Exit Planning
Businesses should be established and grown with the intention to be sold.
While it may be a great bonus to enjoy your work, to generate a solid wage from it, and even be able to enhance your lifestyle along the way, any business needs to be planned from the outset for sale. This will give it a significant commercial value, as opposed to one that is so inextricably connected to the operator and his/ her skills that it is virtually worthless when that person is no longer involved.
A reputable accountant or qualified business advisor should be part of your initial business advisory team, so that milestones and key performance indicators are incorporated into the business plan.
Determine the optimal period you wish to be with the business, then work within that time frame to maximise its viability and saleability. Of course, you may choose to extend the timeframe, but many businesses that do not set a timeframe can languish from inertia.
Most tourism businesses are very people intensive. Maintaining enthusiasm is therefore essential. Recognising that there will be a time when your enthusiasm will wane and you may need to exit is a part of the reality-check. Knowing when to exit and to profitably sell a business is as important as knowing when to start it.
The most saleable tourism businesses tend to be those that are not only profitable and have significant goodwill, but have also established operational systems and documented procedures. They can then continue to run profitably regardless of who is at the helm. Ask yourself:
1. Is the business reliant upon the current owner and how easy is it to transfer knowledge ?
2. Are there documented management and operational systems in place ?
3. When the current owner departs, will key customers and staff be affected ?
4. Is there a healthy work/life balance culture in place ?
Accounting company, CAD Partners (www,cadpartners.biz) advises sellers of businesses to put themselves into the shoes of a potential buyer and to think about what they would look for if you were buying the business. The methods used to value a business mostly relates to the size of tghe business and the type of industry.
For SMEs the most common valuation method is a multiple of EBIT (Earnings before interest and tax). That is, a business could be worth between one to five times EBIT, and the multiple depends on the type of business, its efficiency the and risk to future earnings. Other ways businesses are valued are:
Discounted cash flow: the future net cashflow of the business, discounted back to present value at an appropriate discount rate.
Assets: Going concern value, or realisation value. This method is used where a business is performing poorly and the main value is in the stock or equipment
Relevant industry (market value or 'rule of thumb') - a generally accepted multiple of gross income for the industry
Price to Earnings (P/E) - similar to EBIT Multiple except after tax profits are used and a different ratio is used for multi8ple.
Return on Investment: the return on funds invested to buy the business, ie net profit before owner's wages (adjustments are made to the net profit)
(courtesy CAD Partners P/L, 2009)
The rapid growth in franchising worldwide is built on the principle of standardised and documented systems. While you may have no intention to franchise your business, the development of a franchise style administrative and operational system, plus introducing quality control measures, should maximise the value of the business. The development of such systems can also mean that it can run when you wish to take a well deserved break, are indisposed for a prolonged period, or wish to develop additional business interests.
For some businesses, the sad reality is that a death or serious injury to a key person will require the premature winding-up of affairs. Key person insurance can be taken out, and it goes some way to providing economic protection and peace-of-mind. Regardless, the trauma of dealing with death or injury and business affairs is usually significant. Read here to learn about what to do in this situation.
Whether you are selling or closing a business, it needs to be done carefully.
Click here to read about the necessary steps, including tax and legal obligations, how to deal with employees and their entitlements, and which authorities need to be notified