Succession planning: how to fund a change of ownership

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A succession plan ensures your SME has the strong leadership, clear approach and adequate investment required to thrive over the long-term.

Whether you want to pass on your company to the next generation of your family or sell-up when you reach retirement age, having an appropriate exit strategy and structured plan regarding what will happen when you leave has many benefits. It can help a business to align strategic goals, develop staff and grow profits. Additionally, it means you’re always ready for the unexpected.

While aspects of your succession strategy will be unique to your SME, securing the right funding should be prioritised for a smooth transition. We explore three common ways to transfer ownership of a business and how financial support could minimise succession plan disruption:

Passing on a family business

Many family-owned companies expect ownership to be passed onto the next generation. However, with this key decision made, other important steps can sometimes fail to be addressed. A longer-term approach often improves the process, but this can require additional funding.

When considering this kind of succession plan, families must determine who will take over, what the buy-sell agreement covers and how the company will be run after the event. To support these decisions, family firms can engage a business advisor to help them work through potentially emotional decisions and write-up necessary documentation to complete the succession. 

Inter-family transitions should not be thought of as a ‘quick-fix’ and setting the groundwork for these changes can start many years before completion. Commonly, successors are employed for some time before the take-over happens so that they are equipped to make decisions and understand governance processes. 

It is often assumed that intergenerational sales will require the owner to be a guarantor or for payments to be made over a longer term, but financing existing assets can support the transfer over a sustained period. Invoice discounting, for example, releases funds from unpaid customer invoices, providing the capital needed to cover costs. This can be beneficial when passing on a business because cash flow and assets are preserved, and the successor can continue using the finance facility once the transfer is complete.

Arranging a management buy-out

Investment in your workforce now is a provision for operational continuity later. With skilled people in the right roles, owners can be confident that commercial functions will not be impacted by planned (or unplanned) developments. A people-centric approach to an overall business plan can also mean that trusted decision makers are in place to buy the SME when the time is right.

One of the clear advantages of a management buy-out (“MBO”) is that disruption to the company is minimised. The leadership has an existing knowledge of operations, employees feel more secure when managers they know take over, and client relationships are easier to maintain. Additionally, owners often have proof that the new team will be dedicated to running an SME that they have nurtured for many years.

So-called leveraged buy-outs can help existing management teams access sufficient funds to purchase the company. Asset based lending is particularly suitable in this scenario because the capital needed to complete the transaction can raised against assets on the balance sheet and unpaid customer invoices. This can raise the higher levels of funding needed to complete an MBO. 

Selling to an outside party

For many owners, their SME is their most valuable asset, so trading with an outside buyer is a good way to raise funds for retirement or new projects. 

Selling a company to a third party requires significant advance planning. Whether transferring to an individual, enabling an external management team to buy-in (“MBI”), or working with a private equity firm, it is vital to find a buyer who has the right combination of skills, experience and commitment. This can mean it takes more time to establish interest.

It’s also important for the owner to be clear about their personal goals. They may wish to leave the business immediately or have a handover period, and these choices could impact the agreement and associated outlays.

Having a formal framework can contribute to success. A long-term plan identifies critical business functions and enables objectives to be built around them early-on. It also means that everyone involved knows what to do when, and can budget for costs, such as legal fees. When succession is part of your wider strategy, it easier to mitigate changes and extensions to your exit plan.

Our Liquidity Plus can provide an immediate cash injection to businesses with an invoice discounting facility. This can provide access to funds while an owner looks for the right buyer or help cover additional costs associated with organising the sale of an SME to an outside party.


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