05 January 2022

Taking control of your succession planning

Services:

Acquisitions and Disposals

All good things must come to an end! When it comes to a business succession planning the key is to make sure the ending works to the benefit of the original founder, the businesses team and the incoming owner.

Mark Newbold explains the options available for owners looking to step away from their business, as well as the procedures and benefits involved.

 

Planning for the end

When you first start a business, your focus is on growth and survival. As you start to acquire customers and build your business your goals evolve into generating profit, building cash reserves and preparing yourself for the next step.

Many smaller businesses are often dependent on one or two key individuals – usually the owners – and without them, the rest of the business is at risk. To make your business more attractive for sale you need to put a proper management structure in place to enable you to step away more readily.

Neglecting planning for this process can lead to a lower business valuation or limited choices when selling the business. The earlier you make decisions about how you will pass the business on, the more scope you have to achieve the outcomes, and the value, you want.

 

Options for business succession planning

There are three main options available for exiting your business.

 

Keeping it in the family

One of the most attractive options, both practically and emotionally, is keeping the business within the family of the original founders.

This has been one of the most common practices historically as it retains wealth within the family as well as maintaining brand identity.

Key advantages of a family-based succession plan include:

  • Safe custody: the founders can be certain that they are passing the business onto people that know and understand its values.
  • Staff retention: valuable employees with a strong relationship to the business will be more likely to stay if the business is in the hands of owners that they know and trust.
  • Brand consistency: by keeping the business in the family you can maintain the culture, reputation and history of the brand, the business can continue to offer the same value it’s known for.
  • Customer retention: long-term valued customers, especially those with a relationship with the original founders, will be more likely to stay loyal if the business is in familiar hands.

However, the success of a family business can be its own blocker to passing it on to the next generation – the so-called ‘third generation disadvantage’. Later generations may be less willing to follow in the footsteps of their parents if the business has enabled them to pursue different ambitions in their own professional lives.

 

Management buyout (MBO)

Another common exit strategy for smaller businesses is to pass control to the existing management team via a buyout (MBO). In this option, non-shareholder management take control of business by buying shares from the original owners.

Similarly to the family option, this has the advantage of keeping key skills and knowledge of the business and passing it to safe hands. However, it does rely on the presence of a strong management team who are willing to take on a measure of risk.

Most management buyouts proceed with a combination of the business's own cash reserves, loan notes or funding raised by the by external finance. Buyers in this case will put up a portion of their own capital, and then raise additional debt against the business.

MBOs can often add additional pressure to a business as the distribution of cash reserves and injection of loan funding to support the buy out means it will need to fund the new debt obligations in addition to any existing commitments.

For MBOs to be viable you need to have a management team with an appetite for risk as most will not have the experience of their own cash being on the line.

 

Trade sale

The final option – taking the business to the market. This can be a challenging, and a potentially expensive process if not handled correctly.

Selling your business to a third-party requires actively marketing the business, utilising a corporate finance specialist. A good corporate finance team will market your business following your desired strategy, targeting only specific buyers that would be a good fit for the transaction to ensure the process is completed in the most efficient manner. There is no room for a scatter gun approach for business sales as this can cause considerable damage to your reputation and uncertainty for your customers.

Once you have found a buyer, it can be challenging to extricate yourself from the business in the way you wish. After all, if you’re the owner/manager, then you are a key piece of that business. Many buyers will look for you to be retained in the business for a period of time and link part of your exit payment to an ‘earn out’/profits target.

While trade sales can be very successfully, they are often the most challenging to complete.

 

What makes a business attractive for a management buyout or trade sale?

When a management team or external buyer look at a business for acquisition, they look at the strategic fit with their own operations and the amount of potential that remains to be unlocked. Making a business case for sale is a matter of looking critically at the current business performance and pinpointing the baseline value, and what could be done better. Value growth opportunities include:

  • Synergies within existing operations
  • Access to new geographies and customers
  • New product lines and markets
  • Complementary services for existing customers
  • Efficiencies that come with increased of scale

Take control of your future

With the pandemic dominating business focus over the last two years, most businesses have been on survival mode, focusing on keeping to doors open and trying to get back to business as usual. Very few have had the time to step back and plan for the future. Now is the time to start looking at your five year or longer term plans. With the support of a trusted business advisor, we can help you put building blocks in place for a successful, hassle free exit.

 

Get in touch with us to talk through how you can put your business in the best possible position to succeed in the future and get the outcome you want.

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