Eventually the management and ownership of your business will transition to someone else. The question is not if this will happen, it is how this will happen.
Having a clear succession plan is not simply a financial exit. It involves several stages.
Is it simply a dollar figure that you want to achieve or are there broader considerations that are important to you? These other considerations can include:
- Brand Preservation: what happens to the company you built, is it simply merged and consumed by another larger company?
- Staff Continuity: acquisitions from competitors involve significant cost synergies which are usually large reductions in headcount. Sometimes your staff is as close as family, will you be OK with this?
- Ongoing personal involvement: Do you want continuing board and advisory roles or are you happy to totally divest from the company?
Having a clear understanding of what you want to achieve from your process is very important as it will determine the types of investors to be approached and what changes you need to make to appeal to those various groups.
Financial investors (Family Office or Private Equity) will need to see a management solution for how the company will run without you. If the intellectual property of the company still largely resides in you personally, then financial investors will insist on locking you in for a period of continued employment. They will also insist on deferring a significant portion of the purchase price to ensure you perform your role and don’t just take the money and sit on the beach. This may not be possible or practical, due to health considerations or otherwise, resulting in a dramatically reduced number of exit options and a far lower exit value.
Developing a management team that can run the business without you is essential to achieving a clean and lucrative exit. In reality this step can take several years to get right and often the right staff will need to be recruited, particularly if they are to supplement the skill set of family members who are staying in the business.
There are multiple options available and the right one will depend on the goals that you have set in Step 1 and whether you have a standalone management team already in place. These options include:
- Trade Sale: A sale to a competitor, customer or key supplier. These strategic purchases generally can yield the strongest cash outcome given there is some synergistic benefit in the joint ownership. However, it often results in the loss of the business in its current form with significant changes to staffing, branding etc.
- Purchased by Private Equity: PE will still require some key management to be in place but they have the advantage of being able to assist in the transition of management from yourself to a professional team. PE will result in the loss of control over the business as they themselves will be looking at the investment with a view to exit in 3 to 5 years (depending on market conditions).
- Initial Public Offering (IPO): The introduction of passive shareholders through the public markets can allow the realisation of cash whilst maintaining control over the business. In order to be eligible for an IPO a sound governance structure needs to be in place. IPO’s are not appropriate for every company and due consideration will need to be given to the additional costs as well as the required regulatory transparency.
- MBO: This option will allow the transition of ownership to members of staff or family members in an orderly way. Unfortunately, the capital available to facilitate these transactions is limited and will result in a large vendor financing component (in other words purchase price gets paid out by business performance in the future) or a large debt that will be added to the business to fund the purchase price.
It is inevitable that your business will transition to someone else. Unfortunately, if you are not prepared then this process can be rushed resulting in a poor outcome for all stakeholders. The time to think about succession planning is when your business is going well and your health and enthusiasm for the business remains strong. It is unfortunately all too common that business succession is forced on a company due to an external event resulting in a distressed valuation.
Case Study: Industrial Contracting
Two business founders and owners in their late 50s had accumulated a business in the industrial contracting space with EBITDA of A$12m. Over the last few years the Company had several opportunities to expand their footprint and acquire smaller businesses however never had the required capital. The husband and wife shareholders were ready to cash in years of hard-work and were looking to take a significant amount of money off the table. However, they were willing to continue to work in the business for 2 to 3 years and stay on the board.
Working with us and a tier advisory partner, a two-stage exit process was actioned involving the introduction of a private equity partner who assumed a 50% stake in the company. The PE partner and the Company jointly developed a three-year plan to grow the business through acquisition, develop a stand-alone management team and appoint an ASX ready board of directors. By the end of year two, the previous owners stepped back from day to day responsibilities and played more of a strategic oversight role. With the funds from the exit, the previous owners pursued a variety of investment opportunities and developed a portfolio of business interests across a range of industries. More importantly they took a long awaited extended European holiday.
Explore the Neu Capital investor network to see how our investor relationships match can assist with your succession opportunity.
The Neu Capital network of institutional funds span several hundred Family Offices, Private Equity Firms and Large Corporates.