The Importance Of Succession Planning

Business exit strategies - everything you need to know about succession planning

All businesses need a succession plan, whether they are a family run business, a start-up or an established SME, even if that just means transferring ownership of the company when one owner decides to retire.

Uncertainty can lead to calamity - you just need to watch the BAFTA award-winning show, Succession, which centres on the dysfunctional owners of a global media conglomerate fighting for control amid health concerns of the founding patriarch -  to see the perils of being unprepared.

Your business may be on a much smaller scale but the principles are the same. Having a strong succession plan in place well in advance can take away the stress and emotion that leaving a business is often accompanied by. So what are the main options?

Keep it in the family

In my experience, the situation tends to be more straightforward when it’s a family-run business. I’ve got clients where the grandparents set up the business in the 1950s or 1960s, their children took over, followed by the next generation. Quite often in family succession, a plan is already there, although my advice would be to still have something in writing.

The MBO path

Other business owners get to the point of retirement, but the children aren’t interested in taking over as they’ve taken different career paths. The next point of call is therefore to look at internal management teams. When people have good management teams - a strong FD, marketing manager, production manager and so on, as well as a strong individual to take over as managing director - the business owner may decide to put in a share option scheme, so that the team can benefit one day by doing an MBO, where they raise finance to acquire the business themselves. 

Trade sale

Where the management team is not strong enough to run the company or doesn’t have the means to buy it because they are unable to raise the finance needed, then the succession plans usually involve an external trade sale. Our corporate finance team helps businesses by actively looking for buyers. Initially, the business is marketed anonymously and the potential buyer is simply told there is a business for sale and a little about its size and what it does. If they are interested, they will sign an NDA so that they can’t share any of the detailed information. Don’t forget that a trade sale is often made to a competitor, a customer or a supplier.

Get ahead of yourself

So, having looked at the three main options for succession, why is it important to get it down in writing so far ahead of time?  I tell my clients to think three to five years ahead of when they think they want to retire. If you’re going to do an MBO or trade sale you’ve got to look this far ahead and get the business in the right shape to sell it. Whoever buys it will do their due diligence, so you’ve got to make sure that the management accounts, leases, property deed and statutory books are all in order. If someone doing due diligence comes across holes, there is a risk they will want the price dropped or simply walk away.

Keep it under review

Finally, it’s crucial to revisit a succession plan at least every year if not more frequently. Teams change and businesses change, so keeping your exit strategy under regular review will put you in the very best position to enjoy a long and happy retirement in the knowledge that your business is in safe hands.

If you want to talk to us about your exit strategy and succession plans, contact us below: