How to ensure an orderly and successful transition from one business owner to the next.
Entrepreneurs and business owners who have worked hard to build successful enterprises, often over an extended period, naturally look forward to stepping back from their firms or even retiring altogether. Succession planning can help entrepeneurs to feel that they are leaving the businesses they have nurtured in safe hands, and for many this is an important step – before they depart, they want to be sure there is new management team in place that is good enough to ensure the business survives and prospers without them.
Many are understandably keen for a family member to take on the business they have built up once they’re ready to move on – most obviously their children, but sometimes other relatives too. “Family business owners are well known for their long-termism and their role as stewards,” says William Pedder of the Institute of Family Businesses. “Many owners manage their company as a ‘heritage on loan’, working to build something better for future generations.”
Inevitably, however, that won’t always be possible. Some may not have close relatives, or those relatives may not want to take on the burden of the family business. Where that’s the case, the challenge is to identify a successor elsewhere – perhaps from within the current management team, or even from an external pool of potential candidates. In which case, the entrepreneur is looking for the best qualified management team to protect and enhance their legacy.
This is not to suggest that succession will be an quick process. The most successful transitions follow a period of careful preparation, in which the next owner of the business receives a broad range of support. This will ensure the new owner understands the company well, and has time to develop a clear vision for how future growth can be secured.
Financial Planning
The support often includes financial planning. If the business is being passed on to the next owner for a fee, whether to a family member or not, both sides will have to think carefully about how the transaction is funded.
Most commonly, the transaction is likely to be a management buy-out, where some or all of the existing management team (possibly including a family member), buys out the current owner, or a management buy-in, where a new management team comes into the enterprise.
In both cases, asset-based lending can be a practical and capital-efficient vehicle for financing the transaction. Indeed, MBOs, MBIs and other types of acquisition are amongst the most common reasons that businesses seek asset-based finance.
Asset based lending works simply by blending invoice finance – where a business borrows money against the value of outstanding invoices yet to be settled by customers – with funds secured against stock, property or plant and machinery. The value of these assets is otherwise locked up, so leveraging this value to fund a strategic initiative such as a change of ownership can make a great deal of sense. It typically works best for businesses with a turnover of £10m a year at least, and where the funding sought is in excess of £2m.
Succession planning is often a key driver for asset based lending. By underwiting the transaction with this form of finance, companies can provide continuity of management that is supported by strong funding. This allows carefully-planned and financed successions to be effectively executed, and provides reassurance that the next generation will build on their success.
With four of the top ten worries for business owners related to succession planning, every business should be thinking about what might be possible for them.
