Succession Planning

In 2012 the Exit Planning Institute reported that more than two thirds of all businesses are owned by baby boomers and that more than 80% of these business owners intend to retire from the sale of their business within the next 10 years. Unfortunately less than 30% of these business owners have done anything about documenting their succession and retirement plans and many will simply walk away from their business or sell it well below fair value.

For many business proprietors exit options such as a trade sale or listing may not be a desirable option whilst a management buyout (MBO) can provide a smooth transition for both key staff and customers. MBOs can work well but there are a number of hurdles to overcome to ensure success. For example, many generation X & Y simply don’t have the financial horsepower to acquire your business.

The origins of a succession plan should emanate from a well-constructed strategic review of the business. The strategic review should set out a 3-5 year time frame detailing:

  1. Growth in your business – Financial Goals & Milestones coupled with Non-Financial Goals & Milestones
  2. Improving your business – Leadership, People, Clients & Processes
  3. Culture – Vision, Purpose & Values

It is only by defining these strategies that you have a clear framework for what you intend to hand over to likely successors and the financial impact to existing owners of phasing out of the business under a MBO. Further if a trade sale is your strategy then maximising sale value should be the objective.

Although it is advisable that a strategic or business plan is compiled, in some cases it may be that you simply want to hand over or sell the business and retire without maximising its full potential through planning. Care must be taken however under a MBO scenario as you don’t want successors to inherit a declining business.

At NKH we take our clients through our 10 Stage Succession Process and tailor it to their individual business needs. A quick snapshot of the process is as follows:

Stage 1 – Identify your succession goals and objectives

Stage 2 – Business strategy review

Stage3 – Finance, legal and risk review – This includes such things as financial commitments and guarantees, shareholder agreements and insurances.

Stage 4 – Business and entity valuation – This is a critical component in the succession planning process as it crystallises value extraction from your business (is it the right time to sell or do we implement strategies to improve value?). It will also assist with your personal tax planning relating to the disposal.

Stage 5 – Entity structure review – Review your current structure to determine whether a restructure would be beneficial prior to the introduction of new investors.

Stage 6 – Planning workshops

Stage 7 – Drafting of the Succession Plan

Stage 8 – Adoption and implementation of the Succession Plan

Stage 9 – Critical business and investor issues for successful implementation

Stage 10 – Succession Evaluation – Evaluate the effectiveness of the succession plan on an annual basis.

Remember it is never too early to start planning for succession, the earlier you plan the greater the success and value extraction whether via MBO or trade sale.

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