Succession Planning for family businesses and the importance of the financial side

One of the most important aspects of Succession Planning for family businesses is the financial side. Ensuring that the next generation has the ability to take things to the next level with the right financial structures in place is critical.

In this blog post, we will discuss some of the key financial issues that need to be considered when planning for succession, especially for family businesses.

What is Succession Planning?

Succession Planning is the process of identifying and developing individuals who have the potential to fill key leadership roles within an organisation. It is often used in family businesses, as it can help ensure that the business continues to run smoothly even when there are changes in leadership.

Why is Succession Planning important?

Succession Planning is important because it helps to ensure that the business can continue to run smoothly even when there are changes in leadership. It also allows businesses to plan for the future and make sure that they have the right people in place to take over when needed.

What is the situation?

By the year 2030 US$15 trillion in wealth will be transitioned from one generation to the next according to the 2019 Wealth-X report. Looking in a bit more detail closer to home, Ryan Smith Director at EMC Corporate Finance tells us ‘In Sussex, Surrey and Kent, there are 2500 businesses where the business owner is 65 years old or older and the business is generating half a million or more of EBITDA.’ There is a strong likelihood over the next 5 to 10 years a significant number of those businesses will want changes to occur.

What are the options for the business owners?

In our experience, many business owners do like the thought of realising, in monetary terms, their decades of hard work. However, there is also the emotional side and the desire to keep the business within the family, when family members are involved.

So, what at the options?

1. Sell the business to a third party
2. Pass the business on to the next generation
3. Continue to run the business
4. Sell the business to the next generation

Why might selling the business to the next generation be interesting?

To create that significant liquidity event for the business owner it only leaves options 1 and 4 being possible. If the business is sold to a third party, clearly it will be leaving the family and may be run in a very different way to how the business owner had wanted it to be. Selling to the next generation creates this liquidity event but keeps the business within the family.

How would this work in practice?

For example, SME Capital would support the next generation and other management in their buyout of the existing shareholders. Traditionally this allows for a cash out on day one of approximately 40-60% with the rest deferred and paid over the following three years.

Position for exiting business owner?

1. The business owner has a liquidity event of some significance on day one with the rest being paid over a three-year period.
2. The business stays in the family
3. Next generation take ownership of the business with purpose
4. Hopefully (!) a friendly buyer

Position for acquiring next generation with fellow management team?

1. Business is kept within the family
2. MBO team take full ownership over the business with a line drawn in the sand over the management of the business
3. Roll over equity will be important to have as an MBO team but there may be the possibility of some partial cash out for them should they be part of the existing shareholding
4. Shows commitment and desire to run the business wanting to buy it and grow it
5. May solve a solution for parents to have a liquidity event
6. Hopefully (!) a friendly seller
   

Succession Planning can be a complex process. As we've covered, there are a number of financial considerations that need to be taken into account in order to ensure that the Succession Plan is structured in the most efficient way possible.

It is important to seek professional advice to ensure that all of the financial implications are taken into account.

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.

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