be:
- Set a date for closing and cut-off of everything.
- If the business is in leased premises, close the business when the lease expires or negotiate an arrangement with the landlord.
- Advise all suppliers and associates that the business will be closing on a particular date.
- Advise all customers of the same details, although make sure that the are advised a few days before the actual closure so you can extract maximum profitability right up to the end.
- Sell all the assets of the business and pay all the bills.
- Arrange the disconnection of utilities: water, gas, electricity and telephone.
- File all the necessary returns and financial accounts through your accountant.
- Close the doors, take the balance of the money remaining after paying all the debts and go and have a holiday.
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Passing on the business
That is, succession
The owner of a long-established family business might wish to just pass it on to the next generation. Generally the family as a whole have a strong desire to see the business retained and passed on from one generation to the next. Succession is a process that requires proper planning and teamwork between the owner and family members.
Whatever changeover is involved, it is important to preserve the viability of the business and to make it appear to the rest of the world as if nothing really has changed. The worst that can happen is that customers may perceive it as a changing of the guard and decide to take their custom elsewhere if they feel that the leadership that they had been so used to and respected has been lost.
Succession, of course, can also mean the sale of the business to long-term employees, who should be given the option of buying when the owner decides to move on. It is more ususal, however, for the ownership to be transferred to the next generation and so kept within the family.
Generally a succession plan will have two main factors:
- Transfer of power. The management and control of the business is transferred over to the “anointed” family member chosen.
- Transfer of assets. The wealth concentrated in the business operation is transferred to family members in the normal way.
When transferring a family business from one generation to the next, the departing owner must be able to collect an appropriate reward for their efforts. This is one of those important questions that has to be resolved between the parties. One of the best ways of achieving full value for the older generation is for them to simply sell the business to family members.
This will require a professional valuation, to ensure both parties are happy. The buyers should also be clear about their planned ownership structure before the sale is completed. For example, if the new bosses are the children in the family, then forming a family trust to own and operate the business would be an option that should be considered because of the tax implications and other advantages.
This type of procedure is often used where the owner may want to gift the business to the children, yet still run it through a family trust, to enable proper structuring for the maximum benefit of the new acquisition.
Passing it on? Start planning now
Many business owners try to ignore the fact that they are mortal, and continually postpone having to think about what needs to be done to pass the business on. What they miss is that when a business owner does plans ahead, the business becomes stronger and is more likely to survive.
Some statistics from US studies are illuminating. They show:
- That 95% of American businesses are family-owned.
- Less than a third of these (30%) survive the second generation.
- Only 10% survive the third generation.
- Just 28% of family-owned businesses have developed some sort of succession plan.
The results point to the need to plan succession early. Ensuring a smooth succession means considering several factors:
Family. To avoid any sort of favouritism, many owners leave their businesses to their children in equal shares. Unfortunately, those family members often have different ideas about how the business should be run and their bickering can damage the business.
Qualification. The succession plan should make it clear that children must earn the right to take over the business; that is, the successor needs to qualify by having the right skills and experience – probably gained by working their way up in the business.
A board. Before the business is handed over, the family should consider appointing a board of directors of people from outside the family. This gives the incoming owners access to impartial advice from outsiders who won’t taking sides in family arguments. This should strengthen the business and enable the owners do deal with many of the problems that result from family disagreements or spats.
Hasten slowly. The sooner a succession plan can be put together the better, but they cannot be written in one day; they need to be well thought out. It should be made clear to replacement managers that they will be responsible for ensuring the business runs along the same successful lines as it has been done in the past. The new family managers should understand that their taking over will be a transition, that control will be phased over to them as they prove themselves.
There are obviously many problems that arise when a plan is being drawn up to spell out how and when others can take over the operations. The reality is that family members don't always agree and that what the parents have in mind doesn’t always coincide with the children's vision.
In any event, planning with whoever is being groomed to take over the business should start early.
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Merging
What is a merger?
Put simply, a merger involves two companies agreeing that they want to go forward as a single operation rather than as separate entities. Mergers are often driven by the competitive landscape. When times are difficult, strong companies seek out others to see whether together they would create a more competitive, cost-efficient operation than they do individually. The stronger of the two is likely to gain a greater market share and achieve greater efficiencies through such a deal. A merger may also be advantageous to the weaker company, which might otherwise be unable to survive independently.
What happens?
One of the parts often contacts the other to sound out whether a merger could be effected and whether some of the business and staff could be retained.
A merger does not necessarily involve equals. If one company is much larger or smaller than the other a merger can still work. The whole idea of the merger is that the chief executives agree that continuing the businesses alone is not the best thing for either company, and that both would benefit from a merger.
