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BUSINESS EXIT OPTIONS FOR SME OWNERS

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BUSINESS EXIT OPTIONS FOR SME OWNERS

By , February 12, 2010
adviser

In Australia SME’s have largely been defined based on their number of employees, for manufacturers less than 100 employees is classified as an SME and for service businesses less than 20 employees.[1] According to the Queensland Government, a Small to Medium Enterprise (SME) is defined as any legal entity with less than 500 Employees worldwide.[2]

There are approximately 2.01 million small to medium enterprises in Australia which are responsible for employing nearly 50 % of the Australian workforce.[3] SME’s make up 99.4% of all Australian businesses and account for about 60 % of the national economy. Approximately 90 % of Australian exporters are SME’s. Medium sized companies ( between 20 and 199 employees ) account for 41 % of total goods exporters.[4]Approximately two-thirds of all ASX listed companies are SMEs.[5] Australia’s medium business ( between 20 and 199 employees) contributes 23.6 % of national Gross Domestic Product.[6]

At June 2007, there were 641,538 (32%) Companies in Australia, followed by 620,037 (31%) Sole proprietors, 385,801 (19%) Partnerships and 364,075 (18%) Trusts. There were also a relatively small number of businesses (<1%) operating in the Public sector.[7]

Out of all private sector businesses in the period June 2006-07, entry rates were highest for Sole proprietors (22%) and Trusts (19%), followed by Companies (14%) and Partnerships (12%). Conversely, exit rates were highest for Sole proprietors (20%) and were noticeably lower across the other private sector categories. The business exit rate during 2006-07 was 14.6%, down from 14.9% in 2005-06. This exit rate was the lowest rate recorded over the four year period to June 2007.Across the past four financial years, both entry and exit rates have been relatively stable for all private sector categories.[8]

The exit rate and preferred exit options are a key issue, given that the value of Family Owned Businesses in Australia is approximately $1.6 Trillion and that the approach of the baby boomers bubble will dramatically increase the number of business owners approaching or at retirement age – all of whom are searching for an exit strategy to ensure the return on their equity in their businesses.

According to the ANZ Bank Private Business Research 2008 – Understanding the opinions of privately owned businesses in Australia. Shareholders’ “chosen” method of ending involvement with their company:

over $40M

Under $40M
Other

11.5%

6.7%
Venture Capital

3.5%

6.0%
Sell externally – IPO

15.4%

6.4%
Sell Externally Private Equity

15.4%

8.8%
Sell to family

7.7%

20.5%
Sell to Management team,

23.1%

19.0%
Sell externally – trade sale

23.1%

38.0%

In terms of Business exit, one of the most important issues, , is the equity / wealth extraction. This issue is where many exit plans fall over due to incompatible timetables, simple lack of funding and inadequate structures to deal with the vagaries of ownership styles and structures within SMEs. There is a potential solution for the use of ESOPs as a structured approach for transferring ownership whilst facilitating the smooth exit of current owners. This approach is extremely popular in the United States, with nearly half of all ESOPs there being used by private firms to buy out an owner.
[1] APEC and SME Policy, Suggestions for an action agenda, Chris Hall, UTS Sydney, 2007

[2] SME Participation Scheme, Policy and Guidelines, October 2006, QLD Government Policy Statement and Operational Guidelines for Government agencies.

[3] ABS Cat 8165.0 Counts of Australian Businesses, including entries and exits Dec 2007

[4] SME trends and Achievements: Report by CRA International for Telstra Business , Feb 2007.

[5] ASX Newsletter, 2006.

[6] ABS Cat. 8155.0, Australian Industry 2006-07.

[7] ABS Cat 8165.0 Counts of Australian Businesses, including entries and exits Dec 2007

[8] ABS Cat 8165.0 Counts of Australian Businesses, including entries and exits Dec 2007

Craig West

Craig West

Managing Director | Succession Plus

Craig West is a strategic accountant who has over 20 years’ experience advising business owners. His background as a CPA in public practice, provided invaluable experience in the key issues of concern to business owners. Following 6 years of study to gain two masters degrees, Craig focused on Capital Gains Tax (CGT) for business sales advising on strategic management of tax issues. This experience formed a very strong view that business owners (and often their advisers) were unprepared and unaware of the steps required to prepare a business for exit.

Craig now acts as a strategic mentor for mid-market business owners and has written four critically acclaimed books on employee incentives, succession planning, asset protection and exit strategies. Craig has conducted numerous seminars and keynote presentations throughout Australia & internationally, including adviser education programs for the Institute of Chartered Accountants and CPA Australia.