What is succession planning?

Business owners are often caught up in the daily pressures of running and growing a company. The day they step down from it may be the furthest thing from their minds.

But failing to plan ahead can cause uncertainty and disruption, and jeopardise the future of the business they spent years of hard work building.

The transfer of ownership of a company to another person or team is known as business succession. There are various ways this can happen, from passing it on to a family member to selling it to a trade buyer or management team.

In this article, we explain the importance of succession planning and summarise some of the common succession routes. If you’re thinking of buying or selling a business, this should help you get a better understanding of the options available to you.

 

Why you need a succession plan

Too often succession planning is reactive. Many business owners don’t address it until they’re forced by circumstances like age or poor health to exit the company. This can lead to rushed, ill-informed decisions and a lack of control over the end result. Being proactive and creating a solid succession plan early on puts you in a much better position. The sooner you start the process, the greater the chances you and the company will achieve a desirable outcome.

Advance succession planning can allow you to:

• Choose the most suitable successors to take the company forward and equip them with the necessary skills to take over your role. This will help to ensure the long-term survival and growth of the business  
• Focus on optimising value and making the business as attractive as possible for a future sale  
• Determine how to maximise your returns from any deal and minimise capital gains and income taxes. You may be able to take advantage of Business Asset Disposal Relief, enabling you to pay less capital gains tax when you sell all or part of your business
• Evaluate potential buyers or offers. When you’re not under pressure to sell and you’re better informed, you can make a decision whether to accept an offer or wait for a more appropriate one
• Provide more certainty for employees and key stakeholders on what the future holds for the company
• Retain control of the process, rather than letting someone else make decisions and take control

 

Succession planning starts with clearly defining your personal goals and your vision for the business. There are lots of things to consider:

• What are your post-succession plans? Are you going to retire or do you want to pursue an opportunity, such as launching a new business?
• If you’re selling your shares, do you want a full or partial exit, and over what timescale?
• What are your financial needs? Will you have sufficient resources to support the lifestyle you want going forward?
• Do you want to remain involved in the business post-succession, in what capacity, and for how long?
• What are the long-term goals for the business? How might the sale/transfer of ownership affect the company’s future growth?
• Do you want to build a legacy and ensure that jobs are retained locally?

 

These questions can be difficult to answer, but knowing exactly what you want to achieve and being able to communicate this to your advisors and stakeholders is key to a successful outcome.

Types of business succession

There are many ways of transferring ownership. Here are a few popular succession routes to consider if you’re thinking of selling or buying a business:

Management buyout (MBO)

A management buyout is where the existing management team buys all or part of the business. Company owners sometimes overlook the management team when they’re looking to sell. But an MBO can be the best exit strategy, benefiting both the seller and management and leaving the company in the hands of the people who are most capable of running it.

Advantages of an MBO include:

• It typically allows for a smooth transition and can often be completed quicker than an outside sale
• It can provide reassurance to the seller that the values and culture of the company will be preserved and jobs will be protected
• Employees, customers, and suppliers are also more likely to be comfortable with the transition as they’re familiar with the management team and can expect continuity
• Less due diligence is typically required as the buyers already have an in-depth knowledge of the business
• There is no need to provide confidential information to strategic buyers, i.e. competitors
• From the management team’s perspective, it’s an attractive option due to the greater potential rewards they’ll gain from being owners of the company rather than employees. It’s an opportunity to use their ambition and expertise to grow a company they already know and understand

 

The financing required for an MBO can be significant. As a result, many management teams don’t take the opportunity of buying the business because they think they can’t afford to. But there are a variety of funding methods, and often external funders will provide the majority of the finance, leaving the management team to cover only a small portion. Read our blog post How to finance your management buyout to find out more.

Management buy-in (MBI)

This is where an external manager or management team purchases all of, or a controlling stake in, a business and becomes the company’s new management. Though an external team won’t have the same level of knowledge about the business as an internal team, they are often highly experienced executives with extensive knowledge of the sector. Similarly to an MBO, MBIs typically require a pooling together of finance from various sources, including a financial contribution from the management team to demonstrate their commitment to growing the business.

An MBI is usually beneficial to both the buyer and the seller. It can be a great option where there is no clear successor and the existing management team isn’t interested in buying the company, or if the company isn’t currently being well managed. The new management team can bring experience, expertise, and contacts to drive the company’s growth and increase its value.

Buy-in management buyout (BIMBO)

A BIMBO combines elements of an MBO and MBI. At least some of the existing management team buy the business alongside one or more external managers, who join the team following the purchase.

This can be an ideal strategy if there is a skills gap in the current management team, perhaps due to the exit of the selling owner, which the expertise of outside leaders can fill.

Employee buyout (EBO)

When existing employees buy the business it's known as an employee buyout. It can involve direct ownership (each employee owns shares directly), indirect ownership (shares are held by an employee trust on behalf of the employees), or a combination.

As with a management buyout, an EBO can be a good solution for business owners who want to secure a legacy and ensure that employees’ jobs are retained. It’s a chance to reward loyal employees, who as shareholders will be highly incentivised to grow the company.

We provide flexible loans and equity to support employee buyouts. We also work closely with Cwmpas and their dedicated programme to support Employee Ownership in Wales.

 

Acquisition or trade sale

A trade sale or acquisition is where one company buys part or all of another company and gains control. It can have significant advantages for the buyer, who is often a strategic acquirer operating in the same industry.

For example, it may enable them to obtain skills or technologies quickly, increase their market share, or reduce costs due to economies of scale.

For the owner selling the business, it can be a lucrative exit strategy and, as there is usually a clear synergy between the two companies, the acquisition can lead to greater growth and increased value in the future.

 

Succession finance 

If you’re an entrepreneur or management team looking to buy or sell a business in Wales, we can help with loans and equity up to £3 million and follow-on funding. We have dedicated local teams and a strong track record of succession deals. Our finance covers the vast majority of the capital for MBOs and MBIs, so only a small investment is required from the management team. Head over to our buying a business page to find out more or get in touch with us below.