I recently received an email from the owner of a manufacturing business who had been considering the Eternal Business Programme in preparation for his exit in around three years’ time.
The owner advised that “my management team are not yet ready to run the business, and therefore I will not be joining the programme at this stage”.
This response highlights several of the primary misconceptions of owners as they consider what will happen to their business when they decide to leave.
Selling A Business That Relies On You
First a basic principle. In order to extract maximum value from a sale, the business needs to be in the right shape. The owner who wakes up one day and decides to sell will not receive the same value as an owner that takes several years getting the business ready.
This is true whether the sale is to a large corporate and the business is subsumed, or to management and the business continues. It is fair to say, however, that much more preparation is needed for the latter.
A business where one or a few owners make all the decisions and have all the client relationships will not be worth the same as a business where the employees are engaged and clients consider their relationship to be with the company. Selling something that relies on you significantly reduces its value.
It Takes Time
Not joining a programme designed to help get a business ready for succession because the management team aren’t ready therefore misses the point.
If a business owner only considers succession planning issues at the time that they wish to sell the business, they will have left it several years too late.
The Management Team
The full email mentioned the need for a “stronger and more capable management team”. This suggests that the owner has doubts whether the management team could continue running the business without him.
This is relevant because the payment for the sale of the shares will come from the future profit of the business.
Again, this only makes it more important to embark on a long-term succession plan. Making the objective of the plan to be the management team “stepping up” will provide the focus and shape the direction of the business. The is the entire point of the first course in the programme.
Decide First, Action Last
The first step of succession planning is to decide how you might exit. Like financial planning, this objective doesn’t need to be concrete, but it will provide direction.
One of the options may well be the Employee Ownership Trust. We will be providing more information about succession planning in general, and the EOT specifically, during our free online webinar on the 21st March.
Don’t Do It Yourself
There is one final point to draw from the email. I’m sure we have all dealt with the sort of client enquiry who responds with “thanks for chasing me, I just need to sell my business, sort out my pensions, write a will and sell my house, then I’ll be back in touch”.
The time to bring in help is when you need the help. Most small IFA businesses are run by advisers who never actually wanted to be managing directors. Structuring a business for the best exit is a complicated process.
Allow Your Team To Step Up
There is also a danger when an owner seeks to empower and strengthen an existing management team themselves. Although owners will, of course, have huge experience to pass on, the fact that they are the ones delivering the message can sometimes mean that it is not heard.
I often hear owners expressing frustration that their management team have not yet “stepped up”. One reason may well be that they have not yet vacated the space for the management team to step up onto.
If you have thoughts of exiting the business within the next five years, then do not wait for your management team to become capable. The time to start taking action is now.
Chris Budd is former managing director of financial planning firm Ovation Finance and founder of The Eternal Business Consultancy