Retirement planning flawed for many business owners
Baby boomers looking to sell their businesses to fund their retirements could be in for a financial shock.
New Zealand leads the world in the number of business owners who are looking to sell as part of their succession plan – a massive 69% compared with the global average of 25%, according to an international survey by accounting firm Grant Thornton.
Of even more alarming concern is the perplexing question of who is going to buy these businesses.
Peter Sherwin, chairman of partners for Grant Thornton, Wellington, said that these figures signal a serious problem for both the businesses and how the owners are looking to fund their retirements.
“New Zealand is working its way through a demographic bubble, the Baby Boomer phase, which is characterised by a proportionately high number of businesses being owned by people rapidly approaching retirement age.
“It’s a twin edged sword. You have a bubble of people looking to sell their businesses before retirement against an economic environment with a low appetite for risk and tight capital markets,” he said.
Grant Thornton’s International Business Report examined the thoughts and opinions of 7200 leaders from privately held businesses in 36 countries.
New Zealand’s 69 per cent was well ahead of Australia’s 45 per cent followed by Brazil (42 per cent), Japan (37 per cent) and South Africa (34 per cent). At the opposite end of the scale were Thailand on 1 per cent and India (4 per cent). The world average is 25 per cent.
“A succession plan should start well before the business is offered for sale, thereby giving the owner sufficient time to put the business into a state of readiness. It is important to both maximise and normalise profits.
“If sale is the end transaction, then it is important to have a process that delivers the appropriate person and the best price. It is also critical to have consulted with the correct professional advisers as early as possible.
“Ideally it takes two or three years to groom both the company and potential purchasers.
“Throughout the process the business owners must be mindful of the fact that New Zealand is not a wealthy country. We are well down the OECD list as far as income is concerned which exacerbates the secondary problem of getting the funds to purchase the business, especially in today’s environment where banks are still lending, but on a sharply reduced level from two years ago, and the alternate funders like finance companies and private equity funds have all but disappeared.”
Sale or passing the business to a family member is recognised in the survey as the most common option (23 per cent) followed by a trade sale (18 per cent), bringing in private equity/investors (14 per cent) and a management buy-out (13 per cent).
What business owners should be doing as they prepare to sell:
- eliminating discretionary expenditure (such as excessive remuneration paid to shareholders/directors and excessive travel and entertainment expenditure)
- identifying the correct tax structure
- reviewing stock and debtors provisions
- reviewing accounting policies
- assessing and identifying all business assets and values
- identifying surplus assets and deciding whether these should be sold prior to the sale
- reviewing employment contracts, notice periods, transferability of staff and agreements
- reviewing lease provisions and terms of trade with customers and suppliers.
For further information, contact:
Peter Sherwin,
Grant Thornton
Wellington
T (04) 495-3777
E psherwin@gtwn.co.nz