Transaction Advisory Services Partner Tim Quigley writes a guest blog for Business & Finance on succession planning and how thinking ahead determines and shapes future success for businesses.
Preparation, knowing the value of your business and understanding the market are essential components of succession planning.
In business, thinking ahead determines and shapes future success.
This equally applies to succession planning, a process for identifying and electing potential successors for a business, whether that is a family member, employee or new ownership.
Handing over the reins
For the owner of a company planning to sell or set in motion a succession plan, timing is everything. With the improvement in the economy over recent years, many owners are finding that they are now in a better position to achieve a successful hand over. This could be parents passing the company to their children, or a management buy-out (MBO), where the current management team within a company want to take either full or part ownership of a business.
There has been a notable increase in MBO transactions in recent years, buoyed by an increase in the availability of financing in the market, including financing from private equity firms who have been very active in the Irish market.
So, what are the key factors in succession planning? Let’s start with preparation. To get the best value for your business you need to know who is likely to be interested in investing or acquiring; how to value your business and the best route to maximise value and successfully complete a transaction.
Preparation is key
The preparation phase and the way the business is marketed will be influenced by who will be the most likely acquirer/investor. For example, if private equity is a likely acquirer, the focus may be more towards cash generation and growth to maximise the return to the private equity on an exit. If the likely acquirer is a trade buyer, considerations such as synergies or access to new products and markets would be an attractive proposition to integrate a newly acquired business.
Tax planning is also an important component of preparation so that a transaction is completed in the most tax efficient manner possible from the perspective of both the seller and the buyer.
The ability to maximise value will also be linked to the due diligence process where issues can arise which may have a negative impact on value. Being prepared and identifying potential pitfalls early to ensure they are addressed in advance of a third-party review will help to reduce the exposure to any potentially value reducing issues.
Do due diligence
In addition, no matter which industry you are in, the maximisation of your value will be impacted by your financial performance historically and your ability to maintain and improve that performance. Ensuring that you are prepared for a due diligence process will give the potential acquirer confidence in the process.
At a basic level a well organised exit strategy will always ensure there are adequate books and records, completed audited financial statements and reliable management accounts.
It is also key well in advance of the sale to review the strength of the management team and their ability to grow the business. Strength in this team and the discipline in how they manage the business, are important factors in delivering an efficient and effective business.
Key value drivers
Having decided to sell your business, understanding the key value drivers for your business will enable you to plan and make any necessary changes to maximise the value. For example, if there is a brand or product which is losing money, do you keep it as a loss leader, make the decisions and changes to make it profitable, or do you need to remove it from your offering? It is too late to make these decisions during negotiations and therefore should be a part of your forward planning.
Finally, whatever succession route is selected it is important to maintain focus on the business throughout the succession process and remember that a deal is not done until it’s done. That’s when the money is handed over and contracts are completed. Only then can you and the new owners relax and look forward to your new futures.
Tim Quigley is a Partner in RSM where he leads its Corporate Finance team, advising clients on acquisitions, disposals, MBOs, due diligence and finance raising.
As seen on Business & Finance online, 29th May 2019