By Daniel Livingston, Partner and Scott Colvin, Lawyer
Australian family owned businesses collectively hold an estimated $4.3 trillion of wealth, make up 70 percent of the approximately 2.6 million Australian registered businesses, and employ over 50 percent of the nation’s workforce.
Their wellbeing and survival are critical to the Australian economy.
However, statistics suggest that only 30 percent of all family owned business survive into the second generation, only 12 percent are still viable into the third generation, and a mere 3 percent will make it to the fourth generation and beyond.
For many, the family business is the largest asset they own outside of the family home. Many owners rely on selling their business to fund retirement. However, the ATO reports that about 6 percent of businesses close each year without even trying to sell. Many more are forced to exit on less than favourable terms.
The reasons why typically falls into one of two categories – 1) unplanned circumstances and 2) lack of exit planning.
The number of business owners that will leave the business in the next five years due to unplanned circumstances (e.g. death or disability) is estimated to be 51 percent. This is no surprise when considering that the average age of a ‘small’ business owner is around 58 years.
Based on these numbers, that is a massive 1.3 million businesses that will be affected by an owner leaving the business because of unplanned circumstances in the next 5 years.
Alarmingly, despite this aging demographic of business owners, 75 percent of these estimated 1.3 million unplanned exit owners (975,000) reportedly have no formal succession plan in place. That should be a very scary thought for those business owners and their family.
The other key category is a lack of exit planning. The exit might be via succession to a family member or an exit to an independent third party buyer. For a business owner to position themselves to get the best terms or price payable on a transfer of the business requires detailed planning. Those businesses that are able to get their “house in order” will be able to demand the best exit or transfer terms.
Don’t let your business be washed away
In excess of $3.4 trillion in business value will change hands in Australia over the next 10 years. Some in the media have called it a “Tsunami of Business Sales”.
However, this area is not receiving enough focus from business owners and their advisors. Private Equity is starting to enter this space in a big way – it’s on their radar because they see an oversupply of businesses, with many coming cheap from Vendors who did not properly plan their exit to maximise value.
The “Tsunami of Business Sales” on the horizon threatens to wash away further value as the market becomes increasingly saturated and an over-supply of businesses for sale pushes prices down across the board.
In addition, since the banking Royal Commission, financial institutions have tightened lending criteria and are carefully scrutinising small business activities. This is affecting access to funding and in turn limiting the pool of potential buyers for businesses. Saturation of supply and funding constraints make it more difficult for an owner to sell their business at its true value.
This is where proper exit planning again becomes critical. It will be the well-run, well-structured and well-planned businesses that will command the top dollar on exit.
How to best position yourself
The day-to-day demands of running a family business can be all-consuming, and working in the business is seen as more critical than working on the business. However, it’s vital that business owners or key management dedicate the necessary time and focus to assess their business succession planning.
For private or family-owned businesses, a solid succession or exit plan can drive the growth of the business, reduce taxes, and lay the foundation for exit.
This will be vital over the coming 5 to 10 years and the substantial wealth transfer we will see over this time. Now is the time to have a clear and unwavering focus on strategic succession or exit planning.
So, what next?
Speak to us.
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