While many of today’s SME leaders are opting to postpone retirement until a later age in order to continue running their business, at some point in the future these mature entrepreneurs will be looking to take a step back. There are many possible exit routes to pursue at this junction, but each requires careful planning to pave the way for a secure future.
Keep it in the family
Many SME owners may intend to pass control on to their offspring or a long-standing member of the firm, particularly if the business has been in the family for several generations. In fact, accountants Francis Clark found 50 per cent of family businesses in the South West intended to give or sell their business to the next generation, but worryingly over 60 per cent had no formal succession plans in place.
Reflecting on the finding, Managing Partner Les Burnett commented:
“This would indicate a general lack of understanding of how complex the process can be and how it can be confounded by family conflict, the next generation not being sufficiently skilled or simply not wanting to work in the family business which can be more demanding than working elsewhere."
Perhaps due to this lack of preparation, PwC’s latest Family Business Survey found that just 12 per cent of family businesses survive into the third generation of ownership. The international consultancy firm therefore advises entrepreneurs to treat the succession process with due care, beginning several years before the planned departure.
In particular, successors should be selected with caution, recognising that choosing a family member who doesn’t possess the required skills to effectively lead the firm may place a strain on both the business and personal relationships.
Family business consultant Juliette Johnson advocates giving potential successors a chance to spend time within the company early on, to allow both parties to gauge whether the role would be a good fit.
“Some companies create structured programmes that allow young family members at different educational stages to sample the family business working environment, from holiday jobs to gap year internship programmes,” she reports, explaining, “In laying down rules for these schemes, it's made clear that they involve no commitment on either side - an important two-way message, because the schemes also help companies assess the quality of the next generation.”
However, the succession specialist also underlines that working within the firm is no substitute for external learning, affirming:
“Young family members should ideally go and obtain outside work experience before deciding whether the family business is right for them. When I speak to the senior generation in family firms, who often joined from a young age, they are unanimous in wishing they'd worked somewhere else first. Working outside helps young people develop an objective view of their abilities and talents, it builds confidence, builds a better CV, introduces new ideas and learning, and - very importantly - it helps foster legitimacy and credibility among those more sceptical non-family employees.”
For those without a clear successor in mind, selling the business may offer an opportunity to hand over responsibility and supplement retirement income at the same time. However, Intelligent Business Transfer estimates that as many as 80,000 solvent businesses are closed down instead of being sold on each year by owners aged over 60, reinforcing the need for proper planning.
The organisation recommends enlisting specialists including an accountant, business transfer agent and solicitor to oversee the sale process, paying particular attention to how taxation is likely to impact on the eventual proceeds from the sale.
Exiting owners will need to demonstrate that their business is likely to deliver a strong return for potential investors, which means providing evidence of a well-thought out growth strategy for the next five to ten years. Nick Brown, Managing Director of Corporate Exit and business consultant on BBC Radio 2 similarly highlights the need to convey profitability, also pointing to the importance of healthy cash-flow. The entrepreneur, who sold his business for a seven figure sum in 2004, offers a number of useful tips for those looking to sell:
“Track previous acquisitions in your sector. You will probably already be aware of a rival organisation that has been sold. Take a closer look at what made that company appealing to the purchaser,” he begins, adding, “Your strategy should also include who you would like to sell your business to. Draw up a list of three companies that you feel would be an ideal fit for your own organisation. Then start to work out what would make your business attractive to those three companies.”
Since the future performance of the firm will also depend on the quality of the workforce behind it, potential buyers may also consider employee retention rates, meaning owners should carefully review incentives to avoid losing committed members of staff. Equally, strong customer satisfaction and client relationships, including long-term contracts, provide a positive signal for investors.
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