This is a very interesting and topical question. We have been asked by our PR Company, Alexander Communications, to comment on what business owners should do regarding retirement and succession planning in today’s economic times. Paul, my business partner, was on ASB breakfast Friday 16th to talk about this issue and to make it three, a MBA student saw our article in Unlimited last week and wants to come in and ask me my thoughts on this area for his thesis. All the stars appear to be in line for this week’s blog.

I think it is a given, that most business owners don’t have a succession plan and most industry experts are advising owners to ride out the current market dip and wait for better times before they exit. Is this good advice though?

We have looked at all the business broker websites and there appears to be about 2,500 businesses on the market, being sold via brokers. Obviously this covers all businesses from dairies up. There are about 150 that are above $1 million. With that being said, there are still more buyers than sellers in the market, and a good business is achieving a multiple somewhere in the range, 2.5-3.25 times income area. (Business with enterprise value under $2m which is where the bulk of NZ businesses sit) This is a little down on 2007 numbers but still a fair ROI for both sides of the transaction considering the market conditions.

Statistics NZ say that there are 471,000 businesses in NZ with a turnover exceeding $30k (excluding farming). The ASB survey of March 2009 states that 25% of owners wish to sell in the next 5 years. This poll points toward owners who wish to voluntarily retire, and won’t include owners for whatever reason, that have to exit. That means that about 120,000 businesses could hit the market during the next 5 years, or 24,000pa. That is over 10 times the number that are currently on the market.

The question I have, and I remember my 6th form (not sure what year that is in today’s speak) economic teacher’s explanation of ‘supply and demand’, what will 10 times more supply do to firstly pricing and then demand? Is it a valid question to ask whether a business owner exiting in the current economic downturn could achieve a better sale price than waiting 5 years and joining the rush? Personally I would think yes. There are still more buyers than sellers and a good business will stand out in the current climate.

So the question, on most who read this blog lips, “Is this just a business broker wanting more businesses to sell?” Obviously we would always like more, but looking at our prospects board, things are looking very good right now. But I think the important distinction is, whether or not brokers want more businesses on the market, is that purchasers want more opportunities on the market. That has to be the point that sways the argument. If in the current market there are about 2,500 businesses (good and bad) for buyers to fight over they will be spoilt for choice if 10 times that number hits the market in the same year. Having more buyers than sellers in the current market gives a business owner an opportunity to defend their price in the negotiations. This won’t be the case if the numbers flip.

So to conclude, it seems less of a risk to me if you, as an owner, want to exit your business sometime in the next 5 years, to sell now when there are significantly more buyers than sellers, the market and business confidence has improved marketedly, lenders are making noises that their appetite for risk is moderating, rather than hold on in the hope that things might improve and you get hit by the Tsunami of baby boomers all exiting at the same time.

It is our opinion that business prices achieved in this market are only down somewhere in the range of 10-15%. Is it worth taking the risk of holding on for such a small upside? We think not, see you next week.