Some of the benefits come from the improved efficiency of combining administration and other similar functions. There will also be better cost efficiencies and the combined group will end up with a much higher profile in the industry, which gives more confidence in suppliers and customers.
What is an acquisition?
One company buying another is a little different from a merger. All of the above reasons for combining the two companies apply but instead of swapping stock or consolidating under a new corporate entity, one company simply buys the other company out. Sometimes it is done in a friendly way and at other times it is described as “hostile”. Another name for the unfriendly acquisition is a “takeover”.
A buyer can offer cash or its own shares, or a combination of the two. The difference between the merger purchase and an acquisition purchase depends on whether the purchase is friendly and announced as a merger, or whether it is announced as an acquisition and whether the purchase is unfriendly, in which case it is always called an acquisition.
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What is liquidation?
The term liquidation applies only to companies, whereas the term bankruptcy applies to non-companies such as a partnership or sole trader. Generally liquidation occurs when the creditors of the company (those who are owed money) vote to have the company liquidated. This is usually after a period when the company is under an administration where a separate person called an administrator runs the business to see if something can be salvaged. A liquidator can be appointed by the court following an application by one of the creditors to wind up the company operation. Once the liquidator is appointed, he or she has the duty to all the company's creditors of equal ranking collectively, not just to any particular creditor who filed the application for appointment.
The liquidator has several tasks, defined by law:
- Collecting and sell all the assets of the business.
- Investigating and reporting to the creditors about any matters to do with the operation of the business, as well as the reasons for the company failing.
- Meeting all the costs of the liquidation and also setting out who gets paid first.
- Distributing all funds to creditors with any excess being returned to the owners of the company.
- Reporting to the authorities as to the conduct of the affairs of the company by its directors and officers.
- Applying for the de-registration of the company when all is finished and the liquidation is formally completed.
Paying the liquidator
The company pays the liquidator from its assets. If there are insufficient funds or no assets, then the liquidator can remain unpaid unless there is an agreement for the creditors to meet the fees. On some occasions the liquidation cannot proceed because there are no funds to conduct it. In some cases application can be made to the court for payment of the liquidator, so that liquidation can proceed.
The liquidator is paid at a rate that is usually approved by the creditors.
Rights of creditors
Creditors of a company are paid in order of priority as follows:
- Secured creditors.
- Unsecured creditors.
- Shareholders.
Any secured creditors who hold a security, such as a mortgage, over any of the company's assets are paid first. Unsecured creditors are then paid if there are sufficient funds. If not, payment is made on a pro rata basis, say, 50 cents in the dollar for what they are owed. Finally, if there are funds in surplus then payment is made to return capital to the shareholders.
It should be noted, of course, that the costs of the liquidator are met even before the secured creditor is paid out. The liquidator will, of course, try to extract as much money as possible from the company on creditors’ behalf, including suing the directors through a creditor if they have been negligent and continued trading even when the company was insolvent (that is, unable to pay its debts on time).
Liquidation should only be considered as the last resort. It really only applies when the company cannot pay its debts when they fall due and its shareholders, creditors or the court finally have to put the company under the control of an independent person whose job it is to close the business, sell off the assets, pay off the remaining debts and return whatever is left to the shareholders. Often there are insufficient funds to meet all debtors.
Liquidator's rights and duties
The regulatory body sets out clearly what happens in a liquidation and the rights and duties of the liquidator who is the controller of the company.
The most common form of liquidation occurs when creditors vote for liquidation of the company following a period when it is under administration or, where after a period, the company has failed to meet a court recognised demand for payment. The court, usually following a creditor's application to wind up a company, may also appoint a liquidator. The liquidator has a duty to all the company's creditors, not just the ones who appoint him/her to administer and arrange the payment of all liabilities.
Creditors may agree to indemnify or reimburse a liquidator for costs and expenses if they believe the liquidator can recover further assets for their benefit by undertaking other enquiries. On such occasions after recovering the additional assets the liquidator or creditors can apply to the court for an order to compensate the indemnifying creditors for the additional risk in funding the recovery by the liquidator. If there are insufficient assets or no assets, the liquidator remains unpaid unless the creditors agree to reimburse them.
The liquidator is remunerated at a rate or a fixed amount approved by the creditors, the committee of inspection comprised of creditors, or by the court.
The committee of inspection has a number of duties and powers, which include advising or consulting with the liquidator on various matters.
Types of creditors
There are two types of creditors:
Secured creditors. They hold a charge (such as a mortgage) over part or all of the company's assets. The rights of the secure creditor are set out in the document called a Mortgage Debenture document or Deed of Registered Charge. They have the right to appoint a receiver if the company fails to meet its obligations under the debenture or charge and this right continues if the company has been liquidated.
