by Mark Edwards, CEO, Boss Equity

Early Planning Key to a Successful Sale

Conversations with business owners and shareholders are invariably motivated either by the imminent or eventual retirement of one, or a number, of key executive shareholders. Such conversations also often incorporate discussions around plans to sell the business to facilitate a significant growth step change in the hands of new owners with greater resources, investment and/or reach. 

For small businesses, there is sometimes the option of passing the business to family members who are already involved. However, in my experience, this seems to happen less and less frequently. For larger software businesses, it is a rarity. Whatever the expected scenario, the tip here, as with all exit plans, is to start planning early.

Raising the Money!

When considering family succession, there are numerous considerations; the first and most fundamental is: do your family member/s want to take control of the business? If this has been confirmed (it often hasn't!) then the next consideration is how are your family members going to raise the money? The same can also be said of management buy-outs.

With MBO's they may have the knowledge, experience and desire to take over your shares but valuations and the surety that you need regarding the existing management team’s ability to access the necessary cash, is often lacking. If payment for the shares of the business is being proposed as a series of staged payments over a number of months or years then; do you intend to retain control over the business for some period after retirement?  If so, is it really a retirement until you have been paid in full? A change in performance that doesn’t go to plan and it could become a messy and complicated scenario for both parties, very likely resulting in having to renegotiate the deal and potentially, causing problems in the relationship.

Who, internally, would be responsible for leading the business or is there going to be some degree of shared leadership for a period until the business has grown and new roles can be firmly appointed?

Succession Planning for the Future Needs to be Formulated TODAY!

The above issues only scratch the surface of some of the issues that can occur in succession planning; succession retirement planning can easily become highly complicated when it involves family members or an MBO. Also, just as importantly, it is unlikely to give you the return you may wish. Valuations at the higher end of the spectrum rarely happen via this route. Negotiating with family members or existing internal management is not a comfortable position to be in and is definitely not the ideal scenario.

Building your business is never easy and you don’t want to be left feeling that your efforts and shareholding, “sweat equity” has been under-valued when you finally exit. Building the business required a plan and the same is true when exiting your business.  You need an exit strategy that is robust and can accommodate a number of scenarios. Your exit plan will only be reached if you have a plan in which you believe and your co-shareholders are in alignment with it. You must also vigorously act on your plan. There is no other sure route to exit success. Passivity will take you down a route you don’t want to go to a place you won’t want to be.

Planning for The Unforeseen

Sometimes the discussion about the sale of the business is stimulated by an impending, unforeseen event. It's true that life is lived forwards but can only be understood backwards. By its very nature, the unforeseen is something that cannot be avoided; in this context, it can be many things from a serious illness to a sudden death or even market changes. However, it is also true that the future depends on what you do today and one way to reduce your risk is to plan a solid exit strategy so that you are in a stronger position when the unforeseen does happen.  You can also make provision for certain scenarios that you could realistically predict. Death or a major shareholder wanting to exit is something that could be anticipated and planned for to some degree. It's always possible that a requirement for significant investment could happen at a time that may not be in line with certain shareholders’ personal requirements and timeframes.  Considering and discussing some of these future, possible scenarios should be part of any sensible and robust exit plan.

Let Us Begin

I believe that a business should not only serve its customers but also its owners and employees. As a business owner, I would want a business to work for me as much as I work for the business, especially when it comes to exiting. To that end, ensuring the future of your business and your shareholder value requires work today and the only way to secure that, is to say, "Let us begin".