When it comes time for a business owner to hand over the reins to someone else, it’s important that there is a plan in place. At MKB Law we have been the trusted advisors to many family owned businesses undergoing transition.
Types of Succession Planning
There are four established routes by which the change can take place:
transfer within the family
management buy out (MBO) – where the existing management team buys the business from the current owner
management buy in (MBI) – a management team from outside the company raises the necessary finance, buys it, and becomes the company’s new management
a full sale – a straightforward acquisition by a third party leaving the existing management team in place
buy-in management buyout (BIMBO) – is a combination of a management buy-in and a management buyout. In the case of a buy-in management buy-out, the team that buy out the company are a combination of existing managers, who retain a stake in the company, and individuals from outside the company who will join the management team following the buy-out
Many factors need to be considered including: determining the value of the business; settling tax and debt obligations; choosing and working with successor(s); and developing a plan to deal with succession.
Why is Succession Planning Neccessary?
Entrepreneurs give their lives to building their businesses, it’s one of the crowning achievements of their lives, so they often have a deep-seated desire to see the business continue after they retire. They feel a commitment to their customers, clients, employees and even their suppliers. Sadly, without a clear succession plan, many entrepreneurs fail to realise the benefit of their achievements and either the businesses fail or the original owner is forced to sell on unsatisfactory terms. This is a great pity, a waste of resources and usually affects the livelihood of many people.
It is never too early to begin succession planning. In fact, it should be done even when it seems things are going well and the current owner has no plans to step down from a leadership role, or retire. Sometimes, a sudden and drastic change to the physical or mental health of the owner, or their untimely death, may make it necessary for a business to be either sold or transferred to the ownership of someone else. These unforeseen circumstances are not so disruptive if there is a comprehensive succession plan already in place long before they occur.
Key Elements of Business Succession Plans
Identify what the perfect scenario would be when it’s time for you to exit your business. You may need to ask yourself many questions before you even begin to consider the actual process of transition, such as whether you will play any active role in the company’s future operations, how the sale will affect your employees, customers, suppliers, and other stakeholders in the company, whether the company itself will change locations, and whether the name of the company will change or remain the same (e.g. if the company bears your name, are you happy for a new owner to continue using it?).
What do you want to get out of the deal and what your successors are, or might be, looking for. This is particularly relevant if members of your family will be taking over the business. Are you the sole owner? Is it just you who is leaving the business, or do you have a partner, or partners to take into consideration? Be clear about who is affected by succession.
Will you leave the business entirely, or are you planning to work part-time? Are you considering bringing in someone else to run the business, while you still own, or part-own it, or are you looking to sell out completely? Outline the type of succession you envisage.
Can you identify potential successors? Sometimes, owners decide simply to sell the business outright, whereas others wish to appoint a family member, close friend, business partner, or even a current employee as their successor.
A successful plan is designed to ensure certainty for all interested parties at an early stage. It is important that you make it clear to whom ownership of the business will go, exactly when that will occur, and under what conditions.
It should go without saying that if you are planning for someone to succeed you, you should understand how the business works. It is surprisingly common to find owners of successful businesses who have been work on the “if it ain’t broke – don’t fix it” philosophy and don’t actually understand many facets of their business.
Describe the current business in more detail including its products, services, customers, competitors, strengths, weaknesses, opportunities and threats.
Outline the future of the business, is it growing, or contracting? Is it opening new markets, developing new customers bases? Is it re-tooling, or developing new products or services? Add sales projections and other financial statements that will provide a clear picture of the company’s prospects.
Provide an overview of how the business runs on a day-to-day basis and describe the systems in place that keep things on track, and who has what responsibilities. Then outline how these will work after succession.
Who are the people that you need to involve in the succession planning process? It is very tempting to keep your cards close to your chest but you will need “buy in” from those affected by the outcome. Outline all those who will need to be involved. This can include spouses, children, other family members and key employees, especially departmental, or divisional managers. Provide details of how family, or management are involved with the succession plan and eventual transition of the business to a new owner, or family member. Also consider what role family members that are not part of the business will have in the decision-making process.
What will happen to key personnel after succession? Create a table that lists the names and job titles of all your key employees (include any partners, or co-owners remaining the business). Now add two more columns; one that lists the relevant skills required to do that job and another that details the training they will need to move into that position.
What will the impact of a change in senior management be on the structure of the business? Identify the structural components and levels of management, roles and responsibilities of employees, and policies and procedures of the company’s operations should be clearly explained. It should be clearly understood how the transfer of ownership will affect each manager and employee and what roles will change. You should create an organization chart that shows what you think the company will look like when you have left.
Should you provide training for the successor? A lot will depend on whether your successor already works in your business in a key managerial role, and the level of skill and knowledge they possess. If you are selling to a complete outsider then you will have to include a full orientation of all systems, policies, and procedures.
How do you value the business? Professional advice will almost certainly be necessary to get agreement between parties about the value of the business. this may involve having to engage the services of you accountant, a corporate finance expert, an estate agent or a valuer for plant and equipment. The valuation of liabilities can be as difficult as the valuation of assets.
What is the timetable? Although this may change as things progress, create a timetable of all the activities the plan requires. This will allow you to monitor progress and let all stakeholders know how things are progressing, on a regular basis.
Risk management: Whatever can go wrong, will go wrong so you need to plan for the “whatifs” of life. For instance, you should consider the possibility that you could die before being able to sell your business, or hand it over to a successor. Making a will and an enduring power of attorney will form part of any business succession planning strategy.
You should ensure that you make it clear what your wishes are if this should happen, and make sure that you have a will that details what should happen to the business, or your shares if the worst happens. Make sure someone knows what insurance you have, where your will is and who will handle the succession if you are not around to do it yourself.
The method and timing of leaving the business can have very significant tax implications both for you, your successors and any partners staying behind. It is essential that you get first class tax advice on succession planning as early as possible in the process.
The Legal Process
You will be surprised at how much legal documentation will be involved. this is not only the documents that we will have to create for you but also internal documents. For example there will be:
a business or share sale agreement
HP and finance agreements
domain name transfers
memberships of professional or trade bodies
outstanding agreements or contracts
permissions form other shareholders, partners etc.
Much of the process will be similar to the steps involved in a business sale and purchase but it will need to be tailored to the specific circumstances.
For example, where the succession plan is to exit in stages, a partnership agreement or shareholders’ agreement will need to establish the timetable and deal with issues such as change of control and when it will it happen.