I often hear from agency principals that the bulk of the goodwill and value of their business is directly tied to them – in other words, if they were to exit, so too would that goodwill value. That’s why it’s critical to have someone lined up – experienced and appropriate hands – to take over and run your business if you need to leave.
Business or corporate succession is essentially the planning of your business for a future where you are no longer at the reins.
It’s different from personal succession planning, which involves plans for your estate if you were to pass away.
Without succession planning of either kind, the choices you would have made – or your expectations of the future – may instead be determined by someone else.
The key word here is planning!
While you’re building your business, it’s easy to focus on revenue rather than equity value.
Chasing a revenue target might seem like a good idea, but in reality, it’s little more than a vanity metric.
What you should be focusing on is your profitability, which in turn will positively impact your equity value.
You need to be focusing on what you are building, making sure it doesn’t just give you the lifestyle and income that you want now, but also adds to the value of the business in the future.
It’s the owners that do both that remain ahead of the game and will be more likely to achieve a greater sale price when they do exit than those that don’t.
So, how do you get the best deal and the best price when you exit?
Well, it’s quite simple. You need to be proactive rather than reactive in your approach.
You need to plan your exit now, rather than waking up one day and thinking, ok, it’s time to sell or retire, and try to reverse engineer from there.
If you wait until the time comes, you’ll have fewer options available to you and the price will only be driven by market forces.
Think of it like selling a house. If you suddenly decide to sell because you need the cash or don’t want the mortgage anymore, then you will probably sell as is and the market will completely dictate the price.
You might spruce it up a bit, but it won’t greatly affect the value and sale price.
If, however, you plan to sell in five years and know that a four-bedroom plus a study is what the market is demanding, then you can renovate your three-bedder, manufacture capital value and come up with the best sales strategy possible.
You can also time the sale to ensure market conditions are right.
It’s the same with selling your business. Let’s manufacture as much capital value as possible by planning, plugging any leaky holes that could affect the value of your agency (to drive the multiple up if you have a rent roll) and sell at the best time.
There are different ways in which you can make your exit. Each has different procedures as well as their own unique pros and cons.
Asset/rent roll sale – this is often referred to as sale of business or a ‘trade sale’. This is when your company sells the assets to another person. You choose which assets are sold and which you retain. On an exit, you generally want everything to go. You would need to find a buyer and may use the help of a broker to get you the best deal.
Sale of shares – in a full sale of shares, you are exiting completely, and someone is coming in to take over the lot. With this option, while you have the contract for sale and share transfer forms, there is much less other paperwork as you don’t need to assign or have new MAAs (Managing Agency Agreements) entered into – it’s just the share in the company being transferred.
Sale of shares (partial sell down) – this is becoming quite popular and that is to sell down over time. It can be used to bring in anyone, but is often used as part of a retention and succession strategy to lock in a gun staff member who is looking to take over one day.
It’s always important that you involve your accountant in these decisions and get them involved well in advance so they can do some tax planning for you and your family. Depending on your personal circumstances, there may be a better financial year for you to transact in than another, especially if you are also buying or selling other assets like property or have a family trust.
To learn more about the different exit strategies that are available to you, register for our next free webinar here and if you can’t make, still register as all webinars are recorded.
