Firstly, there is a transaction. Let’s say it is the next generation buying the business.
Hopefully a friendly buyer and seller! The liquidity event happens for the parents and the ownership is now in the next generations hands.
However, there was no gift, they have had to buy the business. Psychologically this is
important for both parties. The next generation to take control and have ‘proper’ ownership, for the parents to know there is a change of control and they have been rewarded financially for it.
Equalising the estate can also become easier potentially at this point too, as the assets can be split between children at this point more fairly.
We have seen other examples of larger families who have a portfolio of businesses. It may be a portfolio company that is more interesting for the next generation to cut their teeth on, learn to grow the business and potentially exit, prior to joining the ‘main’ family firm.
Financing can and often is a useful tool for business owners, whether they are planning an exit or to grow their business.
However, structural debt is often difficult to get for small and medium sized companies.
Since the 2008 financial crisis the high street banks have almost completely left this
space. Regulation and risk appetite has led them to focus solely on larger deals and almost exclusively on asset backed lending.
They do very little cash flow lending and definitely not at the smaller sizes.
Furthermore, supporting management buyouts is even less desirable for many high street banks, as there is a thought the business owner is cashing in and leaving the
business in a significantly riskier place.
We do not believe this is the case, where there is a credible management team taking over, it can be very useful to get a fresh pair of eyes on the business.
Relationship banking and understanding a management teams’ ambition, desire and
supporting that, is a dying form of banking.
There are so many exciting companies in the SME space that have built good businesses but need that support to be great businesses and often that is access to finance.
I found it interesting speaking to an entrepreneur recently, who now advises companies in the catering sector.
Having built and sold a very successful catering business himself, he explained when he
sold the company, he was proud not to have borrowed a penny to build the business.
At the time he felt it was a positive, however in hindsight he would rethink that position. There were plenty of opportunities, looking back, where debt would have been a hugely valuable tool to use.
He now advises companies to use debt in a sensible fashion, as it can significantly speed up the growth in the business, without adding undue risk.
Succession planning is becoming a bigger and bigger topic of conversation.
We are convinced this will be the case for several years to come. As mentioned above,
there is no silver bullet, but it is important that all the various structures and options that are available to families are looked at and evaluated as to the pros and cons.
The conclusion might well surprise you, that the debt route can be very effective.
If you would like to discuss financing your succession plans, do get in touch.
About SME Capital
SME Capital was founded to support the growing number of SMEs who face difficulty or frustration in accessing capital through traditional methods. We understand the importance of real and trusted relationships in the SME lending market and have dedicated Regional Directors based across the UK. By combining traditional lending expertise with the latest in data analytics, we are supporting established UK SMEs with their long-term objectives and business ambitions.
