How can you maximise the value of your business upon retirement?

Succession planning is crucial if you want to get the most out of your business when you come to retire. A lifetime of hard work can easily be flushed down the drain if you don't have the right plans in place.

As a business owner, the chances are your business is a significant part of your retirement fund. Therefore, having the right processes and structures in place is essential if you want to reach your retirement goal while ensuring you extract the maximum value of your business.

Essentially, there are two main options that are available: one is a complete exit and the second is to retire from the day to day running of the company and remain a shareholder in the business.

Exit

An exit would traditionally involve a trade sale, management buyout or a sale to private equity investors...

Trade sale

A trade sale often provides the greatest value of all the exit routes as the buyer is investing in something that will enhance their existing business. The buyer may have identified synergies that are available when the target business is acquired and this could lead to a greater disposal value being achieved. The key to a successful trade sale is having a strong management team in place that is capable of running the business without input from you as the owner. Businesses without a strong management team can struggle to attract buyers as the value of the company is perceived to be tied up in the abilities of the owner.

Management buyout (MBO)

This is where an existing management team buys the business from its current owners. An MBO can potentially deliver good value to existing shareholders provided that the management team can secure investment to fund the purchase of the shares. This option generally involves the least disruption to the business as the majority of the individuals operating the company will not change.

Private equity

To be of interest to a private equity investor, the business either needs to be the right size for the existing private equity portfolio or have a niche product/service that can be ‘bolted on’ to the existing portfolio of businesses. A private equity firm may look to insert its own management team, develop the business and sell it on. This means they may try to buy the business at a lower cost than may be available on the trade market. 

Retain ownership

As a business owner, you could step back from the daily operations of the business and put a management team in place to take over the day to day running of the business. You could then continue to draw dividends so long as the business continues to trade profitably. There would, however, be no lump sum upon retirement and the owner would continue to retain the risks of the business going forward.

Key steps for maximising value on retirement 

Plan ahead – It is important for any business owner to plan when they intend to retire from running the business. Once this is known a strategy can be formulated either for succession or disposal of the business. If a disposal is the preferred route, steps can be taken in the period preceding a sale to prepare the business.

Deleverage yourself from the daily operations of your business - In the period preceding an exit or retirement, it is important to develop a senior management team capable of both running the business and also developing and driving it forward in the future. If you don't have a management team you would trust to run the business without you, you are potentially limiting the value you are able to extract upon an exit or retirement.

Work to grow profits and or develop a niche – A business with growing revenues and profitability is always going to be more attractive to a potential buyer. If your business develops a niche in the sector it operates in this can also make it more attractive for acquisition as a potential buyer could be investing in something that enhances their own existing business.

Haines Watts - North East accountants and business advisors

It's crucial for business owners to develop an exit plan ahead of their anticipated exit from a business. Haines Watts offers a range of corporate finance services in the North East, including strategic business planning, acquisitions and disposals advice, and assistance with grants and funding. If you're thinking about the future of your business and want to maximise its value upon retirement, please get in touch with Chris Hird to arrange a no-obligation meeting to discuss your requirements.