Unsecured creditors. They have only contractual rights and those collectively arising out of a liquidation. Unsecured creditors have a number of rights when a company is wound up. These rights include the right to:
- Share in any available funds after costs of liquidation and priority payments and secured creditors have then settled.
- Take part in choosing the liquidator in the creditor’s voluntary winding up.
- Attend and vote at meetings of creditors on various matters including the fixing of the liquidator's remuneration.
- Take part in the appointment and be a member of the committee of inspection.
- Receive information about the liquidation of the company including the sale of its assets and the way in which the proceeds are distributed.
Unsecured creditors should attend all the meetings called by the liquidator because this is their best chance to find out what is going on and of having their say. In limited circumstances, unsecured creditors (as well as secured creditors) can sue directors for losses if the company continued trading while it was unable to pay its debts on time (when it was insolvent).
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What is bankruptcy?
Bankruptcy is a legal process that gives immediate financial relief to people with financial problems by stopping legal actions against them by their creditors. It is a legal process that is controlled by law. It usually results in getting rid of most the person's debt, and is often the best option for those people who cannot see their way out of a financial mess.
Bankruptcy is the term used for individuals, rather than for businesses and companies. The term for businesses and companies is liquidation. The bankruptcy procedure is set up really with the purpose of giving the person with the problems a fresh start. It takes into account what that person owns and then these are split by a court-appointed person (the official assignee) and distributed among the creditors. If there are not sufficient assets to cover the creditors' debts, then the split is on a basis of percentage.
The law allows for both creditor and debtor initiation of bankruptcy.
Consult a lawyer or an accountant
If your business is in danger of heading into problems, which could lead to the liquidation of your business as well as the possibility of bankruptcy for you personally, then you should seek professional advice as soon as possible.
When lawyers are talking about bankruptcy, they are really meaning that there is a situation where the person is unable to pay their bills as they have become due. As already explained, the term bankruptcy is generally applied to non-business type situations where the business is a corporate structure, such as a company. A sole trader or a partnership, can go into bankruptcy and therefore it is considered in a situation where the business “goes under”.
Why consider bankruptcy?
Bankruptcy should only be looked at by a business owner in a situation where efforts have been made to keep the business operating and pay all creditors, but without success. It can mean that costs are rising faster than income, leaving the business and creditors in a deteriorating situation. Then is the time to consider bankruptcy rather than allow things to get worse.
At that point a business owner should contact their creditors and try to work out some sort of plan to make payment over a period. If this and another plan put in place to clear the debts of the business do not work, then talk to a lawyer about the necessity for putting the business into a bankrupt situation or liquidation. This process is unpleasant and requires more costs and time relating to legal fees and court involvement, but the final results may justify moving in this direction.
What bankruptcy will do
By filing for bankruptcy the following situation will probably result for the person filing:
- Stops all further action from creditors and gives the person breathing space.
- Stops foreclosure actions on the person's home or action against their assets.
- Prevents repossession of their vehicles or other property where money is owed.
- Stops harassment from debt collection agencies.
- Allows the person to challenge the claims of creditors who perhaps are seeking to collect more than the debt owing.
- Finally discharges all liabilities belonging to the person and enables a fresh start.
Bankruptcy places severe restrictions on the financial and personal independence of the debtor.
What bankruptcy won't do
Although bankruptcy will relieve the immediate distressed person of financial problems, it is not intended to cure all situations. For example, some of the things that bankruptcy will not resolve are:
- Discharge the rights of creditors who have proper security over the assets of the business or the person. That creditor will be entitled to take the asset because of the security held.
- May not discharge against some things the court decides should remain, such as child maintenance and alimony, etc.
- Will not cover debts that are incurred by the bankrupt after filing for bankruptcy.
- Will not protect other people who are tied in with the bankrupt, such as those who have issued guarantees supporting the bankrupt.
Keeping honest
If a person is considering bankruptcy, this should not be used as a means to get out of responsibilities and to defraud the creditors of their rightful payments. Being declared bankrupt puts restrictions on a person and they should consult a lawyer before going ahead. Above all, be honest: the court is not a stupid and toothless authority, so it is not a wise move to try and be dishonest when it comes to the process of bankruptcy.
The courts are very strong on penalising and imprisoning people who use the bankruptcy legislation for their own means if their case is not genuine. The law is specific in that the courts can go back for certain periods and recover money or assets that have been diverted to other people, so as not to be included in the bankruptcy action.
