Business Leadership Equity Participation
Ideally you want your business seen as a valuable asset and often identifying the right person to take over is difficult. Selling to an outsider who has the right background and experience and who can bring added value to the business is one ideal strategy. The process of evaluating and hiring a suitable manager needs to be combined with a negotiation involving a structured partial sale process or share sell down over time. There are usually financial and performance limitations or thresholds imposed to safeguard both parties. Additional options to consider are the possibility of vendor funding and so called ‘sweat equity”, where a profit share or dividend scheme is used to pay for shares. Some transactions can also be structured with an ‘earn out’ provision for the owner.
Promoting Leaders from within by Management buy in or buy out.
The other proven strategy is to hand the company over to someone who knows it well can help maintain the intellectual capital of the organisation. It can also act as a motivation to people in the upper levels of management because they know it is possible to one day lead the company, or even own it. Sometimes, the most qualified person to take over and lead your business isn’t financially able to fund a purchase. Often it happens that a team with a combination of the above two attributes come together to buy a company. This can also be achieved by utilising some or all of the previously mentioned funding strategies.
What happens if you get run over by a bus…?
The succession of your business could be controlled and planned by you or it could be brought on by events beyond your control. These situations are invariably caused by or related to life’s BIG 3:
- Health
- Relationships
- Money
The ‘BIG 3’ as we like to refer to them, are essential for harmony and success in every human endeavour and if one of these 3 key aspects is out of balance it can and will affect the others.
Sadly, we have all heard the stories of the guy who had an unexpected triple bypass or car accident or acrimonious divorce. There is never a ‘Right Time for an event like this. The bottom line is that eventually your business will be sold either by you or your executor.
It is also important to have a strategy in place for succession which will protect the business in the event the company loses a key person - due to an emergency or standing down of management personnel - and someone has to step into that leadership role suddenly.
Selling the business outright is the best option for many owners. Alternatively, for some business owners, a full or partial sell-down over an extended period of time is more productive and usually offers a better cash return.
We first actively recruit a suitable manager for the business who has the skill and ability to run and improve the existing business. We then ensure that the new manager has sufficient equity or access to capital to invest in the business over time. We are able to advise on and structure a wide variety of prudent and sometimes creative strategies to facilitate the deal between the parties.
The advantage of retaining partial ownership and equity for a defined period of time is simply that the potential for growth and improvement created by a motivated and energetic equity participant in the business can be fully realised. This often equates to a better cash return for the original owner.
So what is actually involved in planning for business succession?
Here is a step-by-step overview built around a business sale, the most common form of succession. Generational succession planning or management buyouts will require some modification to the process.
- Step 1 - Determine the state of your business
Review your succession options. Undertake a business diagnostic - what shape is the business in, and where are the gaps? Do you have the right management, insurance, funding or financial and legal structures? Get a current market value appraisal. What is the business actually worth?
- Step 2 - Developing a Succession plan that meets your needs
Determine a time frame for the succession plan to be implemented. Develop the succession plan and identify the needs of the business to be prepared. Undertake a business improvement program based on your findings. Conduct a Balance sheet review. Complete a Taxation review and its impact on the sale or transition of the business. Review the business’s financial reporting structure
- Step 3 - Readying your business for Succession
Conduct a Pre-sale internal due diligence. Establish sale or transition terms. Do a Value test – review current value appraisal against sale price expectations. Establish the marketing plan for the business sale / transition. Prepare the information memorandum
- Step 4 - Moving on from the business
Taking the business to the market. Enquiry management and assessment. Deal Negotiation. Contract and conditions. Manage due diligence process. Settlement. Post settlement issues and opportunities.