A Succession Plan - Your New Year’s Resolution?

Taking the first step …

As the Chinese say, a journey of a thousand miles must begin with a single step. What should that step be for you, the owner-manager?

When you set up your company it will no doubt have been with a mix of hope and fear.  Many of us contemplating our retirement will experience a different kind of fear – that of losing the purpose in our lives.  At the same time you may be just as fearful of letting down your family and your employees by leaving your affairs in a legal muddle when you go.

Sadly in recent years a good deal of our legal work has been probate sales:  acting for a spouse or child in selling the family company. But if such a sale has not been planned and carefully thought through it is very unlikely to produce a satisfactory result for those left behind.

If the shares in your company represent a significant part of your wealth your first step should be to decide on the plan for exiting your company, however as the owner and manager of your own company it may not be possible to separate your personal objectives from the objectives of the company.

So your first task is to decide what your personal objectives are and consider how they relate to your ownership of the company, which may represent your largest asset.  When would you like to step down and do you think you would like to phase your retirement?  What sum of money (net of tax) would you and your family need to be financially secure?   You may find that the gap between what you want or need and what is realistic and absolutely assured on a sale, is a frighteningly large sum particularly in a world of low interest rates.

But you must have the courage to confront that gap:  to determine that number.  If you do not you will end up putting off making the key decisions until ill-health or death takes the decision out of your hands.

The challenge here can be particularly difficult where you are one of two or more owners.  It is particularly complicated if you and your co-owners have markedly different ages, lifestyles and personal circumstances. For example, if one owner wants or needs a significantly higher sum his determination to achieve his personal objectives may mean that you are unable to achieve your own.

These hidden tensions may be unspoken (and perhaps not even admitted by your co-owner) but can all too often lead to breakdowns in relations.  Such a breakdown may occur when one of the owners has a health problem or a family member dies.  Whatever the trigger, it can be very stressful to learn that a fellow business owner has his own objectives and will not support your own. And family pressure from both sides may make matters worse. These difficulties can be avoided by employing a skilled independent adviser to help each of the owners to assess their own personal and financial objectives.

Choosing the best way forward

Once you have decided on your personal objectives there are three further questions which need to be addressed. The first is to try and assess what your company might be worth (which we will deal with in our next blog).  Secondly, what are the strengths and weaknesses of your management team?  Thirdly what might be the practical obstacles to a sale of your company?

We know from experience how difficult it can be to sell a private company for what you as the owner may think it is worth.    Buyers of companies will be cautious and risk-averse.  Even if you can agree a price the buyer may well find it difficult to raise funds to meet it.  You may then be faced with a very high risk deal with deferred and/or contingent payments and the suggestion that you take shares in the buyer.

This is why we think it so important for you to consider your management team (perhaps a strengthened team) as a potential buyer.  But going this route may require a lot of forward planning.

It is crucial to address these key issues efficiently, cost?effectively and in a timely manner.  This way you have the time to plan for your exit.

The result of assessing these key issues will be one of four alternatives (and quite frequently a combination of the four):

  • A Trade Sale, meaning a sale on arms’ length terms to a third party;
  • A Management Buy-Out, but not necessarily a traditional one where the managers have to find the funds to buy you out.  A powerful alternative could be for you the seller to provide the finance (by accepting deferred payment) and keep a minority stake;
  • A Family Transfer;
  • Closure.

You may come to the conclusion that a combination of these alternatives is needed.  Perhaps one division needs to be closed and another prepared for sale to a management team.  Or the management team may need to be developed or strengthened over a number of years before the team could confidently run your company and undertake a buy-out from you.

The key to choosing the right path is to take stock methodically and with careful analysis.  Objective advice and long-term planning is essential and this is where your lead adviser can play an invaluable role.

Source: http://www.lexology.com/library/detail.aspx?g=4940c7dc-8dbf-44f4-bdf3-8e6424b3dff7

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