Introduced in the Finance Act by the government in 2014,... ...
Business Succession - An Inevitable Challenge
21 August 2020
Unsurprisingly, running a business involves challenges at every stage for any business owner.
In the early days, survival’s key. Indeed, many businesses fail before they achieve their potential. But, after a few (or multiple) years’ hard work and your business has grown, and you now have a small empire, how do you tackle the idea of business succession and exit?
Sustainment or growth?
Once you’ve overcome the survival challenges, most ambitious owners set to growing their companies. This brings different set of problems; staffing, premises and funding, among many others.
Others adopt a more conservative approach, content to ‘earn to live’ from their business, without risking a further phase of growth, but rarely achieving wealth from their entrepreneurial endeavor.
All routes, however, lead to an eventual exit as age, health or changes in circumstances dictate the ownership must change. Whatever the journey, a planned exit always delivers a better outcome for the business owners.
The value’s maximised from a well organised and profitable business that provides opportunity for the purchaser, whilst delivering a fair reward to the owners.
The chart below plots the typical business life-cycle.
So, what’s next?
Broadly, there’s four main ways of exiting your business:
1. Close the doors and wind up the business
This is the ultimate exit solution, and brings the business to a formal close. Whilst it provides a definitive end to the business, it rarely delivers much in the way of value to the owners.
Money owed needs to be collected, debts are paid, and any stock or assets are sold where possible for whatever price can be achieved. To deal with things properly, it will also require specialist help from your accountant and lawyer, to make sure all liabilities are extinguished.
Sadly, this solution’s fairly common. Many business owners leave their succession planning too late, and then events overtake them forcing a closure in a hurried fashion.
2. Family succession
In many countries and cultures, this is still very common. Businesses pass down from parents to children, and the tradition’s maintained.
However, in the UK, this has become quite rare. Many children are reluctant to take on the family business, or may not have the skills and acumen required to succeed in the competitive business world of today.
Where businesses are passed down, value’s rarely extracted, although parents sometimes remain ‘on the payroll’ for a number of years to cushion their retirement.
3. Sale of the business
This is a popular and common solution for business owners, but one that’s fraught with difficulty. Selling a business to a competitor’s an anxious and stressful process, and sadly, not always a successful one.
Unlike a house sale, there’s very few ‘rules’, although just as many unscrupulous purchasers. To protect your business from prying eyes and loose tongues, whilst maximising the value upon sale, it’s vital to secure expert help from the outset of any process.
There’s a myriad of sales brokers and sales agents, who all claim to achieve the best price for your business by using the most wonderful marketing. They’ll often promise you an attractive sales price, whilst charging expensive upfront fees for the ‘marketing documents’.
Beware of signing these contracts without taking advice from your lawyer or accountant. Sales agents are unregulated, not part of any professional body, and offer a frighteningly wide quality of service.
If you use Corporate Finance professionals, like the team at Fortus, they’ll be trained in selling and buying companies, so they work on both sides of transactions and ‘know the tricks’. They’ll be regulated by a professional accountancy institute, with a code of conduct and full indemnity cover.
They’ll also have colleagues who can help with financial modelling, tax and financial due diligence to make sure you maximise your cash return from any deal.
4. Sale to management
This is increasingly popular, as business owners find the company sale a stressful and unpredictable process. The attraction of a sale to management is the lack of disruption to the business, the certainty of the price to be achieved, and the high rate of transaction completion (compared to company sales).
Management Buyouts (MBOs) are extremely flexible, and providing you have the basis of a team to run the key functions of your business, there may be a solution to fit your needs.
- Private Equity backed MBOs are often seen in larger transactions where the management have insufficient money, or access to debt to fund the deal. The involvement of a large backer provides comfort to the business owner, although the transaction’s fairly rigorous, and expert help is needed to support the process.
- Debt backed MBOs are also used with larger deals, where the business has consistently high profits to support loan repayments. The business owner benefits from more of the purchase price ‘up front’, but may have to wait until the loan’s repaid for the full balance.
- Transitional MBOs are increasingly popular for smaller deals, where the management team’s incomplete and a period of ‘transition’ is required before full management control passes from the owner. In many cases the owner retains a small stake for a few years whilst any gaps in the management team are filled. In this case, the sale price is usually paid to the owner over a period of years, whilst control’s gradually passed over.
- Trust-based MBOs are an innovative way of selling your business to your employees, whilst benefiting from a zero rate of tax on the sale proceeds. These are complex, and require a skilled team of expert professionals, but they’re increasingly attractive in a world of uncertain taxes. Again, the sale proceeds are usually received over a period of years, but the zero tax rate applies to all of the proceeds.
In summary, there’s options for most owners to exit their business in a profitable and satisfactory way. The key is to discuss your succession plans early with your Corporate Finance advisor, so you can decide at an early stage which route to follow.
With many positive options available, it’s always sad to see so many businesses simply close down, through lack of planning. Make sure yours isn’t one of those.