Succession planning for an effective exit strategy

When it comes to succession planning for a business, some people say that you should have your exit strategy in mind as soon as you set up the business. But in my experience, most principals don’t think about their departure until it’s far too late.

Typically, they carry on working in the business while they are emotionally invested in it. But once they stop enjoying it – for example because of growing financial uncertainty – they often find themselves in a situation where they can’t easily get out of it.

Like most things in business, a little bit of regular succession planning for a business will pay dividends in the long run, starting from the premise that if you want to maximise your return on the business, you need to make it as attractive as possible to a potential investor.

But bear in mind that getting the business ready for sale will cost you money in the short term – for example by making sure your IT and financial systems are up to date – and is not usually something that happens overnight.

One route when succession planning for a business is to sell it to in interested third party, and that could well be someone you do not yet know.

Corporate finance firms specialise in mergers and acquisitions like this, but their clients are often only interested in businesses of a sufficient size and scope that will offer them a substantial return on their investment.

A more likely route for small-to-medium-sized businesses is to sell to someone they know already. This could be a customer, a supplier or even a competitor who may be interested in taking on the business as a going concern.

But one of the first things you’ll have to demonstrate to any third party is that succession planning for the business has taken place, so it is strong enough to prosper even after the principal has left.

Having that strong team in place naturally takes you down another route when considering succession planning for a business: whether it would be better to sell it to the existing management team (often called a management buyout).

Emotionally, this can prove attractive for anyone looking to leave behind a legacy from all the hard work they and their team have put into building their company.

But management buyouts can falter because of the team’s attitude to risk and their inability to raise the cash you’ll need to secure your own future.

Often, you have to accept that you will get your money over a longer period, receiving your pay-out from the profits made by the business as it continues to trade.

You also have to be realistic about how much you can take out of the business while still leaving it in a healthy position.

But this is often a compromise that people are happy to make because of the emotional connection they have with the current team.

Both routes to succession planning for a business have their advantages and disadvantages.

You may make a higher return when selling to a third party, but finding an interested buyer might prove difficult.

On one hand, a management buyout seems like a more ethical and satisfying way to go. But don’t underestimate the difficulty of getting your people to step up to the challenge of ownership and to adopt a positive view of the risk that comes from being an entrepreneur rather than just a member of the team.

We’ve found this difficulty even more acute since the pandemic, a time when lots of people reassessed what they wanted from their careers and became more inclined to strive for a different work-life balance.

At Prime Accountants Group, we are well used to navigating the landscape of succession planning for a business and helping owners to protect the interests of both themselves and their company.

I would recommend that a business principal talks to an accountancy firm like ours well before the question of an exit strategy becomes a thorny issue.