The succession or sale of a business requires careful consideration and planning to ensure it can be successful for many years to come.
How will you exit your business?
Armstrong Watson’s Family Owned, Privately Owned and Owner Managed Business Report 2024 found that two thirds of business owners (67%) plan to leave their business within the next 10 years. When asked about their plans for exit, the majority (35%) said they plan to pass their business on to their children, while 21% will cease trading, and, worryingly, 10% of business owners haven’t yet considered how they will leave their business. Another 10% plan to sell to a third party who will carry on the ethos and values of the business and 9% suggest they would sell to the highest bidder. Other plans included management or employee buyouts and passing on/selling the business to other family members.
Of those respondents planning to pass their business on to the next generation, it is concerning to see that 36% have not yet discussed this plan with their adult children, and 29% of those businesses do not yet have their successors already in the business.
Meanwhile 22% of business owners said they do not consider their business to be structured correctly to maximise the return from a future sale and a third don’t know if this is the case.
Planning to exit your business is an emotive process to go through, but also one that needs to be managed with practical rigor, with preparing a business for sale often spanning multiple years. Unfortunately, in our experience – and as the survey findings suggest - many business owners do not tend to give the level of focus and preparatory lead time to enable a smooth transition and maximise their business’ value.
3 considerations when planning for succession
Change is certain and planning ahead will help ensure the smooth succession of your business. As part of this planning process, business owners need to consider when this will happen, who will take the business over and know how much it is worth.
When? This could be any time, and whilst no one wants to consider the worst-case scenario, could possibly come about quite suddenly so it will help to be ready for whenever a decision for change is made. Ensuring that governance is in place and that internal systems and controls are robust is important. Everything that the business does must be capable of being scrutinised by external due diligence and potentially being done without the current owners.
To whom? Trade sale, management buy-out, transfer to family, your estate (should anything unfortunate happen to you), private equity, etc. Making sure that your business is in a good state and ready for whenever the new owners take over is essential, bearing in mind that the change could happen at very short notice. Do not assume that the next generation will want to step in if you’ve not had those important conversations, and nor should you assume that the aspirations of each of the members of the next generation will be the same as each other.
For how much? This usually depends on the level of underlying EBITDA the business is generating. Maximising this needs careful planning, positioning and consideration. Developing the management team to run your business without you as owners will significantly enhance its value, so consider a mechanism for locking in and incentivising key staff.
Prepare for succession
The sooner you prepare your business for succession, the better. If you’ve not yet began planning for succession, then start now – the familiar phrase of ‘failing to plan is planning to fail’ could not be more relevant here. Decide what you want the business to look like and then plan accordingly and don’t forget to seek advice to ensure that any tax implications of changes are properly considered.
