Thursday Thoughts for SMEs - Don’t Sell. The Case for Building Enduring Wealth.

As many of you know I am a believer in selling, it's why I started a Corporate Advisory business! But there is another side to me. A side that argues the case that good businesses should not be sold but rather ‘corporatised’ and held to build enduring wealth. 

This week I want to dive into this concept of the case for building and holding instead of selling. 

The Real Reasons they Sell 

Most business owners that I come across who want to sell are driven by one thing only: Emotion. 

Emotion is a very powerful force. Our emotions can make us believe that we are “over this business” or that “the grass is greener”. Emotion is the core driver in owners wanting to sell their business. 

This makes sense when put against the metrics of sales. The average SME trades at a multiple of around 3x EBITDA. Owners are prepared to take 3x their annual earnings up front rather than hold on. In context this is less than the time between each Olympic Games! 

SME owners generally must be motivated by something else because 3 years is not that long. To be fair, there are some tax considerations in relation to CGT concessions etc which may result in more benefit in those 3 years than if the EBITDA was paid but you do need to question why? 

Why wouldn't an SME owner just hold on? 

I think the answer is that they generally don't know how to hold on and simultaneously let go. 

The benefits for holding on with the right structures in place are immense. This business could be the jewel in the Family Office crown, creating wealth for generations.

So what does a business owner need to do in order to hold on to the asset whilst letting go of their involvement in it?

I suggest there are 3 key things: Structure. Governance. Advisors. 

One of the 3 key things needed in order to hold on to a business and build enduring wealth is the structure of the asset. Many businesses are set up to benefit the immediate. They are structured around tax effectiveness rather than risk protection without much consideration as to the purpose of the entity. 

In considering holding a business and building enduring wealth, the structure is critical. Getting the right structure in place will mean governance and advisors can have greater impact. It will also facilitate the tax efficiency and risk protection required to ensure that the business is positioned for long term perspectives. 

Part of the structure question is also innately linked to governance. Building out a corporate governance function to appropriately govern the business is critical. If the business is to be held for the longer term, it needs to be governed in relation to that purpose. The governance process should establish key principles and directions with a view to a long term position. That does not mean limiting growth but it does mean implementing a strategy that balances risk and reward in a medium to long term view. 

The right governance structure can and will assist the business to run efficiently which, in the end, builds enduring wealth for the family unit. 

I cannot stress enough the importance of advisors in this process. Transforming a business from running under a certain individual to operating on the basis of an enduring perspective is not an easy process. It involves hard discussions and trust. Two elements which are not easily or quickly developed. 

The client and family must trust the advisors and vice versa. The goals must be aligned and the purpose understood. Building legacy and enduring wealth for the generations to come must sit atop the strategic priorities of the business. Advisors who understand this and can take a long term perspective are critical to the outcome being achieved. 

If we get the structure, governance and advisory team right we can take a business which was once very dependent on the proprietor and transition it to be an enduring, legacy motivated asset. 

The owner or founder can still be involved in the governance process but certain safeguards mean that decisions are made through a long term rather than short term paradigm. Whilst this process may be painful in the first 6 to 12 months, the seeds that were planted will sprout fruit and ripen in due course and benefit many more than the founder. 

Generational wealth is real. Legacy is real. Combining the two through the operation of an enduring business seems logical especially if there is a pathway to execute. 

Next time you are considering selling, ask yourself whether this could in fact be a legacy or enduring business for the long term?