The ‘exit generation’ needs help – SMH 19th September
Picture this: within five to 10 years there will be thousands of small business owners each year who are forced to close their enterprise upon retirement. After a lifetime of hard work they will walk away with nothing, because there are not enough buyers at a fair price. Many employees will lose their jobs, and country towns in particular could lose some small businesses that provide important services.
I doubt if enough politicians grasp the significance of a generation of baby boomer operators of small businesses leaving the workforce this decade and next. Or the effect that years of poor superannuation returns will have on their exit strategies. If they did, there would be more considered long-term thought and even policy action to help plan for and manage this incredible business transition.
With business owners needing a good three to five years to plan their exit, this is the time to act.
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Business and insolvency experts tell me that more small business owners are already struggling to find buyers for their enterprise upon retirement. And that’s when the trend of baby boomers leaving the workforce is still in its infancy and when the Australian economy has solid fundamentals. Imagine what happens as the trend of baby boomer retirements peaks around 2020.
About one in four business operators in Australia were aged 55 or over in 2007, Australian Bureau of Statistic (ABS) data shows. In raw figures that’s just over half a million enterprises. My hunch is the proportion of business operators aged 55 or over will rise when figures are recalculated based on latest census data: poor superannuation returns will have forced more people to delay retirement, while others who were unable to sell their enterprise for a good price will have kept working.
Care is needed with these ABS statistics, which are based on a survey and prone to sampling error. It is likely that a chunk of the total 1.92 million business operators provide services, such as consulting, where they are the business, and closing rather than selling the venture is expected. And rising life expectancies could see more operators work longer than previous generations.
Even if you halve the 296,000 business operators aged 60 or above, there are thousands of small enterprises that must to be sold each year in the next five to 10 years. This glut of business sales could come at precisely the wrong time if US and European economies have another five years of economic pain (a “lost decade”, like Japan) and the global economic recovery is tepid. Heaven help us if the non-mining part of the Australian economy weakens further, just as more business operators need to sell.
Smart owners of enterprises already have one foot out the door. A recent KPMG family business survey found 59 per cent of respondents would consider selling their enterprise if approached by a genuine buyer. But just over a third of respondents said their business was “exit” or “succession” ready. The majority of respondents had annual turnover above $1 million, meaning even more sophisticated private enterprises have plenty of work ahead to make themselves ready for sale.
What chance do smaller enterprises have to engage in serious exit planning or succession strategies, especially if they are struggling to keep the business profitable, let alone plan for an exit that may be some years away?
The danger is ageing business operators abruptly decide to sell when they have had enough; which is the worst possible time and strategy to get a good price. Or that weaker trading conditions mean less investment in the business now, and less ability to get a good price later.
A more important question is where will buyers come from? Think about the traditional exit mechanisms: a trade sale to another company; selling to private equity; an initial public offering on the sharemarket; the succession of younger family members to run the business; and a partial exit by hiring external management to run the company while the business operator retains majority ownership.
I see fewer Generation X and Y people wanting to run the family business over the next decade. Most businesses needing to be sold will be too small to raise capital and list on the sharemarket, or attract private equity. Trade sales will always be the key exit path, but with a glut of businesses wanting to sold, valuation multiples could fall.
One business broker last week told me that valuation multiples of about six times earnings before interest and tax (EBIT) prior to the GFC, for a quality small business worth more than $5 million, are now around 3.5 to four times, and a good chance of heading below three times – a huge destruction in value.
I suspect that more business operators will have to make partial exits by hiring external management, possibly selling them some equity, and slowly leaving the business over time.
The federal government can play a big role in managing this transition. It should provide more support for business operators who are approaching or past retirement age, and who want to hire external managers to run their business. Here are four ideas for federal and state goverments:
•Launch awareness campaigns to emphasise the importance of engaging in exit/succession planning several years before the event
•Consider a tax rebate for business owners over 60 who engage corporate advisors, accountants, lawyers, and wealth-management experts on succession/exit-planning issues. Maybe half the fee could be rebated (instead of the usual tax deduction now), provided there were strict guidelines, so sharks and shonks could not rort the subsidy
•Consider a tax rebate for business owners over 60 who form an advisory board to provide advice on exit/succession planning and other strategic matters. Perhaps half the director fees could be rebated through the tax system (instead of the tax deduction now), to encourage ageing business owners to form boards and tap external advice. Again, strict guidelines would be needed to stop rorts
•Consider launching a federal government fund to finance part of management buyouts or ‘buy-ins’ for ventures worth $5-$30 million, where the owner is past retirement age. This would make it easier for an employee to buy out an owner who retires, or encourage external managers to join the firm and buy into it. I can’t see the banks doing enough in this space, meaning governments might have a role to provide debt capital for aspiring business owners. That’s got to be better than watching a business close and dozens of employees lose their jobs because eager buyers cannot access finance
I’m not sure what the answer is, but I do know that more debate is needed about a defining small business trend for years to come.
Most of all, we need considered thought about how to retain some commercial knowledge of a generation of retiring business operators. I would love to see formal programs where accredited retired business owners are paid a modest fee – yes, paid by the government – to mentor emerging Gen Y and X entrepreneurs or join their advisory boards, or given tax incentives to invest in emerging enterprises (under strict conditions). We could swell the number of “angel” investors overnight and build a deeper pool of patient capital for micro enterprises, which would come from experienced business operators and investors who bring much more than money.
We also need more thought about the opportunity this generational transition will present to younger people who can take the reins of many smaller enterprises and reinvigorate them. I’m convinced that within a decade, many more young people will need to create their job rather than apply for it, as big companies automate more services or outsource them overseas.
With some rare foresight, politicians could find stronger mechanisms to link thousands of business operators who need to sell, with thousands of young people who need a job, are eager to start a venture, run an existing one, or create value by reconfiguring resources through industry ‘rollups’, which could go to waste if business operators are forced to close viable enterprises.
This trend is simply too big a threat, and an opportunity, to pay lip service to, or to think that the problem is years away. It is emerging now.
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