Expert View
PLANNING FOR THE NEXT GENERATION
by Richard Bell, Partner at Farleys
The demands of running a family business, like most other businesses, can be intensive and time-consuming.
It often results in too many business owners spending little to no time planning for the succession of the business and their exit or retirement.
The benefits of a clear and well thought out succession plan are key for the future growth of the business and the plans of the original owners.
Arguably, this is more important for family businesses which often, due to their nature, can run on the assumption that the next generation will take over.
This may not be in the plans of the original
but that valuations are being challenged as a result of poorly presented information or underlying uncertainties in the business.
“It is now more important than ever for any vendor to stay focused on delivering the robust financial results through a transaction.”
There are other areas where focus is important. Ryan Bilsborough at PM+M adds: “All too often family businesses don’t have a shareholder agreement in place which can add another layer of complication.
“Our recommendation is that one should be drafted and signed to mitigate potential disagreements. The key is to always make a transaction as smooth as possible in the minds of buyers.”
He adds: “When presenting to buyers, we also always recommend that family businesses don’t diminish the fact that they are just that: a family business. This can be one of the strongest draws as they usually foster a healthy culture that really appeals to acquirers.”
But once again that comes with challenges – buyers may be concerned of the impact of key family members exiting on completion of the deal.
Ryan says: “We would advocate, if possible, that key strategic hires are made two to three years in advance – relieving the reliance on family members and ensuring sustainability of the business after their exit.”
Michael Barker, partner at Preston based accountancy and business advisory firm WNJ, highlights the need to address this aspect of a family exit. He says: “The key to a successful business exit often lies in the smoothness
owners or the next generation of the family who respectively may favour an alternative exit by way of a sale to a third party, Employee Ownership Trust (EOT) or wider Management Buy Out (MBO) as examples.
It is, therefore, imperative that the members and wider family stakeholders of a family business engage in open and frank discussions in relation to their respective future plans, hopes and aspirations from the outset and on an ongoing basis.
As with many family discussions, these can be challenging and difficult but should not be seen as a barrier in a genuine attempt to avoid conflict and dispute in the future, potentially leading to a negative impact on both the business and family relationships.
of the transition. Early planning and good communication are both vital.
“The business may be losing one, if not two, of the key people that have been instrumental in its development, who have a lifetime of business experience, contacts and technical expertise.
“These retiring family members may be central to the businesses culture and branding so their sudden removal could be disastrous.
“Early planning is important to ensure the new owners or other key employees in the business, gain the necessary qualities and build trust with the various stakeholders.”
He says that in some cases a transitional period works well, and he adds: “Usually, a gradual withdrawal helps both the original and new owners get maximum value from the business and leads to fewer problems both for the business and the family.”
John Daly, M&A partner at Preston based audit, tax and consulting advisor RSM, also says preparation is vital for a successful deal.
Family businesses need to define their “exit horizon” and desired exit value and develop a business plan to deliver on those aspirations,
And he adds: “Incentivise key management on delivery in order to align interests and present a credible management team at point of sale.”
He also advises building a “growth mentality”, adding: “Growth businesses attract the greatest buyer traction and value.
“And don’t forget the housekeeping - management accounts, contracts, leases and tax planning will ensure a smoother process at exit.”
Running a family business isn’t always straightforward...
...but we believe the law should be
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LEGAL VIEW
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