Guarantee an orderly and successful transition from one business owner to the next.
After working hard to build a successful enterprise, often over an extended period, entrepreneurs and business owners naturally look forward to stepping back from their firms or retiring. However, they still want to leave the businesses they have nurtured in safe hands. Succession planning is an issue many entrepreneurs feel prevents them taking a step back – before they depart, they want to be sure there is new management in place that is good enough to ensure the business survives and prospers without them.
Research from Close Brothers on SMEs in the UK and Ireland suggests such worries are remarkably common. 15% of company owners consider succession planning a concern, while just 31% have a continuity plan established in the event of senior management leaving. Understandably, many are keen for a family member to take on the business they have built up once they’re ready to move on – most obviously their children, but sometimes other relatives too. “Family business owners are well known for their long-termism and their role as stewards,” says William Pedder of the Institute of Family Businesses. “Many owners manage their company as a ‘heritage on loan’, working to build something better for future generations.”
Inevitably, however, that won’t always be possible. Some may not have close relatives, or those relatives may not want to take on the burden of the family business The current owner may feel their children don’t have the right skills or qualities run the firm, as managing and growing a small or medium-sized enterprise requires a broad range of attributes and experiences, which aren’t necessarily inherited by the children of entrepreneurs.
The challenge is then to identify a successor elsewhere to find the best qualified management team to protect and enhance their legacy, either within the current management team or from an external pool of potential candidates.
Careful preparation is needed for a successful transition, and the next owner of the business should receive a broad range of support, most commonly including financial planning. This ensures the new owner understands every aspect of the company and has time to develop a clear vision for future growth.
If the business is being passed on to the next owner in return for a monetary consideration, whether to a family member or not, both sides will have to think carefully about how the transaction is financed.
Most commonly, the transaction is likely to be a management buy-out, where some or all of the existing management team (possibly including a family member), buys out the current owner. Alternatively, a management buy-in could occur, where a new management team comes into the enterprise.
Asset based lending can be a practical and capital-efficient vehicle for financing the transactions in both cases. Some of the most common reasons businesses use asset-based finance are MBOs, MBIs and other types of acquisition.
Asset based lending blends invoice finance – where a business borrows money against the value of outstanding invoices yet to be settled by customers – with funds secured against stock, property or plant and machinery. The value of these assets is otherwise locked up, so leveraging this value to fund a strategic initiative such as a change of ownership can make a great deal of sense.
Asset based finance typically works best for businesses with a turnover of £10m a year at least, and where the funding sought is in excess of £2m. Succession planning is often a key driver of the transaction.
Financed successions can be effectively executed with careful planning, providing reassurance that the next generation will build on their success. With four of the top ten worries for business owners related to succession planning, every business should be thinking about what might be possible for them.