In theory, the best time to plan for succession is the day the business is established. In reality, we realise that this planning rarely occurs. Regardless, the earlier the plan is put in place, the greater the benefits for owners. The exit plan will assist owners in:
- Setting business strategy for the short, medium and long term;
- Identifying likely successors (internal, external or both);
- Determining a timeframe for a reduction in business commitments and/or retirement;
- Assessing capital requirements for the business (and personally); and
- Establishing tax efficient structures for both earnings and sale..
In the absence of having a plan in place from day one, which will be revisited subject to changes in industry conditions, the competitive landscape and/or personal circumstances, it is important that a succession plan be considered a number of years prior to your desired exit. Early planning will assist in identifying the most likely succession options (e.g. competitors or management) and the steps to put in place prior to commencing a formal sale process.
There are a number of other considerations to consider with respect to the exit including:
- Considering whether the customers of the business are loyal to the “brand” or the “person”. In order to maximise the success of the handover, the status of key relationships should be evaluated prior to exit, with the higher risk customers to be managed pre exit with the handover of relationship to succeeding parties. Consideration should be given to the potential continuation of the relationship in a reduced role post acquisition.
- Understanding whether the exit can be achieved in one-step, or needs to be completed by a staged buy-out, or some form of consultancy agreement post sale. This step should also consider the owner’s desire to continue in the business post sale as a function of personal income requirements, or a desire to maintain involvement with customers/clients of the business for the benefit of the purchaser.
- Considering agreements with customers, other business relationships and suppliers. Generally, longer term customer agreements are considered favourably, whilst longer term supply agreements or other commitments (such as leases) may be considered unfavourably as an acquirer may be seeking to realise cost savings or synergies in the acquisition. This factor is particularly relevant for mergers between professional services firms.
If you are considering the divestment of your business please contact a member of our Corporate Finance team for a confidential discussion.
This article is part 2 of a 7 part series. Click to read the previous entry; What is happening in mergers and acquisitions?