Succession Planning: How To Retire From Business

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.

Buyout Teams Take Initiative

By Andrew Wheeler, Partner at Luminar International (Australia)

The Luminar acquisition model is designed that all parties end up with a win-win scenario.

In my conversations with retiring business owners I often see their preference of the Luminar acquisition model of a controlled succession rather than a hostile type acquisition.

I recently reported on an amazing dynamic that transpired in an acquisition deal even before the transaction was completed.

During the acquisition process and at the stage when key terms with the retiring vendor as well as the formation of the Buyout Team and the individual managers’ equity allocation had been agreed, the managers became aware of the attractive opportunity that was presented to them whereby all they were required to do was maintain business earning levels already achieved by the business. By maintaining these earning levels over the Deferred Consideration period they would generate substantial personal wealth. In a typical acquisition the Deferred Consideration period is generally three to four years. Any growth in earnings results in higher wealth in a shorter period for all parties.

In one of our conversations the retiring business owner was excited that two of his long standing loyal employees, who were part of the Buyout Team, all of a sudden had made recommendations to him that resulted in improved profitability. The vendor also reported that these new initiatives would secure the ongoing business of a large long standing client of the company.

The owner of the business was amazed how the mindset of these managers had changed almost overnight now that they were to have “skin in the game” rather than just being employees.  

The above is illustrative of the human nature that if members of staff have a large incentive as part owner that the business, then they will achieve optimum results.

Furthermore, the risk profile of a business is mitigated when the following occurs:

• Exiting vendors retain a small rollover equity piece. All their skills and contacts are not lost but are retained post-acquisition
• A comprehensive, capable and enthusiastic Buyout Team is formed and, with Luminar onboard, a new high level dynamic is added of pro-actively overseeing the business with pre-determined Covenants and Key Performance Indicators

The philosophy applies that if a well established business is pro-actively managed by a diversified team, the chances of it failing are substantially reduced.

Retiring Business Owners Need Not Struggle to Sell Their Ventures

In the article, Shortage of Buyers for Retiring Vendors, in The Telegraph of 13th December 2010, Richard Tyler talks about difficulties that business owners encounter when they are looking to sell their businesses and retire.

He says that vendors struggle to find buyers for their ventures due to the uncertain economic environment and face closing their businesses instead or continue running their firms into their late 60s. Staff may also find it difficult to raise the necessary finance to buy owners out because of bank lending policies.

Although potential investors might not pay the multiples that we saw only 3 or so years ago, there are a few things that baby boomers can do to ensure their comfortable retirement:

• Business owners ought to start looking at Exit Strategies early in the process. This will allow them to set their goals and targets and monitor their business's performance
• Set realistic expectations in terms of the price they want for their businesses. When selling a business, most owners will engage the services of their accountants and business brokers. We often see overinflated prices whilst bidding wars commence; however, it is the seller that is left disappointed in the process as their business "sits on the shelf" for months or sometimes years
• Get an independent valuation carried out early as it will give retiring business owners a better understanding of the areas they may need to improve
• Vendors may want to consider selling their businesses to staff and should involve their existing management teams in advance to avoid a bitter disappointment when their staff cannot come up with the cash
• Engage professional services: business disposal experts, such as M&A lawyers, corporate finance specialists and business advisers will add value and help owners to get closer to their target price
• Review and streamline processes and systems in the business to make it more attractive to potential buyers. After all, investors would be more willing to pay the price closer to what the owners have in mind when the business is running "itself"
• There is also another option available to retiring business owners: Deferred Consideration. It is often more beneficial and profitable when part of the money is deferred for 3-5 years. The sellers will get part cash up-front and the remainder at the end of the term. This will remove the pressure on the buyer to raise the whole amount up-front, raise more confidence in the business they are looking to buy and make the transaction much easier

If you are a Business Owner and thinking of retiring and selling your business, then CONTACT US to learn more about how you can benefit from working with Luminar International.

http://www.luminarinternational.com/

Luminar International: An Insatiable Appetite to Buy Businesses from Retiring Owners Worldwide

Luminar International announces the launch of its unique proposition to acquire established and successful lower to mid-market privately owned businesses from vendors worldwide who seek to retire and exit commercial life.

