Although all owners make plans for the operation of their business, many delay or don't have time to plan for their personal exit, sale or succession.
Even setting aside one hour a month can help achieve a smooth transition, maximise the eventual proceeds, raise awareness of potential tax liabilities and reliefs, keep all the family happy and, most importantly, reap the value of your efforts.
Will you sell?
With a sale, the sole objective is who will buy and for how much. The focus is on maximising value. Remember that you may not be able to walk away after a sale. The purchaser may pay partly in shares, loan notes or 'earn-out' proceeds, based on future results. The more the business is linked to you and your personal skills, the more the purchaser may want to retain you for one or more years' of employment post-sale.
You will also need to warrant and indemnify risk areas to protect the purchaser; meaning you may have to give back some of the proceeds if discrepancies are found. Having a full independent review and vendor due diligence well before a sale minimises your risk. Ideally these aspects should be considered one to three years before a sale and the earlier the better.
Your emotional attachment to the business and your determination for it to succeed post-sale can be important in deciding on the best exit route.
What about tax?
Although commercial issues should always take precedence, the capital gains tax and inheritance tax consequences are important as they affect the net amount receivable from the sale.
Passing on the business
Unlike a sale, succession is more about the people rather than value. Are your children the right people? Do you need non-family management as well? What skills do your children have or need? Have they inherited your entrepreneurial DNA? How do you treat children equally (or not) if only a few take on the business? Will the business survive in their hands?
A trend in recent years is for entrepreneurs to make a sale to their children in order to extract cash value and also use their children's bank debt as an additional incentive for them to grow the business. The most successful succession planning is achieved where the family can genuinely separate business meetings and issues from family, always knowing which 'hat' they have on at all times. It is also important that the founder can let go of the business and not interfere after the succession.
Management buyout
This is the hybrid: it is a sale but the 'people issues' that arise on succession are still important. Usually the buyer is taking on a large amount of personal debt to acquire the business from you. Will they buy the business and at the price that you want? Do you need to strengthen the team now in order to maximise your value?
What if you have done nothing to date?
It is all too common that a successful owner delays reaching a decision on succession. Three things you can do to get your mind thinking about the exit strategy are:
- write a rough plan - make a start by jotting down a rough plan on one page, including hopes, fears and barriers.
- discuss it - talk to family, fellow directors and advisers.
- consider 'the day after', even at this early stage - what do you want from the exit in terms of wealth, assets, family and projects to fill the day?
But whatever you do, thinking about this in advance and taking advice on your plans can help provide the best outcome.
We have taken great care to ensure the accuracy of this newsletter. However, the newsletter is written in general terms and you are strongly recommended to seek specific advice before taking any action based on the information it contains. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. © Smith & Williamson Holdings Limited 2014. code: 15/11/2014 exp: NTD197
