October 15, 2020

Business Succession for Mining & Resources: Getting Exit-Ready takes THREE to FIVE years

Business Succession for Mining & Resources Getting Exit-Ready takes THREE to FIVE Years Business Owners Mining Resources

Research* indicates that a large number of business owners, among them those in mining and resources, are planning to exit their businesses within the next five to 10 years.

Importantly, findings also indicate that on average, getting exit-ready requires three to five-year lead time.

As an extremely challenging and disrupted year begins to wind down, many business owners are likely to pause and reflect on the year that was, including contemplating the question ‘how much longer will I lead my business?’

Whether you’re feeling tired and worn out or conversely, deeply connected to your mining and resources business but feeling the pressure of looming retirement or health issues, successful business succession depends on being both emotionally-ready and financially-ready.

Succession takes time

While exiting a business is ultimately about selling, succession planning is about clearly defining the pathway to that sale, at a pre-determined point in time and in a manner that will deliver the best possible outcomes for both the outgoing and incoming owners and management teams.

An *Exit Smart Survey and Report conducted by William Buck in 2019, indicated that of the 300 participating businesses, 77% expected to exit their business in the next 10 years, and of those 53% expected to do so in the next five years.

However, despite these very high exit expectations, only 34% of participants have an exit strategy in place.

Further, and despite the large number of business owners wanting to exit their business in the next five years, (53% with an average age of 54 years), the survey revealed 31% of business owners had never sought independent advice and 13% had ‘never really thought about it’.

Unfortunately, many business owners only consider succession planning when they’re ready to go – imminently.  Sadly, we see many business owners being forced to sell their business prematurely due to one of the “Four Ds” – being:

  • Death of the owner or key person in the business
  • Divorce
  • Disease or ill-health
  • Disputes between the owners

In my experience, the premature sale of a business usually results in a significant loss of potential value to the seller.

While 31% of those surveyed were concerned about finding a buyer, 21% were worried about the heavy reliance of the business on them as the owner. And rightly so. Business valuations tend to be lower when business owners are heavily invested in day to day operations.

Leaving enough time for hands-on business owners to sufficiently extract themselves, rectify operational problems, implement improvements and attend to the tax and legal structures necessary to allow a smooth and profitable exit, all takes time.

The process of evaluating a business’ status in terms of its reliance on owners or key staff, its reliance on key customers or suppliers, and the appropriateness of its legal structure in the context of a business sale, followed by the implementation of strategies to address any shortcomings, is known as “getting exit-ready”.

This process of becoming exit-ready may take several years (typically 3-5 years) to complete successfully.

Planning in the early stages

In the early stages, mining and resources business owners thinking about exiting their business within five to 10 years, should be reviewing their personal objectives, including your expected cash flow requirements.

You’ll also need to review your business’ operations, taking into consideration plans for growth as well as evaluating the business’ internal management capabilities. Importantly, you should determine the value of your business now. This will enable you to consider whether the value is likely to be sufficient for your needs at sale time or whether steps need to be taken to increase the value of the business for the future, or alternatively if you need to adjust your expectations and in turn, your financial planning.

This information will enable you to prepare a strategy for optimising your business processes and maximising the business value.

During this early stage, it is also important to properly understand your business sale options which will include full or partial sale, management buy-out or buy-in, joint venture or merger arrangements.

Armed with this information, you will be well placed to develop an exit strategy around your personal requirements and taking into account your best options for an exit.

Ideally the development of an exit strategy will involve input from a variety of trusted business stakeholders, including senior staff, accountants, lawyers and financial advisors.

Five key steps for becoming exit-ready

In my experience, there are five key steps for enabling your mining and resources business to become exit-ready:

Step 1: Review and quantify the owners’ objectives and ongoing cash flow needs.  This may be done in conjunction with a trusted advisor, such as the owner’s accountant, lawyer or financial advisor.

Step 2: Obtain an independent valuation and understand what your business is worth now and what you need it to be worth at sale time.

Step 3: Engage with an accountant and/or business adviser experienced in succession planning matters who can assess the business’ “exit-readiness” and assist with developing a strategy to integrate your exit planning requirements with your current and ongoing business operations.  This may include assessing the following and forming a plan to address shortcomings:

  • How reliant is the business on the exiting owner?
  • Is the business’s legal structure appropriate and conducive to an effective exit?
  • How might an exit transaction be structured? If there are several options, what are the implications of each to the business and the exiting owner?
  • How might the after-tax outcomes for the owners be optimised?

I have also found that larger or more complex businesses may undertake a “mock due-diligence” of the business to identify and address perceived weaknesses prior to undertaking a genuine transaction

Step 4: Seek financial planning advice that considers your business and succession plans with your personal financial planning and retirement goals. Research indicates most business owners have not adequately provided for their retirement.

Step 5: Engage legal counsel to review your corporate structures and contribute to strategies aimed at maximising the likely return and minimising legal risk from the business sale, in alignment with your accountant and financial planner.

Please contact Craig Barry on +61 (0) 7 3007 2000 or email contact@resourcesunearthed.com.au should you have any questions about successional planning and exiting your mining and resources business.

Craig Barry is an accountant and specialist tax adviser who has worked with mining and resources clients for his entire professional life.  To learn more about Craig you can read his profile here.

Resources Unearthed is a solutions hub that provides integrated financial, legal, property and accounting & business advisory services for executives, professionals and business owners in the mining and resources sectors.

*William Buck’s Exit Survey / Report 2019 is an independent report surveying Australian small-to-medium business owners and c-suite executives, to measure their business’s level of exit readiness. William Buck surveyed over 300 business owners and employees.

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