The world’s only private investment firm, already operating in a number of developed and established markets, such as Australia, UK, EU and USA, has developed a business acquisition model that offers genuine retiring vendors a solution to selling their businesses swiftly, painlessly and profitably. Because Luminar International buys businesses directly from business owners without involvement of third parties, it provides vendors with a simple, yet efficient and effective way to realise the value of their lifetime’s work without the need to incur additional time in searching for buyers or intermediary costs. This offering makes Luminar International a number one destination for business owners who look to sell their businesses and enjoy retirement in comfort with a peace of mind that their business is well looked after.

Here are some of the key criteria for the businesses that we acquire:

• Established, stable and successful business with EBIT (Earnings Before Income and Tax) of at least $1M or local currency equivalent per annum
• Genuine Retiring Vendor: business owner(s) who are looking to exit commercial life

If you are a Business Owner and thinking of retiring and selling your business and your venture fits the above key criteria, then CONTACT US to learn more about how you can benefit from working with Luminar International.

The Advantages of Deferred Consideration

by Paul Berry, UK Partner at Luminar International

It may appear to be a strange opening statement that actually business sellers may be better off agreeing to defer a portion of the value of their business on retirement, or deferred consideration. So how could anyone make such a statement?

Well for many the challenge is to maximise the value of their investment, often something that represents a lifetime’s work. For those coming up to retirement from business it is less the need for cash on day one, and more the need to ensure that total amount, when it comes, is as large as possible.

The main benefits of deferring a portion would be:

• Maximising price
• Leaving the business with a more sustainable funding structure going forward.
• The flexibility to pick a more advantageous time to convert the lump sum into an annuity
• The ability to plan taxes, treating the proceeds as Capital Gains using the increased entrepreneurs’ relief allowances.

In the past there have been two primary routes:

• To sell to a competitor or someone in the trade who have complimentary interests
• To sell to a investor, be this a private equity house, or a high net worth individual

The reality is that there are no simple solutions. Selling a business is not like selling a house, which has a pretty well trodden path. With a business its value is based primarily on what is likely to happen and less so on its past. Therefore it carries inherently more risk.

One way that people manage that risk is to be more cautious and demand a higher rate of return. This is fine if you have high growth rates; however, even the announced growth figures on 27th April 2011 for the UK economy show growth of 0.5%, which largely reflected a return following a poor Q4 2010. This year estimates are officially at a growth rate of 1.7%, with the unofficial consensus being closer to 1.4%. Some sectors will perform better than others, though it appears much more likely that the economy will carry on its uninspiring performance for the foreseeable future.

The difficulty is that with a background of low economic growth and an increase in the number of “Baby-Boomers” coming up to retirement, some of the performances and valuations of 3-4 years ago are unlikely to return. With this as a background, now is a good time to think about how to best realise probably your most valuable asset.

If you would like to investigate whether Luminar International may wish to buy your business, then contact us

Management Teams Join with Luminar International to Buy Businesses

More and more management teams are joining with Luminar International Partners to buy the businesses that they already work in and know so well. In buying the business from the retiring owner, the existing management team can enjoy benefits such as continuity of employment, involvement in strategic decision-making and of course wealth creation.

Luminar International is a private investment firm focused on buying businesses from genuine retiring business owners. Working closely with the incumbent management team, Luminar International will initiate a management involved buyout (MIBO™). The buyout team will comprise those key managers who are willing to participate plus one of the Partners from Luminar International. This style of transaction appeals to vendors who in the main are very enthusiastic about seeing the existing managers continue on and enter a new phase of ownership for the business.

From time to time the existing management team may need new skills or experience to continue running the business without the retiring vendor. Luminar International will be instrumental in evaluating the future requirements and bringing these to the business post-acquisition.

Luminar International has a unique way of buying businesses which relies on the existing management team to continue running the business post-acquisition. It is important to remain faithful to the people and culture that helped the business become successful in the first place.

If you would like to investigate whether Luminar International may wish to buy your business, then contact us.

