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Succession Planning: In business it’s never too early to plan for the future

Finance Wales holds a range of succession workshops and drop-ins across the country; our most recent event was held at the University of South Wales’ Newport campus. For more information on events in your area email: info@financewales.co.uk

So you have a successful business, you’ve got good market coverage and a strong management team. You have a solid five year strategy, your business is growing. But wait a moment; have you thought about what happens when you want to sell or retire?

It may seem a lifetime away but it’s never too early to start succession planning. That’s the key message from a recent round table event held at the University of South Wales Newport campus, facilitated by Finance Wales.

“In a perfect world you should have your exit strategy planned as early on as possible,” explained Institute of Directors (IoD) Chair Robert Lloyd-Griffiths.

“The problem is many business owners are not thinking about this, they’re thinking about running the business and building value in the company. Succession planning often gets pushed to the back of the queue” explained Mark Hislop a corporate finance adviser and succession expert with Advantage Accountancy & Advisory.

Start planning now

Here in Wales SMEs are king. Our economy is driven by dedicated owner-managers. More than half of business owners in Wales are over 50, with a significant number already over retirement age. That means a lot of Welsh business may be looking to change hands in the next few years – with owners looking to pass on their experience to the next generation. If they don’t have a succession plan handing that baton on may be harder than they expected.  

“You probably need a two to three year period, at least, to get your business ready for sale,” – explained James Williams, a partner in Blake Morgan specialising in corporate finance and business acquisitions.

“You need make sure you have good governance in place. You have to think about what may come up when prospective buyers do their due diligence checks – anticipate that and your business will be more appealing. A legal audit is a very good idea to help smooth the process.”

“You also need time to do a stress test,” added Mary McDonagh from Kilsby & Williams. “That’s vital from a tax-planning perspective. There are often a lot of hoops to go through if you want to take advantage of the substantial tax benefits available.”

“Prospective buyers like to know you have your ducks all in a line. That the company is profitable and any takeover will go smoothly,” explained Uprise VSI’s finance director Geoff Thomas.

For many owners in Wales that means they need to act soon.

‘A friendly transaction’

There are a number of options to consider. Do you pass your business on to a family member, sell to an outside buyer, or keep it local and sell it to your existing management team?

“We’ve worked with a range of companies – from micro to medium – to help with succession deals. There’s a growing appetite for management buy-out (MBO) and vendor initiated management buy-outs (VIMBOs) as well as more traditional trade deals,” explained Joanne O’Keefe an Investment Executive at Finance Wales.

MBO deals are increasingly popular with both owner-managers and funders.

“From the point of view of the seller, a disposal of the business to an MBO team should be easier to achieve,” explained Finance Wales’ succession expert Stephen Galvin.

“The vendor will be selling to a trusted team which they will have known for years.  This should be a friendly transaction between a willing seller and buyer.”

“An MBO often means a vendor has to offer fewer warranties to the buyer,” added Gary Partridge, Lexington Corporate Advisors.  “This can lead to a smoother sale process.”

Buying a business

What if you’re a management team looking to buy-out your company when it comes on the market?

The team at Chepstow-based creative firm On Screen Productions (OSP) recently did just that.

Two-years ago new owners Vikki Byrne, Lydia Owen and Mike Dyson started preparing for the buy-out. They took more responsibility for the day-to-day running of the company. This year they combined personal capital with a six-figure mezzanine loan from Finance Wales.

Explaining why they undertook the management buy-out, Mike Dyson said: “Having worked for OSP for many years, we saw this as a unique opportunity to buy into a business to which all three of us have a deep-rooted commitment.”

“Management buy-out teams are comparatively easy to fund,” Galvin said. “It’s a well-trodden path for experienced funders and advisers and Finance Wales is well-placed to achieve an outcome suitable for all involved.”

If you’re considering this option you need to have a good team in place a few years before you aim to sell.

“Taking on and nurturing a senior management team and also letting go of the reins - that’s a bold decision but one that will pay long term dividends,” explained Mervyn Ham, company director of Iridium Corporate Services and an experienced trade buyer of businesses.

Succession funding is available

Whether you’re selling a business or looking to buy there is help available.

Launched in April 2016, the Wales Management Succession Fund is there to help safeguard the future of Welsh businesses.  Loans of between £500,000 and £3 million can be made from the £25 million fund. These can be repaid over a five to seven year term.  A number of the other funds managed by the Finance Wales can offer succession support - no matter what level of assistance you need.

“Whilst it can be a daunting conversation, talking to advisers early on is really important,” added Alun Yule, an SME relationship manager with Lloyds Bank. “It gives the funder confidence and makes it easier for banks and other funders to help and support you – whether you’re selling a company or looking to buy.”

So what’s the take home for Welsh businesses?

“Get the ball-rolling,” said Lloyd-Griffiths. “Look at your options for sale and make sure you get a plan in place. Phased transitions are often best for SMEs, so any exit-strategy needs to look at a long term plan.”

For more information on support Finance Wales can give, visit www.financewales.co.uk or call 0800 587 4140