It’s a complex and lengthy process, with tough decisions to make along the way, but planning is essential when selling a business, so everyone involved can benefit. Neil Hodge looks at how best to approach the task.
Here’s a couple of worrying statistics.
It is estimated that two thirds of small companies in the Midlands have no written succession plan, and 60 per cent of these businesses will expect to close on retirement.
Research by the University of Central England has indicated there are more than 38,000 companies in the region at risk from failing to make the right plan for passing the business on. This is a worrying statistic and gets even worse, considering that this could affect up to 300,000 jobs.
Passing on the family business – or selling it outright – can be a complex and lengthy process, yet too many entrepreneurs in the Midlands have not considered who should take the reins once they step down, and how to plan for it.
Most experts say succession plans should be set in place up to five years in advance of the owner pulling out. Chris Briggs, partnership manager at Business Link West Midlands, says: “Succession planning is one of those facets of business that is often overlooked until the last minute, and this continues to have a very damaging effect on the Midlands economy.
That needs to change.
“Owners need to plan ahead and think about their options, whether it is passing the company on to family, the management team, an investor or a trade buyer. If they want to retire with cash from the business, it isn’t going to happen overnight.”
In cases where family members may be expecting to succeed the owner, early planning is essential if sibling squabbling or inter-family feeds are going to be avoided. Owners also need to take account of the fact that their children may not want to run the business – only take a part share in it and enjoy the spoils.
According to David Chapman, senior partner at accountancy Mazars in the Midlands, some family members may wish to see their shares as an “earner”, providing an income after retirement.
“Matters such as who should be entitled to hold voting shares and what the dividend policy and long-term strategic goals of the business must all be considered when planning,” says Chapman.
“How ownership is going to be shared out on the retirement or death of a shareholder – with buyout options – are complex, yet important issues.”
Briggs says owners need to be aware that family members may not be interested in taking over the company, or capable of running it.
He adds that they may just be interested in selling it on to a trade buyer and taking their share of the cash: “If owners want to pass their business on to their children, they should make sure their long-term aims for the business are the same. There can be few things worse than seeing your children sell the company you’ve spent your life building, especially when you had assumed they would take the business on.”
These situations are not uncommon, and, as a result, advisers are keen to make sure owner-managers consider strongly whether passing the business on to family members is the right course of action.
There is a grim joke that if a successful owner-manager wants to help create a small business for his children, he can give them his own thriving company and revisit it in two years when it’s on its knees.
Rob Carroll, managing director of Catapult Venture Managers, says some owners feel duty bound to hand their businesses over to their sons or daughters when, in fact, it would be better to sell the company for a good price and distribute some of the resulting wealth back to the family members.
“Very often, however, children or grandchildren join a business with little or no entrepreneurial skills and perhaps milk the business for what they can get out of it,” he says. “This clearly is a recipe for disaster and many such companies fall into terminal decline.”
“I’ve seen businesses passed on to sons and daughters that have subsequently gone pear-shaped. It would have been better to have taken a hard-nosed decision to sell the business for a good price and distributed some of the wealth back to the family members.”
Evidence of poor succession planning and decision-making is endemic. Jon Warsop, partner at accountancy UHY Hacker Young, says a lot of management successions and buyouts fail in the first three years – caused by a lack of planning, particularly in situations where the retiring owner is intrinsically important to the business. He adds that in many cases, when the owners leave, the company’s employees follow.
“It’s not unheard of that a business can complete a changeover but then find that a high volume of staff leave or customers go to competitors,” says Warsop. “Obviously, not every detail of the deal needs to be communicated, particularly to customers, but it’s essential to let customers and staff know the succession process is going well and that it is positive for all parties.”
Martyn Pilley, partner in the corporate finance team at accountancy Grant Thornton, says one of the problems of any succession plan is that the owners make too many assumptions about the strength of the business. “Many owner-managers have an inflated view of the value of their business,” says Pilley. “Often, the key asset is the owner because he has built the company and retained customers. Once he leaves, the company no longer has that.
As a result, a sale price can be disappointing, particularly as the owner may be relying on that money for retirement.”
Another problem is that in the case of a management buyout, owners tend to assume the existing management team will be able to raise the money to allow the owner’s exit because they know the business. In fact, investors may want to reshuffle the team and will not invest unless changes at the top are made.
Unfortunately, it is not the case that an investor will back an existing management team just because they have worked for the company for a number of years. They need to be able to show that they know how to run it and make it grow.
If the previous owner was primarily responsible for winning clients, it is going to be hard for a management team to persuade lenders to part with the necessary cash, particularly in the present climate.