If there is any fraud involved in some of these situations, then the person may be subject to criminal charges. The policy is that once bankruptcy papers are filed, the person should be honest and open about all affairs so that the matter can be tidied up to the advantage of the person, creditors and others.
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Source: CPA Australia
By Andrew Kent
The buying and selling of privately owned businesses in Australia has often been referred to as the hidden market. Historically, businesses have been very reluctant to reveal that they are for sale, keeping a trillion dollar market hidden from view.
But this is starting to change.
With a growing number of businesses coming on to the market as the baby boomer generation heads toward retirement, businesses are taking a far more open approach to selling. In particular, they are providing things like turnover, EBIT, and asking price to the market.
The reasons for this are two-fold. First, online markets like BizExchange require this information. Second, there is a growing awareness that buyers need to be enticed and a key way of doing this is to provide more information. Quite simply, providing more information generates a greater number of genuine inquiries.
Although there are still concerns among businesses that customers may be deterred, or competitors may take advantage if the business is known to be for sale, this can be managed by the appropriate use of a business broker or adviser to handle any inquiries.
The business’s identity can be withheld until an inquiry is known to be genuine, while the fundamentals of the business opportunity can be widely promoted to potential buyers.
Concern around the reaction of related parties may also be overrated. There is a growing acceptance that every business is for sale at the right price. Add to this the fact that your staff, suppliers, customers and competitors are some of the most likely potential buyers, there is no reason that their inquiries cannot be given due consideration by your adviser.
Take the following example of a business for sale:
Home builder
Value-for-money home builder targeting the second homebuyers market. Provides a high-quality service together with a range of affordable and attractive homes, servicing Melbourne and Adelaide metropolitan areas and their surrounds. Already established as one of the top builders in Victoria.
Business financials
Turnover range: $50,000,000 +
EBIT range: $2,000,000+
Business background
Industry: Construction > General construction > Building construction > House construction
Years in business: 15
Location: Victoria
Franchise: No
Sale details
Sale/investment terms: Owner prepared to assist with transition
Selling price: $20,000,000 to $50,000,000
Although some of the competitors operating in the industry may be able to identify the business concerned, potential buyers outside the industry or looking to expand into the markets in which it operates are given sufficient information to warrant proceeding.
The need to provide at least this level of information is even greater for businesses looking for partial sales or equity-raising.
If you are concerned about market perception when putting your business on the market, remember that more than 90% of business owners would sell if they received the right offer, and less than 5% are ever approached.
Quite simply, if you don’t advertise your business for sale, you won’t sell it.
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By Mike Preston
Planning to sell your business? The landscape is changing fast. Prices for small businesses are plummeting as retiring baby boomers and the June 30 cut-off to put $1 million into superannuation trigger a flood of businesses on to the market. At the same time, accountants and online business sellers have rushed in to try and grab a slice of the action, competing head-to-head with traditional business brokers.
These changes mean getting top dollar for your business is an increasingly complex and difficult task. Business owners need to be more strategic when planning their exit, understanding how the valuation process works – and knowing who is the best service provider to use.
The market’s changing
The business sale market at the SME end is changing, and not in a way that business owners looking to exit will welcome.
As SmartCompany revealed on March 29, the massive growth of funds available to private equity funds is sucking demand out of the SME market as fund managers search for the big deals that will deliver them the fat fees.
This means many businesses below the $50 million annual revenue mark are missing out on higher sale prices the private equity bonanza was supposed to bring.
On the supply side, increasing numbers of baby boomers reaching retirement are starting to generate a steadily increasing flow of businesses on to the market. At the same time, the Federal Government’s 2006 superannuation changes have created a June 30 deadline for SME owners hoping to beef up their retirement stash with a million-dollar contribution.
Hayes Knight senior partner Greg Hayes says these trends are being exacerbated by a structural shift in the market. “There is what you might call a lifecycle of business as people buy, sell and buy again, and at the moment that is just feeding businesses on to the market and really giving buyers the upper hand.”
Accountants muscle in
The upheaval in the business sales market has also prompted a rush of accounting firms into providing sales services, which had been the domain of business brokers. The accountants are motivated by the prospect of offering new services to their clients and the additional revenue that brings.
Hayes says the succession issues faced by many baby boomers selling their businesses has given accounting firms a new way into the sales service space.
“These succession issues have led accountants to get far more involved in sales, without a doubt. They are often issues that need to be dealt with sensitively. It’s the sort of thing they [business owners] will only do once in their life so it’s natural to go to someone who they have a relationship with.”
Wayne Marlow, a director of business brokers Blount Osborne Walsh, has a slightly more cynical view of what is behind the move.
