Succeeding at Succession

Buyout activity is holding up despite all the economic uncertainties and what’s going on at Westminster. Business owners are adapting their exit plans and succession requirements that are driven by age, business performance and other factors.

What we’re seeing

At PEM Corporate Finance we’re busy with buyout transactions, with two completing over the last few weeks and another three that we’re actively engaged on. The drivers for the management buyout (MBO) varies slightly in each case but they’re probably representative of the reasons people consider when think of MBOs. We’ve seen an MBO initiated by an investor group seeking to enfranchise the day-to-day management who are driving the company, by vendors who stepped out of the business a number of years ago and need to realise the value on an asset they’re no longer controlling day-to-day, and by business leaders driven by retirement planning.

Track record

We have a long track record of advising on buyouts and succession and what’s interesting is that a number of these businesses are now coming back to conduct a second buyout as the original buyout team plans its exit or seeks to bring in new talent. All this proves how good buyouts are as a tool to secure succession.

Issues to consider

Securing succession is a big issue for all business owners. One could sell to a trade buyer, but a Succession Buyout is an increasingly viable and popular alternative. This involves selling to the rest of the management team. Here’s five reasons why business owners might consider one.

1. Stability. They’d like their successful independent business to continue beyond their personal retirement. This is most likely if they sell to their existing management team. A trade sale might lead to big changes in the company.
2. Tax efficiency. The deal can be structured to mitigate tax liabilities, to secure capital gains treatment and Entrepreneurs’ Relief, and can also be tax beneficial to the MBO team.
3. Rewarding management. Directors running successful businesses will usually have a loyal and able team around them – this is about giving them their chance.
4. Customisation. As a “friendly” deal, it can be tailored closely to the vendor’s personal objectives.  He or she could for example withdraw from the business in stages, both financially and operationally.
5. Funding. Finance for Succession Buyouts is available from banks and equity providers. Vendor finance often forms a significant part of the funding if the vendor is to retain some involvement in the business for a period.

How can you tell if a business is suitable for a Succession Buyout? If it’s profitable, has a good team with the appetite to take over, and a suitable valuation can be agreed upon, it’s probably suitable.