For the entrepreneur who has put heart, soul and countless hours into growing a business, considering how to exit, pass it on or sell up may be their first step into the unknown. Creating a business plan, seeking backers, winning new customers – all these tasks become compelling and all-consuming. So much so that the job of considering how to stop doing those things would be akin to a racing driver suddenly throwing their vehicle into reverse.
Denis Kaye, Director of Firm Ideas and an experienced SME advisor and mentor, says entrepreneurial businesses need succession plans in the same way that individuals need wills. “No matter how entrepreneurial you are, your business has many other stakeholders and you owe it to yourself and them to plan for the time you won’t be there. It also helps focus your decision-making as you move towards implementing the plan.”
Who can help?
Firms of accountants can help walk entrepreneurs through their own sometimes muddled thinking on why they may want to dispose of the business. They can also help with preparatory work, valuing the business and translating the complexities into a saleable proposition.
Denis says independent specialists are a good source of advice, as are local Chambers of Commerce or branches of the Institute of Directors. Entrepreneurs tend to know their suppliers, customers and competitors very well, he says, but they often lack the wider contacts that will help them secure a sale or exit. Their chosen advisor needs to be someone with a wide network as well as transactional expertise. Former or serial entrepreneurs also make good advisors and people who run their own businesses may be more inclined to listen to someone who has gone through the process themselves.
“The most important aspect of succession planning is to start ahead of time.”
Regardless of whether the business is destined for a trade sale, flotation or a management buy-out (MBO), there are some important first steps to all succession plans. Systems, processes and good governance around debt collection are important, as are a marketing strategy and accounts preparation. But the foremost task is to put in a strong team. If the founder is responsible for the day-to-day running of the business, any new buyer or investor will ask themselves whether that person will suddenly be less motivated on completion of a sale. “What they will want to see is a competent management team that can keep on developing and growing the company independently of the founder,” says Denis.
Succession plans don't differ greatly whether the business is destined for a sale, flotation, MBO, or passed on to a family member. All plans need a provable valuation and management information that demonstrates a viable future revenue stream.
Nevertheless, each type of succession has its own watch points:
- A business sale – A well-networked advisor can help entrepreneurs identify potential buyers, but before any deal-making takes place, it is well worth drawing up a plan to groom the business for sale. Cutting costs, reducing debts and drawing up detailed financial information are all important tasks ahead of a trade sale.
- Flotation – Flotations are rare for smaller companies, but for a fast-growing and truly scalable business, it may make sense to formulate a plan for a public listing once a target size has been reached. One feature of succession plans of this kind is that public markets more than anywhere else will want to see the founder remaining financially committed. The public markets are definitely not a route whereby the founder can cash in.
- Management buy-out – MBOs are sometimes the deals entrepreneurs can’t envisage, because they believe their directors cannot find sufficient funds, says Denis. In fact, there are a range of options including banks, venture capitalists, asset-based lending and family and friends. The entrepreneur’s role and the succession plan should focus on creating links between the management team and potential backers.
- Passing the business on to family – Denis advises that family business succession plans can be highly complex. Many such businesses employ family members from different generations, sometimes to an unaffordable extent. While family members may be there in number, sometimes a clear successor does not emerge. A constitution that sets out how family members and others should act within the business and what they can expect from the company in the future is a great aid to aligning the expectations of key players with the realities of the business.
Before and after succession
In the run-up to a succession, the entrepreneur needs to develop a team, business network and structure that will build some forward momentum for the business. Denis believes they need to make sure the right advisors are in place and start managing the reputation of the business among potential buyers or investors.
What they do after succession is a more thorny issue, he believes. Often tricky, earn-outs are where part of the sale price is dependent on the founder staying in the business and achieving a defined profit target. The vendor is sometimes poorly placed to influence the performance, particularly if the new owners impose unfamiliar procedures and bring in new people. Make sure the profit is clearly defined and keep the earn-out period short, is Denis’s advice.
Life after succession
Staying on in the business is often fraught with difficulty. Where the founder has technical expertise, an advisory role can work well. But often entrepreneurs find it difficult to remain within their business once their control has been diluted. Denis believes that most entrepreneurs will need to prepare for life after succession by finding new focus for their energy and skill. A different enterprise or a role as an active investor may be the answer.
Denis emphasises the most important aspect of succession planning is to start ahead of time. ”It is never too soon to start working on a succession plan. There are some basic issues that require attention regardless of your actual exit and it is those, such as building a high-performing managing team that should be addressed first because they can take years to implement.”
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