Succession Planning
The one key piece of advice we always give our clients is that it is never too early to start succession planning if you want to get the best returns. With other pressures, it's all too easy to let this priority slip. However, business returns and outcomes vary dramatically between those who have and haven't put in the groundwork early.
A colleague in one of the major banks made a comment recently that really bought this home: "It's very common when we ask clients what their plans are for the future to hear them say something along the lines of, 'I want to sell up and retire in five years' time'.
"The worrying thing is that when we have the same review a year later, and the year after that, the answer is still the same - 'I want to sell up and retire in 5 years' time'. Their retirement or sale never gets any nearer."
As with many of the businesses we've helped in recent years, whether you run a family owned company considering transition from one generation to the next, are an entrepreneur looking to build a business to sell at some point in the future or run a professional firm planning for the retirement or exit of a key partner, the one key piece of advice we always give is that it is never too early to start succession planning if you want to get the best returns.
So, if you haven't got a clear succession plan, or if your plan needs a bit of dusting down, where should you start and what could your business be worth?
What is unique and valuable?
It's important to step back and look at what is genuinely unique and valuable about your business. It may be the business in its entirety or specific skills that could be applied to a different type of business, your customer base that could be equally valuable to a different or complementary business, your technology, your cash-flow etc.
Who could buy and why?
Once you have identified your value, consider who could buy and what they would look for. Many focus too quickly on a trade sale to a competitor when other, potentially more attractive options may exist with the right planning.
When?
Timing plays a great part in getting the best price in any deal, but consider when your potential buyers may want to buy. This may not be the same time as when you want to sell, which is often driven by internal considerations such as age, family circumstances, lease expiry etc.
Creating demand and value
We all develop plans to market our products and services. Selling a business is no different. To get the best value, once you have identified who and when, develop a plan of how you are going to get on to buyers' radars early and how to appear attractive to them. Getting the buyers to come to you will always yield more than having to chase them. This often needs careful planning over two or three years rather than a short sharp burst of promotion shortly before an intended sale.
Exit options
Each has different implications for you in terms of the amount of work involved, the likely time scales and the potential return. As a start, here are the main exit options and key issues to consider.
1. The "Internal sale" - management buy-outs or buy-ins
Selling your business or your share in it to "the next generation" is not often the way to get the best price. Instead, it's usually recognition of other considerations, like rewarding loyal staff or the desire to see the business continue in the same form or with the same values that you have built into it.
Generally in these sales there can be less time involved because the parties have a good view of the business based on the same information and experience.
2. Sale to a trade or other buyer
This can be the route to the highest price if handled well but it's often a more costly process. Points to consider are:
Preparation
Preparing your business to appear the most financially attractive at the point of sale is a crucial element of achieving the best price. Improving cash flow, reducing dependence on a few customers and restructuring of the balance sheet need to be undertaken well in advance of going to market, both to be achieved and reflected in the accounts. Actions to achieve "top dollar" can take years rather than months.
Management time
It is always worth remembering that considerable management time can be involved in providing information and meeting potential purchasers' due diligence, as well as in negotiations. Does your business have the resources to handle this and still maintain day-to-day performance at a critical time?
Advisors
Very few business owners have experience of buying and selling companies. It is a complex area of law with significant accounting, tax and other implications. To succeed you'll inevitably need to appoint experienced advisors to assist you.
It is also key to make sure your advisor is incentivised to achieve the best for you. Many firms work on a standard flat commission or even take most of their fees for achieving the minimum agreed sale price. Their incentive is to sell as many businesses as quickly as possible to make the most money for the least time rather than to go the extra mile to get the best price for you.
Agree a win: win contract where the adviser gets only a basic fee for achieving the minimum price and is incentivised to find a buyer at the best possible price for you.
3. Listing the business to sell shares publicly
With the growth of the AIM and PLUS markets in recent years this has become a more achievable option for more businesses . The costs of admission can however be between £100,000 and £400,000, in a process that will also absorb considerable management time.
The liquidity of these markets is also still developing and some businesses have found it difficult to find market liquidity for their shares. One benefit which can be useful in building the current business is that your existing company can acquire other businesses by using shares instead of cash.
Successful succession planning takes in a wide number of areas, not just the financial but legal, people and organisational. Hence I come back to one key piece of advice - plan early - preferably starting now!
If you would like to discuss succession planning issues for your business, please contact Colin Ellis on 020 8652 2450.
If you would like to discuss succession planning issues for your business, please contact Colin Ellis on 020 8652 2450.
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