Steve Plaskitt, Partner at MHA Tait Walker gives his view on what owners of family businesses should consider when planning their succession
Succession planning for SMEs is a much talked about subject. It is well known that plenty of preparation is the key to proper succession planning as it allows time for a strategy to be developed and executed. Some say one to three years may be required. The starting point is often a valuation of the company – an understanding of what drives that valuation and what could increase it.
A subsequent strategic review would allow issues to be identified and goals to be set in a business plan including the all important exit strategy. Such a plan may identify investments to be made, operations to be improved, new products to be launched, management to be recruited and incentivised to deliver higher profits, the profile of the business to be raised and eventually the valuation is maximised ready for your exit.
It sounds simple doesn’t it?
But it misses two key factors that are often overlooked. And yet these are critical to making the succession plan achievable – and one of them is particular to only family businesses.
Firstly, keeping up your motivation, ambition and desire can get harder as you approach retirement age. We see this more and more for many business owners who have lived and led through the recent pandemic – some will recognise that the challenges they are facing now may appear harder to overcome and risks more apparent than at any previous time in their career. Finding the resilience to keep overcoming challenges can sometimes seem hard and you should allow yourself to feel that you can ask for help – from others in your family, in your company, outside of your business or your advisers.
With the right attitude and mindset you should be able to maintain and grow your desire, keeping attention to detail and surrounding yourself with reliable support to drive the right behaviours, encourage others and deliver your exit plan. Secondly, and most importantly for family business, is how you can deliver your exit plan and still remain on friendly terms with other family members who may remain in the business. This is where considerate and open communication is essential to make sure that issues around money, control and responsibility do not get in the way of family relationships.
It is not easy. You have to prioritise what you want to value the highest – is it your personal wealth, the ongoing legacy of your company or your family relationships? In rare circumstances, and with luck, you may be able to able to maximise all of them – but that requires good planning and execution.
I have seen this done in a few different ways:
Shareholder agreement: which defines how each family member may retire, when and at what value for their shares. This is particularly useful for large family businesses which are now run by non-family directors and where the shareholdings are spread across many family members.
Partial exit: which is where one director shareholder agrees to exit whereas the other family member remains to own the whole company. This is usually achieved by a Company Buy Back of Shares or by a Newco being set up to secure funding to facilitate the buy out. This normally requires plenty of planning to allow finance to be secured and may require some diplomacy to ensure that the family relationships are not damaged during negotiations.
Full exit: typically where all the family members agree it would be best to sell the business to a trade buyer. Again this can work if all of the family agree it is the right time to sell and none want to continue in business.
Delayed exit: this may be a combination of a few different elements but would typically involve finding new management to run the business and for the retiring shareholder to reduce their influence and control over time. Given there are different approaches to succession planning – taking corporate finance, legal and tax advice early is important to understand what would suit you best. But first of all maybe you should invite your family round, so that you may all share your personal hopes and plans around the kitchen table before you start to formalise it around the boardroom table.
Steve Plaskitt is Head of Corporate Finance at MHA Tait Walker and assist businesses with finance raising and growth. He has over twenty five years of experience in the North East market. For more information please call 0191 285 0321 or email steve.plaskitt@taitwalker.co.u
