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. But they also want to leave the businesses they have nurtured in safe hands. Indeed, succession planning is an issue many entrepreneurs feel prevents them taking a step back – before they depart, they want to be sure there is new management in place that is good enough to ensure the business survives and prospers without them.
Research from Close Brothers suggests such worries are remarkably common. Succession planning is a concern for 15 per cent of company owners, the research shows, while just 31 per cent have a continuity plan in place in the event of senior management leaving.
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. In these cases, the current owner may feel their children don’t have the right skills or qualities to make a success of running the firm –managing and growing a small or medium-sized enterprise requires a broad range of attributes and experiences, which aren’t necessarily inherited by the children of entrepreneurs.
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 instantaneous 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 every aspect of the company inside out, and has time to develop a clear vision for how future growth can be secured.
The support may also include financial planning – if the business is being passed on to the next owner in return for a monetary consideration, whether to a family member or not, both sides will have to think carefully about how the transaction is financed.
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 blends 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.
Asset based finance of this type can be used to finance substantial deals. 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. And succession planning is often a key driver of the transaction.
Take, for example, Bodel Distributors, which Close Brothers supported last year with a funding package comprising a combination of invoice discounting and asset-based lending. A leading distributor of appliances, sinks, taps and kitchen equipment for brands such as Franke, Bosch and Smeg, the owners agreed a deal with sales director John Leckey, who had been with the company for more than 20 years. Mr Leckey was able to use Close Brothers’ funding to release capital tied up in the company’s stock and to take ownership.
For Bodel, the transaction, underwritten by this form of finance, provided continuity of management, with a new owner who was steeped in the business and who had worked alongside its owners for many years. The succession strategy made sense for the business and asset-based finance provided the means with which to ensure the transaction could proceed.
This deal is an example of how carefully-planned and financed successions can be effectively executed, providing 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.