If you own a small to medium sized business in New Zealand and selling up is on your mind, then be prepared for some stormy weather ahead.
- A recent survey showed New Zealand has more than 90,000 businesses owned by people aged 55 and over. Most of them will exit from their business within 5 to 15 years.
- Another survey indicated that 40% intend to leave the business in the next 5 years and 60% of them plan to use their business sale as their primary source of retirement income*
In short there will be a lot of businesses coming on the market and while this is good for buyers, the sellers will be facing more competition than ever before in New Zealand’s history.
The good news is there will be a good pool of buyers from local and overseas sources. The bad news is many business owners are not going to realise the value they require due to the competition. Phil Wicks, a leading succession planning expert from Business Success Partners warned of this last year.
“A large number of New Zealand businesses are heavily reliant on the owners to run them. These types of businesses are not realising their expected valuations at sale time due to buyers focusing their attention on better quality stock.”, says Phil.
In short it appears that buyers are wanting businesses that are not reliant on the owner for day to day operations and are prepared to pay a premium to acquire them.
Phil Wicks sees two factors that have a significant effect on business valuations.
The two contributors to the business valuation decline.
- Stagnant turnover.
The majority of small businesses peak at around $500k to $1m and stay at that figure without any more growth. Sale prices are generally significantly lower for these types of businesses.
- Too much reliance on business owners for day to day operations.
Buyers want businesses that are proven to be profitable without reliance on the owner. They are prepared to pay a premium to achieve this.
In a recent survey* of SME owners, 51% of the people interviewed identified that achieving work/life balance was the main issue in their business.
To position your business for a successful sale it would appear you need to address the above concern and fast. Quality lifestyle, time freedom, a profitable business and a sellable asset is something buyers also desire. Phils team specialises in restructuring businesses to meet this demand and has seen an uplift in enquiries from SME business owners in recent years.
For example, a small manufacturing company who turns over about $1.5m and generally returns to the owner between 15-18% NPBT. The company has doubled in size over the last 4 years and is performing better now than it ever has. The owners (a couple) of this business spends about 30 hours on this business – a year! They also don’t actually live in NZ anymore. So here is a business that is still performing, still pays the owners well but is not demanding of their time.
A similar sized business but in the service industry has the owner working 10 hours a week, in an over seeing capacity, while focusing on his passion of flipping houses. The business is well run and profitable, but again is affording the owner the lifestyle he wants.
These types of scenarios don’t happen by chance. They are usually part of an initial vision and then a well thought out strategy to turn the vision into reality. If we are to learn anything from the statistics in New Zealand, it would appear the single most important deliverable that comes from this type of planning is making the business less reliant on the owner.
Phil has written an article on this, titled "The 'Great Business but I Have No Life' Paradox – And How to Solve It" with some tips on what needs to be done. You can read it here.
What are the first steps?
His advice to business owners is to get started by following the simple steps below:
- Recognise the need for change
- Develop a personal and business vision for your future
- Develop a well thought out strategy to achieve your vision
- Bring in expertise to help you if needed (especially in strategic development)
- Every week spend a small amount of time on your strategy
- Start developing people and leadership
- Learn to delegate responsibility more
- Employ good people (they are out there!)
- As leadership develops introduce profit share systems
These items and more are covered in the Business Succession Program that Phil and his colleagues run nationwide which is designed to assist SME business owners grow sales and profits and work on the business, not in the business.
If you are interested to talk more about your business make contact with your local advisor or fill in the form on this page and speak with Phil directly.
"A small business owner will not only improve the life/work balance considerably by what in essence is actually succession planning, but will also build an asset that will be in demand by buyers."
* Ministry Of Business Innovation and Employment
* Bizrewards Study 2016
* Xero business study 2019