“It’s definitely a trend at the moment. There’s good money in it, especially at the $2–10 million mid-tier, accountants are chasing the work as a way of making money on top of their core business,” Marlow says. “Its all about value-add: they want to add to their other services and many promote themselves as being deal doers but they’re not.”
New competition from online
The profits to be gained in a swollen business sales market have also prompted a wave of new ventures seeking to provide services online.
BizExchange, Seek Commercial and realcommercial.com.au are just a few of the websites battling in the last few months to become the dominant online marketplace for businesses, while sites such as BStar are providing services such as online valuation calculators.
The “baby boomer bubble” was a key factor behind the establishment of BizExchange, director Andrew Kent says.
Kent says BizExchange doesn’t seek to compete directly with accountants and business brokers, although he acknowledges that some business sellers do list directly on the site.
“It tends to be owners of smaller businesses who list directly, and that’s really reflective of what the broker or the adviser market is interested in – the smaller end. It’s not always a viable proposition for a lot of these guys so there is a cut-off point there.”
Paul de Rome, a director of business broker Jamiesons, says while BizExchange is one of the good sites out there, business owners thinking of selling online need to be wary.
“There is a proliferation of websites targeting people selling their business, but there’s also a lot of work involved and experience needed in handling a business sale and especially in determining a pricing for a business. To just do it yourself and keep running your business, it would be hard to not take your eye off the ball,” de Rome says.
Accountant or business broker?
Business brokers claim they are closer to the market than accountants and so better able to give a realistic assessment of the value of a business.
But more importantly, says business broker Wayne Marlow, brokers are motivated by heavily commission-based fee structures to strive to sell their clients’ businesses.
“The difference between accountants and us is that we know how to do a deal; the reality is someone who’s paid by the hour doesn’t have a finish line,” Marlow says. “Brokers get paid when they sell the business, and if we don’t deliver, we charge nothing. But accountants will always want at last a retainer and often a per-hour rate.”
But the fee-for-service basis that accountants generally use can work in favour of clients, according to Grant Thornton partner Peter Carroll.
“Brokers do work on a success fee and if it is a hard to sell business they can run out of puff. We want to have relationships with clients over the long term and so that not only provides a motivation but it means we are conscious of achieving outcomes that work for them,” Carroll says.
He says the business owners often go to accountants to sell their businesses because of long-standing relationships and the “one-stop shop” they can provide. “Accountants can handle the structure of the transaction and tax advice as well as the sale of the business itself, and that is attractive to some clients.”
In the end, however, brokers and accountants both acknowledge that the most important thing for a prospective business seller to do is find someone with experience in their sector and track record of making sales at good prices.
Hayes Knight’s Greg Hayes says business owners thinking of selling need to assess the different strengths of accountants and brokers.
“Understand what you want, and if you hear of someone with specialist skills in the space your in, they are probably the best – whether they are an accountant or a business broker. It is really horses for courses.
“Some accountants are very good in this space; others who aren’t very experienced and would purely deal with it to help a client may not be the best person. Equally there are brokers who know their markets inside out while for other, it’s just another business to put it on their website.”
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By Tom McKaskill
When you decide to sell your business, you can do what the vast majority do and hand the process over to a broker, who will simply advertise the business to solicit the highest offer in the shortest possible time with the least effort on the part of the broker.
However, this is hardly likely to find the buyer who can best exploit the potential in the business, an essential requirement if you are to gain the highest price. Instead of giving the task to someone who knows little about your business, and probably even less about who the right buyer could be, take charge of this process yourself.
For a business where the value is based on its ability to generate future profits, the highest price on sale will be obtained by finding a buyer who can fully appreciate the potential in the business and is able to exploit that potential. That is, you really need to find a person or corporation who can develop the business and who has the capacity and capability to do so.
Simply advertising the business in the hope of finding someone or some corporation that can best develop the business is as reliable as tossing your hat in the air to see if it lands back on your head.
The right buyer is almost certainly a corporate executive within your own industry who wishes to transition into their own business, or a corporation in your industry, undertaking a roll-up or consolidation strategy. That being the case, your best strategy is to become known within your industry and get yourself on the target list for those companies looking for acquisitions.
The best corporate acquirers are frequent buyers, have very good processes for integrating new acquisitions, and will be able to fully appreciate the preparation work you have done and the potential you have built into your business.
You need to get on the radar of corporate executives who might be interested in buying a business and on the target list of corporations undertaking acquisitions. Time spent supporting the industry association, developing a high profile through industry media and industry events and getting known through local and national public relations won’t be wasted.
Other ways to put yourself in front of the right buyers include tracking acquisitions activity within your industry to