by Paul Berry, Partner at Luminar International (UK)
If you are an owner manager of a business and are coming up to retirement, you might be asking yourself “How do I sell my business and retire?”
Usually you are involved with the running of the business and people who talk about succession planning or realising value talk in a language that is akin to gobbledygook. It may seem that succession planning is something for large businesses in big headquarters with a large staff and this can seem a totally different world from your own. Large companies often talk about succession planning, however they often have a range of internal candidates to choose from, often boasting significant qualifications and stories of success. However if you run a smaller firm, it is rare that you have such choices; after all you might not have the luxury to carry surplus staff. Often there aren’t the same opportunities to give your team experience of other areas so they can become fully rounded; it is much easier for a large corporation to take that chance. So the team tend to do the same roles they have always done. Any exposure is gained through experience and though it is often a great teacher, it can lead to doing what you know, rather than what works.
Another factor is the vendor themselves. We all have our own views and so often being involved in the day-to-day running of our business makes it almost impossible to take a step back and see things objectively.
This doesn’t necessarily pose any major problems, until you want to exit and sell your business and earn a well deserved retirement. At the time of any business sale having a good second tier management in place is vital. Business buyers will want to know that your business is well set up for success and that it can continue without your day-to-day involvement. Normally smaller businesses are heavily dependent on the vendor, and making large scale changes is usually risky for any business, even more so following an acquisition.
So if you are a retiring vendor looking to sell your business with a small stable management team, what are your options?
- One option would be to retire and leave the running to the existing management team. The main challenge here is one truly being retired and running the risk of being brought back into the business on practically a full time basis
- Consider a trade sale. Clearly they will have the knowledge of your market and processes, and often will use those synergies to get a good market price. The downside is that the culture that you have worked so hard to establish and nurture is often replaced overnight, and management often struggle to fit into the new ethos. You also have to find a trade buyer, many are still sitting waiting and others are really not a good fit.
- Management Buy Out (MBO). Usually this involves borrowing money using the balance sheet of the business with Bank debt, and potentially a further cash injection from a Private Equity House. This is a significant market; the European market in 2007 was £45.9 billion. A private equity house will assess the strengths and weaknesses of a team, and again smaller businesses tend to suffer.
- Management Buy-In (MBI). The statistics suggest that MBI’s have a high failure rate, compared to a MBO’s or no transaction at all. This is often because the Buy-In candidate has come with a costly financing structure and by their nature want to take charge
- Management Involved Buy-In. This is a process whereby you can extract better value, and where the ultimate price is made up of some cash now and some deferred. Here you gain the benefits of MBO, without the high costs of an MBO, increasing the likelihood of success post-acquisition. Moreover you gain access to proven methodologies to support the business going forward. All of this means that it is easier to retire in peace.
It can be very difficult for a business owner of a small successful company to truly realise value for their work, and know that this has not gone to waste. Still it is not something to be feared, solutions do exist. We at Luminar pride ourselves in our ability to realise value by acquiring businesses from Genuine Retiring Vendors whilst working with Second Tier Management teams to build long term success for their business.
