Planning for your future and the succession of your business
Succession planning can sometimes feel like trying to exit Bank Underground station; you know there are many different routes, but finding your way takes a lot longer than expected and sometimes you don’t quite end up where you envisaged.
Last updated: 7 August 2019
Even as an entrepreneur, you are inevitably going to move on from your business at some stage. It is important to allow yourself time to evaluate your options and implement a plan to take you down the best exit route and maximise your value.
Our top tips to consider when succession planning:
1. The early bird catches the worm
If you choose to sell your business, it takes planning to maximise company value. Ideally, you should be prepared to spend at least four years formulating your exit strategy and putting it into action - it will take longer than you expect!
2. Timing is key
When you have a plan in place, you can review the timeline you are working towards and establish when the best time will be for you to step away. If you are looking to capitalise value and your business is on a strong upwards curve, it is worth considering whether you can delay selling to help maximise your returns.
3. Survival of the fittest
Before your exit, you should ensure that your business is able to run without you. Businesses that are reliant on the owner’s continued involvement tend to suffer longer earn-out periods.
Earn-out periods are very common; a percentage of the sales price is paid upfront and the remainder deferred over the next year or few years. The deferred portion is usually contingent on the ongoing performance of the business and your continued involvement to guide this. A longer earn-out period is a higher risk to you because if the business’ performance dips, you are unlikely to receive the full sale value.
4. Priorities over convenience
Allow yourself time to consider what drives your decisions as this can help you identify the exit route most aligned with your priorities. Consider which of the below is most important to you:
Highest exit value
Providing opportunity for the next generation of leaders in the business
The future of your employees
Protecting the legacy of your business
5. Explore your exit options
Trade sale - most likely the highest exit value and selling to a competitor or private equity house has the potential to provide longer-term stability for the business. However, it will take the control away from existing shareholders and the business culture and direction could change significantly.
Management buy out (MBO)- the purchase of your shares by either other existing shareholders or management. They already know the ins and outs of your business, which encourages a smoother transaction and provides you with the reassurance that you are leaving your company in the right hands.
Partial MBO or share buy back- refresh the shareholder structure while keeping ownership within the existing business and motivating junior staff. This method is similar to a full MBO, but as opposed to handing all your shares to top level management, it allows for a gradual transition from one generation to the next. The shares are sold in tranches; the first portion going to top level management and later the second portion being sold to second level of management.
Employee ownership - the transfer of the ownership of your business to your employees. This ensures the business stays under the control of all the employees and acts as an additional incentive in recruiting and maintaining key staff. Existing shareholders are able to leave their imprint on the trust to make sure the business continues to run in their vision.
Considering these five top tips will help you to ensure the success of your business, even after you move on, and will leave you with the peace of mind that your business is in the right hands. Remember to start planning as early as possible and keep your priorities in the forefront of your mind when deciding what exit route to take.