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So you have a successful business, you’ve got good market coverage and a strong management team. You have a solid five year strategy, your business is growing. But have you thought about what happens when you want to sell or retire?

It may seem a lifetime away but it’s never too early to start succession planning. That’s the key message from a recent round table event held at the University of South Wales Newport campus, facilitated by Finance Wales and attended by local businesses and intermediaries.

“In a perfect world you should have your exit strategy planned as early on as possible,” explained Institute of Directors (IoD) Chair Robert Lloyd Griffiths.

“The problem is many business owners are not thinking about this, they’re thinking about running the business and building value in the company. Succession planning often gets pushed to the back of the queue” explained Mark Hislop a corporate finance adviser and succession expert with Advantage Accountancy & Advisory.

Start planning now

Here in Wales small and medium-sized enterprises (SMEs) are king. Our economy is driven by dedicated owner-managers. More than half of business owners in Wales are over 50, with a significant number already over what has historically been perceived as ‘retirement age’. That means a lot of Welsh business may be looking to change hands in the next few years – with owners looking to pass the baton on to the next generation. If they don’t have a succession plan handing that may be harder than they expected.

“You probably need a two to three year period, at least, to get your business ready for sale,” – explained James Williams, a corporate partner at Blake Morgan.

“You need make sure you have good governance in place. You have to think about what may come up when prospective buyers undertake their due diligence checks – anticipate that and your business will be more appealing. A legal audit is a very good idea to help smooth the process.”

“You also need time to do a stress test,” added Mary McDonagh from Kilsby & Williams. “That’s vital from a tax-planning perspective. There are often a lot of hoops to go through if you want to take advantage of the substantial tax benefits available.”

“There’s a lot to do to ensure a business is ready for sale and taking the time to plan put your house in order will help the transaction go a lot more smoothly. ” explained Uprise VSI’s finance director Geoff Thomas.

For many owners in Wales that means they need to act soon.

'A friendly transaction'

There are a number of options to consider. Do you pass your business on to a family member, sell to an outside buyer, or keep it local and sell it to your existing management team?

“We’ve worked with a range of companies – from micro to medium – to help with them with their succession planning. There’s a growing appetite for management buy-out (MBO) and vendor initiated management buy-outs (VIMBOs),” explained Joanne O’Keefe an Investment Executive at Finance Wales.

MBO deals are increasingly popular with both owner-managers and funders.

“At Finance Wales we recommend the out-going owner stays on for at least three to six months as part of a phased handover as it helps the process go more smoothly,” added O’Keefe.

“From the point of view of the seller, a disposal of the business to an MBO team should be easier to achieve,” explained Finance Wales’ succession expert Stephen Galvin.

“The vendor will be selling to a trusted team which they will have known for years. This should be a friendly transaction between a willing seller and buyer.”

“An MBO often means a vendor has to offer fewer warranties to the buyer,” added Gary Partridge, Lexington Corporate Advisors. “This can lead to a smoother sale process.”

“Management buy-out teams are comparatively easy to fund,” Galvin said. “It’s a well-trodden path for experienced funders and advisers and Finance Wales is well-placed to achieve an outcome suitable for all involved.”

If you’re considering this option you need to have a good team in place a few years before you aim to sell.

“Taking on and nurturing a senior management team and also letting go of the reins - that’s a bold decision but one that will pay long term dividends,” explained Mervyn Ham, company director of Iridium Corporate Services and an experienced trade buyer and seller of businesses.

Succession funding is available

Whether you’re selling a business or looking to buy there is help available.

Launched in April 2016, the £25 million fund Wales Management Succession Fund is there to help safeguard the future of Welsh businesses. Investment from this and other funds managed by Finance Wales offer succession support - no matter what level of assistance you need.

“Whilst it can be a daunting conversation, talking to advisers early on is really important,” added Alan Yule, an SME relationship manager with Lloyds Bank. “It gives the funder confidence and makes it easier for banks and other funders to help and support you – whether you’re selling a company or looking to buy.”

So what’s the take home for Welsh businesses?

“Get the ball-rolling,” said Lloyd Griffiths. “Look at your options for sale and make sure you get a plan in place. Phased transitions are often best for SMEs, so any exit-strategy needs to look at a long term plan.”

What should you include in a succession plan?

Step 1: Set a personal goal

  • What value do you want for the company? Be realistic in setting this goal.
  • What is the timescale for the transfer of ownership? Will it be phased?
  • Do you want to maintain family or local ownership?
Step 2: Maximise value
  • Protect any intellectual property you have. Highlight any wider value it may have e.g. alternative applications of a patent.
  • Have a diverse customer base.
  • Make sure you maintain and modernise equipment and facilities.
Step 3: Learn to step away
  • Tell your employees and management team about the plan.
  • Identify your core team and any potential successors.
  • Introduce your management team to key suppliers and customers.
Step 4: Prepare the business for sale
  • Identify any issues which could affect a sale early on.
  • Have an effective way of reporting good management information.
  • Develop a track record for realistic budgeting.
Step 5: Plan the transition
  • Make sure you have a timeline for transition.
  • Include time for tax planning.
  • Seek advice from professionals, talk to corporate accountants and lawyers.

By Finance Wales