Small businesses owners are jeopardising the survival of their companies by failing to plan their own exit strategy.
That’s according to wealth management service Zen Wealth, which points to the fact that as many as 60 per cent of small business owners do not have a succession plan in place, according to surveys.
Patrick Murphy, chartered financial planner at the company says, ‘We find a lot of small business owners are relying on the release of capital from their business to fund their retirement.
‘Unfortunately, this is pure fantasy for most small business owners as they do not have a plan in place, and expect the sale to ‘just happen’. This ‘ostrich approach’ is a risky tactic.’
Murphy adds that small business owners have a lot on their plate, particularly in the current economic environment, and all too often succession planning slips down the to-do list.
‘However, it’s never too early to plan an exit strategy from your business. This means the business will be best-placed for a smooth transition, will achieve its value potential and will allow the current owners to leave the business on their own terms and with financial security,’ he adds.
Succession planning can form part of a start-up’s business plan, encouraging entrepreneurs to crystallise their objectives and consider what factors would future-proof the business for sale or transfer.
Typical reasons for business sales or transfers not succeeding include the business owner ‘being’ the business and it not being able to function without them, the business being reliant on a few large clients with an undiversified revenue stream, and there being a non-transferable lease on business properties.
For family-run businesses, which account for 66 per cent of UK small businesses, there can be additional pressures and emotional factors at play, making it all the more important to draw up a formal, strategic plan.
Only 5-15 per cent of family businesses reach the third generation.
Murphy continues, ‘By creating a realistic exit strategy, operational improvements can be identified, potential weaknesses addressed, personnel improvements made and business valuations are more easily ascertained.
‘By ensuring the business is robust and doesn’t fall foul of any of the usual snagging problems, and by achieving the best valuation possible the business owners are in a better position to effectively plan their retirement income stream.’