SME business succession: it makes sense to plan head
Tuesday, 24 October 2017
Sometimes when you’re so busy running your business on a day-to-day basis, it can be difficult to find the time or energy to give any thought to your ultimate exit strategy. In fact, many small and medium-sized (SME) business owners and managers have no succession plan in place for their company.
Why’s that a problem? Well, it takes time to develop and implement a succession plan that ensures the best deal for both the owner and those who will remain with the company if it continues to exist. If it’s left too late, it may not be possible to maximise the company’s value. In a worst case scenario, the owner could find themselves financially unable to retire when they want to do so.
So, it makes sense to be prepared and plan well ahead. We would advise SME owners and managers to start by thinking about:
- Their personal goals and plans. When is the owner planning to retire? What, if any, involvement with the company do they want to have following the sale? Do the current managers or employees have ambitions to buy the business themselves? Where might they get funding from?
- A five-year plan for the business. What will the business look like in five years’ time? Which growth opportunities can be grasped? Are there any plans to launch new products or services, or maybe enter new markets?
- The business’s financial performance. How is it is performing now and can this be improved?
- The business’s valuation. How much is it worth now? What might it be worth in future?
When it comes to exiting a business, a sale is the most common route. There are essentially four main types of business sale:
- Sell the business to a third party;
- Sell the business to management;
- Sell the business to employees;
- Sell the assets of the business.
The first three options involve the business continuing to exist, while the last one results in the business ceasing to exist.
Selling to a third party could mean selling the whole business or parts of it to a competitor. Or it could even be selling to a management team that has formed to buy into the business, otherwise known as a Management Buy In. Alternatively, it could involve passing the business to children or other family members. Selling to the company’s existing management is known as a Management Buy Out, while selling to the firm’s employees could be undertaken via a vehicle such as an Employee Ownership Trust.
Whichever option is pursued, the business and/or its assets will need to be marketed to attract buyers, it will need to be valued, due diligence will be undertaken by the buyers, negotiations will take place, the sale will need to be agreed, clearance will be required from HMRC, and so on. All of this can take a significant period of time.
The pros and cons of each option, both for the owner and for the business, should be considered carefully. It’s crucial that the best possible advice is sought to help owners and managers explore these options and decide on the best one. It’s vital to select the right agents - accountant, auditor, lawyer and selling agents - to assist in the process. Their experience and expertise will prove invaluable in helping make the succession plan a success.
It’s also imperative to consider and plan for the impact on other stakeholders, such as the management team, staff, customers and suppliers. This is particularly important if the company will continue as a going concern. All will need time to transition.
And finally, we can never forget to account for tax! In addition to Corporation Tax and Income Tax, there’s Capital Gains Tax (CGT) to be considered. It can’t be avoided, although the Annual Exemption (the annual tax-free allowance) and Entrepreneurs Relief may reduce the CGT bill.
Please get in touch with us if you have any questions or would like more information.