Luminar International
http://www.luminarinternational.com/
info@luminarinternational.com

Setting Your Business Up For Sale

All business owners look ahead to the time when they retire and hope that they will sell their businesses swiftly, painlessly and, most importantly, profitably. After all, what’s the point in spending all the years of hard work, sleepless nights and making sacrifices building the business when you don’t get what you deserve?

In the current economic climate the press would tell us how hard the times are and that the future is far from bright and orange; whereas the governments are trying to assure us otherwise. Perhaps there is a good lesson to be drawn from the recession is that the strongest and well organised survives. If you are a business owner and managed to see your business through the recession, then huge congratulations to you! You have done well and far better than some of the banks and corporates world-wide.

However, regardless of who tells us what, we still hope that we will find that buyer who will make us happy and we won’t need to worry about a thing when we sell our businesses because we know that a) our business (that we worked long and hard for) is in good hands; and b) we get the price that we deserve for all the sacrifices that we’ve made over the years. We also hope that we sell the business whenever we like and without a glitch. Sadly, the reality is usually far from it. The world is overcrowded with organisations that are willing to “help” and promise retiring vendors the Earth and overvalue their business whilst waging a bidding war while we wait (for months and years) and pay tens of thousands of Dollars (Pounds, Euros and Yens) for the privilege.  However, most vendors are disappointed when they sell their businesses because they don’t get what they thought they would (or what they were promised).

The good news is that it doesn’t have to be this way! There are a few simple steps any business owner can take in good time to ensure that they exit their business comfortably:

1. Get an early business valuation done to identify an indicative price for your business and areas for improvement.
2. Build a strong management team.
3. Ensure that you have M&A (Mergers & Acquisitions) specialists (lawyers, accountants, and business advisers specialising in business disposals) on board early in the process. No-one can help you once it comes to signing on the dotted line as it may be too late.
4. Look for direct buyers and don’t just rely on brokers.
5. Be realistic about the price of your business. Ask yourself a simple question: Would I, knowing all about my business that I do, pay the price that I ask for it?

Also consider some deferred consideration when selling your business. After all, it is not very often that business owners get the full asking price up-front. There could be more benefit in part-payment up-front and part-deferred.

If you would like to investigate whether Luminar International may wish to buy your business, then contact us.

Luminar International
http://www.luminarinternational.com/
info@luminarinternational.com 

Happy Retirement, Baby Boomers!

by Paul Berry, UK Partner at Luminar International

The term Baby Boomer was used to describe the dramatic increase in birth rates primarily following the Second World War.  Its size is quite staggering with seventy-six million American children born between 1945 and 1964. In 2004, the UK baby boomers held 80% of the UK's wealth - some £5.4 Trillion, yes that’s Trillion not Billion and bought 80% of all top of the range cars, 80% of cruises and 50% of skincare products.  Nice lifestyle... for now.

The issue now is how the Baby Boomers realise the value of their assets.  This is particularly acute when you look at business owners.  One noticeable trend - according to family-business expert Frank Schneider – family businesses tend not to pass down the generations.  Only a third of family businesses were taken over by the second generation dropping to only 13 percent when passed onto the Grandchildren.

Furthermore:

• Ninety percent of all businesses with employees are family owned, and one-third of Fortune 500 firms are family controlled.
• A survey by PriceWaterhouseCoopers finds that one out of every two company owners plan to sell their business within the next 10 years. This represents about 8 million businesses.
• People 55 or older own 30 percent of all businesses with employees.
• Businesses with employees are expected to grow in number by 22 percent every five years, as they did from 1997 to 2002.

The concerns in the market place have led a lot of potential vendors to sit and wait.  The economy is struggling we are told, banks aren’t lending, profits are below the levels in the last few years.  All of which leads owners to be cautious.  However there is a risk is that in the next few years the tables may turn, as circumstances change.  With such a significant event as selling your own business, planning is essential.  If you plan to retire, getting the right building blocks in place now is vital.

If you would like to investigate whether Luminar International may wish to buy your business, then contact us.

Luminar International
http://www.luminarinternational.com/
info@luminarinternational.com