Succession factor

Publicly quoted companies are always taking flak for lack of succession plans. It’s equally significant for the unlisted private business, but many owners shy away from the issue.

For a small, private business, succession is typically about who owns and runs it after the current owner retires or dies. It can equally concern how owners realise value from it to operate elsewhere or fulfil ambitions.

If you aim to pass the firm on to family, you still need to plan. Do the successors have your skills; would other abilities take the firm forward? Do they want to run it? Capability has to be matched by desire.

Next up comes the home-grown successor, the young gun groomed for the hot seat. These stars often join competitors instead of waiting for succession, and you still have to agree price, format and timing.

This raises an interesting issue: what’s your business worth? Most owners have no idea. The market in private businesses is not highly visible; even drawing comparisons with prices from a business transfer agent’s web site is only a rough guide. Premises, plant, staff, location and customer base could all impact dramatically on price. There are several ways to estimate price, the classic being a multiplier of profits.

Because they don’t have succession plans, many owners sell at far below potential. In the worst cases, they simply cease trading at retirement.

Options for moving on

Option one for sellers is a business transfer agent. There are 386 members of the business transfer section of the National Association of Estate Agents (NAEA). As this is an unlicensed field, choosing a NAEA member makes sense.

This has a simple feel: selling to the highest bidder, organised by a specialist, like selling a house. You get a free expert valuation, advice and an idea of timescale – at least eight weeks, but sometimes 12 months. Commission is typically 5%, plus marketing expenditure; you’ll also have solicitor’s fees.

The problem is this process demands discretion. You must be secretive with staff, clients and suppliers – normally called bad management. You have no influence on how staff and customers will be treated, nor operational standards.

The next option is a management buyout (mbo) or buy-in (mbi). This offers continuity for staff, customers and suppliers. Timing is flexible and a mbo can often re-energise a business. The problem here is that while the owner can initiate the idea, this route is driven by the buyers. Many mbos and mbis falter before completion because the buying team lacks commitment. Equally, the team may lack the skills or entrepreneurial spirit to run its own business. The process can take two years and is complex.

Above all, is the issue of finance. Commonly, gearing will be 5:1 or as much as 10:1. Full funding normally needs the involvement of a venture capitalist. This debt and the need to generate returns to service it, can have negative outcomes. Commonly, mbos sell within six years, especially because external investors demand it to realise gains.

Also consider a management-led all-employee buyout (mebo), which is a means to sell the company to existing employees. Criteria include a strong business with consistent profits and low debt; at least 40 and preferably over 70 staff; a continuing management team; a vendor who keeps a significant share (up to 25%) and stays on, classically as non-exec chair, is encouraged. If you can tick those boxes there are serious advantages. First, it’s not adversarial: everyone’s on the same side. It’s fast – from first meeting to completion in two to three months. It enables firms to grow, long-term, with all staff benefiting financially. Plus, sellers get a fair price.

A further option is to keep an eye on the trade press. While it’s hardly a flood of demand, you do see advertisements from principals or their agents looking to buy businesses.

Plan ahead, because the sale process is extended. Without careful preparations the price will be less than it might have been. Like selling a house, selling a business benefits from tidying it up. Start by getting your books in order: get them complete, up to date and presenting a picture of robust health. Notably tighten up on debtors; deal with long-term debts, negotiate part settlement, apply for CCJs, write them off. Whichever route you take, take their blemish off your books.

The easiest place to cut costs is discretionary expenditure: travel, vehicles, entertainment. Reducing these progressively boosts end-of-year profits. Care is needed: replacing your Mercedes with a Ford may send the wrong message, but you don’t have to buy a new car.

Spend time on your customer database. Update the details, communicate regularly and feature sales/ enquiries/call-back dates. It’s a simple way to demonstrate the base value of repeat purchase in the business.

Build succession into your plans or you’ll lose money. Discuss those plans with an accountant and individuals involved. Don’t put it off.