Increasingly succession planning is on the minds of business owners. It’s a wide ranging and sometimes daunting topic. Below we discuss some key aspects – generating options, building in flexibility, maintaining perspective and aligning interests.
It might not work first time!
We like to ensure the business owner is fully informed about available options, including the associated pros and cons. While there is likely to be a preferred choice, a back–up plan is vital as circumstances can, and often do, change. One example is where a client owned a business that progressed through three different attempts at succession over a ten–year period before achieving an exit.
The first attempt was a partial sale to a family member who ultimately proved they weren’t as passionate or capable as the existing owner; the second was a partial sale to a corporate that turned out to have a bureaucratic and incompatible decision–making process; and the third and final attempt was successful through a 100% trade sale.
So what if things do go wrong?
Importantly, we assisted our client by ensuring each attempt was appropriately structured and documented so the transactions could be unwound when things started to go wrong without adversely damaging the business value.
Do I have the right perspective?
In the lead– up to any attempted exit, owners and management need to have the mindset “What will make the business more valuable to someone else?” For example, I met with a client who wanted the answer to this question: “How do I make sure that our planned new computerised inventory management system doesn’t limit business value when we look to exit in 5 years time?” We discussed how unique customisations might be good for their business, but might be unwanted complexity for a potential purchaser; alternatively the purchaser might just scrap the system completely.
Are management really looking after my interests and do I have their commitment?
To ensure management are focusing on increasing value it helps if their remuneration is directly linked to it. For example, we are currently working with a manufacturing client who is considering ways of offering senior management a shareholding. Firstly, we revisited whether shares or bonuses would be the best motivating factor – often what works for one person will not for another.
Secondly, we prepared an indicative valuation so the business owners understood the base business value. More importantly we explained what management needs to focus and be incentivised on to improve that perceived value.
In other words, it’s ok to offer shareholdings or bonuses, but make sure you are encouraging management behaviours that will increase the value of the business!
The reality is that it takes time and effort to maximise succession planning opportunities and the sooner you start the better the odds are for a favourable outcome.
