Succession planning for owner managed businesses
In a year of new challenges, exiting a business arguably remains one of the biggest challenges for business owners. It can be difficult to balance time between managing the current needs of the business and strategising for the future.
All business owners will transition out of their business at some stage, perhaps due to a change in priorities, to take up a new challenge or retire. Studies have shown that despite this reality a significant percentage of small businesses do not have an exit plan. This short article considers the benefits of having an exit plan in place and initial considerations for an exit.
Benefits of an exit plan
Planning an exit strategy early (for instance three years before an exit) can be useful and benefit a business in a number of ways, for example:
- it can lead to a smoother exit transition by pre-empting time consuming due diligence requests;
- reviewing and investigating existing business arrangements may identify areas for improvement in advance of an exit (for instance putting in place new employment arrangements or re-negotiating certain commercial contract terms). Or of any business shortcomings (for example regulatory non-compliance) which could delay an exit if discovered at a later point in time; and
- it may enhance the business' value, by improving organisation and efficiencies as identified above.
Initial considerations for an exit plan
- Putting in place an exit plan: thinking about questions including when an exit is to take place, the desired value of the business on exit and who the successor is intended to be is very important.
- Collating due diligence: often the most time consuming and labour intensive part of the sale process. A buyer of the business or potential investor will usually want to conduct a thorough process of due diligence before entering into a transaction. Due diligence will likely cover a wide range of areas including the company's commercial contracts, regulatory compliance, employment arrangements and banking and financial arrangements.
- Management team: having a wider management team employed under sound service contracts can show that the business is not solely dependent on the business owner.
- Your personal estate planning: don't leave your own estate planning as an afterthought. There may be enhanced opportunities to carry out estate planning as part of your exit plan. Once you have exited you may need to consider steps to ensure fairness within families and re-purpose funds acquired. Our corporate team are experts in business structuring and share sales and work closely with our tax and private wealth specialists'.
The Autumn Budget presents challenges for businesses, particularly those in the hospitality sector, including ongoing cost increases (such as the end of the temporary reduced rate of VAT, with VAT now appearing to return to 20% from 1 April 2022). These new challenges reinforce the need for forward planning.
Whether you are starting a new venture, for the long term or your vision is to hand over your business to the next generation, sell to your existing management team, exit through a sale, we can help you plan for the future. Whatever option you choose for, it is crucial to make sure that you start planning for the future as early as possible to ensure a smooth transition.