Succession Planning

Are you thinking of selling your business now or sometime in the future? If so, here are some simple tips that can help you make a more profitable sale.

When running a business, it’s easy to become so preoccupied with the day to day operation of the organisation that you omit to carry out regular reviews to assess how you are doing and to make plans for the future. This is why so few business owners have an exit strategy in place until just before they come to sell. Neglecting the long term vision can be a costly mistake. The good news is that this situation can be quite easily avoided. In fact, with some simple pre-planning and care, the sale of a business will run more smoothly – with more profitable results for the vendor.

1. Management buyout

The best case scenario for most business owners, and often the most profitable exit strategy, is to sell your business to your own managers; this is known as a management buyout. This route has several significant advantages:

the managers will have experience running the business
they will have detailed knowledge about the value of the business
most managers have the motivation to become their own boss.
However, if you are aiming to achieve a management buyout, you do need to lay the groundwork well before you are thinking of selling.

2. Set a date

The first thing you should consider is at what age or time you ideally want to exit the business? If you can establish a date, you will then have a timeframe to work towards. This will enable you to set yourself relevant targets that you need to complete in order to get the most out of your business when you come to sell. This also helps to avoid the scenario of seeking a quick sale from necessity and therefore having to settle for a lower price.

3. Identify an heir

With a timeframe in mind, you then need to identify key members of staff that have the potential and/or desire to assume greater responsibilities and go on to run (and own) the business. Once you have done this, you can then begin training these staff with this in mind. Training should include teaching them about marketing the business, giving them supervisory roles when available, promoting them to managerial positions when available, teaching them about networking and of course mentoring them on how to run the business on a daily basis. Therefore, if you want to retire in 10 years time, you ought to be thinking about who has the potential to take over the business at that time, training those people and offering them share options when they hit their targets (which become available in 10 years). This will encourage retention and let them know that their career is moving forward – great for motivation.

4. A mentoring role

If you have adhered to steps 2 and 3, you should already have a pool of staff members who are fully prepared and ready to take over by the time you are ready to sell. However, remember that it is unlikely that any of them will have run a business before, so you might want to consider remaining as a part-time consultant within the business for a set period of time after the sale. This will give the buyers greater confidence in taking over the running of the business as they will have a mentor to guide them through the first few turbulent months. In addition, it will secure you an additional income and ease you into retirement.

5. Apply the principle

Of course, you may not be fortunate to achieve a management buy out. If this is the case, there are additional options available to you which can still be lucrative and attractive such as trade sales or open market sales. Principles 2 to 4 are equally valid if you are going down one of these routes as they will help to ensure that your business is an attractive, saleable proposition with stable and well trained staff. You should ensure that these ideas are considered and applied as neglecting them could significantly impact on the potential profitability of the transaction.

The alternatives to a management buyout are trade sales or an open market sale. You must remember to follow the principles previously discussed but you need to be aware that when you sell your company on the open market or at a trade sale the buyers will not know a lot if anything about your business, therefore they shall conduct detailed due diligence in respect of your business. The purpose of due diligence is to find any skeletons in the cupboard which would put them of buying or which they could use to negotiate down the purchase price.

It is therefore vitally important that you have dealt with any outstanding issues and that all your documents are up to date. Below is a non exhaustive list of key things to think about:

Check that your lease is up to date and the correct names are on it;
Check that you have the correct employment contracts in place for your staff;
Ensure that you have protected your brand through trademarks (where applicable);
You will need 3 years of accounts;
Check that you have no outstanding legal issues. If you have outstanding legal issues, check that you have all the information regarding the claim.
Once you have resolved all of the above you can move on to advertising your business for sale but be aware that there are many businessmen and women out there who use the process of due diligence as a fishing expedition to find information about your business, your customers and your products with no intention of buying your business. It is therefore vital that when you enter into negotiations with a potential buyer that you enter into a Non-Disclosure Agreement (NDA). An NDA prohibits a potential buyer from using or disclosing information about your business, it also prevents them from contacting your customers. If a potential buyer were to do any of these things you would have a claim against them.

It is standard practice to enter into Heads of Terms (HoT). HoT’s are used to outline the principal terms of a potential offer for a company. Within the HoT you can have clauses which require the buyer to provide proof of monies to buy the business (so that you don’t get 2 months down the line and find out they have no money), you can insert a clause requiring the buyer to pay your legal fees if they pull out of the transaction prior to completion, in addition the HoT sets out the timescale for the transaction and the offer/consideration for the business.

What has been discussed above is by no means an extensive list but it gives you an idea of what you need to be thinking about when you come to sell your business.

For more details on businesses for sale and succession planning please visit businessesforsale.com