Success requires succession - Your business, without you

So you've built a successful business - nurtured it from small beginnings, managed it through good times and bad, created a brand, a culture, and a legacy. But now, it's time to move on. Perhaps retirement beckons, maybe you've got a great new venture in mind, or just possibly, you have no idea what's next but you do know you've reached the end of this particular road.

"Everybody has a plan until they get punched in the mouth" - Mike Tyson

"In preparing for battle I have always found that plans are useless, but planning is indispensable." - Dwight D. Eisenhower

Plan right, plan right now

This isn't the 'exit' that Venture Capitalists yearn for, this is merely the next step towards s life well-lived. There'll be no crowing headlines in the financial pages, just the quiet satisfaction of a job well done and the  excitement of fresh challenges ahead.

Succession and exit planning is an important feature of a good business plan, after all, a successful business should have an operating timeframe measureable in generations. So, what should business owners consider now, to position themselves appropriately for the future?

The first question that needs to be answered is - who is most likely to assume control of the business - a family member, the existing management, a third party individual, or a corporate buyer? Having a clear picture of potential new owners and their expectations will allow you to structure and manage the business now, to facilitate that longer term outcome. 

The underlying nature of the business' activities is a fundamental consideration; what are its unique commercial attributes, how and where is value added, and how transferable are these factors? For example, a manufacturing facility can generally operate under new ownership without affecting the final product, but the same cannot be said of an artist's studio. 

Is the business saleable, or transferrable, with its current operating structure?

An outright sale is a straightforward option for some companies, primarily those with a substantial and transferable asset base, but not for all. Operations more dependent on a personal networks, individual expertise, or pure intellectual capital are a more difficult proposition. If it is unclear that similar returns can be achieved in alternative ownership, then any valuation will reflect that, or equivalently, attract a smaller pool of potential buyers.

Is the business saleable or transferrable with its current ownership structure?

If the business is 100% owned by an individual, with limited outstanding debt, and no refinancing requirement, then a sale can be pursued easily. But if the capital structure incorporates multiple stakeholders, differentiated share classes, personal loans, external guarantees, longer-term liabilities, option plans or soft promises, then arranging a clean transfer of control becomes more difficult, and again, the realisable value is likely to be impacted. On a similar note, it can be important to ensure that the tax treatment of any sale is favourable, ensuring tax efficient measures are pursued where possible to minimise taxation arising on any transfer of ownership. 

Are there intangible assets that exist separate to your direct involvement - brand value, patents, licensing agreements etc?

Spending time to ensure intangible assets are properly assessed, and valued where possible, is time well spent. Similarly, providing comfort that any required IP is owned or securely licensed by the business will be appreciated by prospective acquirers.

Would existing client relationships survive your departure?

If not, now is the time to ensure that other team members step up and augment client relationships. Loyalty to the firm, not exclusively to any one individual or owner, should be encouraged where possible. This is good business practice in any case and fundamental to creating a strong brand. A brand requires consistent investment in product, culture and client relations at a minimum, and while a brand cannot be created overnight, it can certainly be destroyed in an instant.

Value realisation channels to consider
Outright sale - As noted above this may not be possible for all businesses, but can provide a clean exit for cash, allowing the founder to move on quickly to new opportunities (or the golf course).
Partial sale - Sell a portion of the equity to new or existing management, and negotiate a personal exit over an agreed time-frame, perhaps taking a step back to a board or advisory role. This offers the benefit of maintaining connections with the business and possibly a future dividend income stream, while enjoying greater time and freedom to pursue other interests.
Share transfer (most relevant for small, close held, and family businesses) - A transfer of shares to a business partner or involved family member can provide a strong future for the business in experienced hands. While easily done, particularly if there are no external shareholders or loans, care must be taken to minimise applicable taxes.
Management buyout - Sometimes the best people to control a business are the people currently running it. If capital funding can be arranged (likely debt, secured on business cashflows) then the management team can buy out the founder(s) and have a direct stake in the returns on their labour and risk. This has the added benefit of minimising and external visible changes, clients enjoy continuity of service, and employees benefit from minimal disruption.