The Truth About Sale and Succession

There is a lot written and spoken about sale and succession, but before you disappear down the rabbit hole, you’ve got to answer one key question:

“What do I want at the latter end of my career?”

Without the answer to that question, you will tie yourself in mental knots.

💱 Three types of sellers

In my experience there are three types of sellers:

a.) Those who know they want to sell and have a capital event.

b.) Those who get to the end and find they have no other option than to sell because they haven’t planned ahead.

(Be careful you’re not telling yourself that you don’t have time to make a plan and execute it. If you’ve got a 3 – 5 year window, that’s enough).

c.) Those that tried succession, but it fell over (typically because the successor didn’t work out).

🚧 Some issues to understand

1. Promises, promises

In my experience, most business sales in our sector leave the selling owner richer but hugely disappointed.

I’m not saying all of them but a MASSIVE percentage of sellers I speak to don’t have much good to say about their experience. The promises made by the purchasers are very, very rarely kept.

In one recent conversation I had, a business that was sold to what I would have considered a reputable buyer, had a core promise broken within a week of sale. And now they still have to work there for 2 more years to get paid.

Despite all of this, as long as you know this is what you’re getting into and if getting paid is your only goal, then you can navigate this. Possibly through gritted teeth, but hey-ho.

2. What about the clients?

If ensuring your clients are well serviced after you sell is your main goal (or part of your wish list) then you’re typically on a hiding to nothing.

Why?

Because the buyers are doing multiple deals a year, while you are selling once in your lifetime. There’s a clear situational disparity here that is not working in your favour.

3. We’ll sort you out

Be very careful of people saying they can knock your business into shape in the 12 months before the sale and make you significantly more valuable. 12 months is not nearly long enough to do that and it’s likely to be financial engineering, not anything significant.

Plan earlier and do the work necessary to get your business in good shape. Spending 3 years on the process gives you time to address issues that will make a difference to the quality of your business and therefore its saleability and final sale price.

4. The issues are the issues

Regardless of whether you are staying and trying to grow, you are selling, or you want to create internal succession, the business issues to work on are identical.

Did you clock that?

I didn’t say they were close, or very similar. I said they were identical.

A good business is a good business, is a good business. And good businesses sell for more money:

• Having successors in place increases the sale value of a business because there can be advice continuity after the selling owners depart.
• Being more profitable increases the sale value of a business (obvs), but it also makes it attractive for a successor to fork out and buy in. Don’t listen to the spurious argument that being more profitable and (hence more valuable) makes it even harder for successors to buy in.
• Having good management in place helps all the options (stay, sale, succession).

Can you see what I’m driving at?

Just focus on improving the business every day, week, month and year. Work on the right things. That’s what drives value. There are no hacks, tricks or silver bullets I’m afraid.

5. Succession planning

If you want to go down the succession route to avoid selling to a consolidator, then you need to plan well ahead. Ideally 5-10 years.

Why?

Because you are going to have to develop people and that takes time.

It’s almost impossible to ‘hire’ a successor 2 or 3 years before you intend to sell. It’s not enough time to get to know them and be sure that they are capable of being the next custodian of the business.

And I’m calling an Employee Ownership Trust (EOT) a succession strategy. For some businesses this is an option, but again, only if you’ve spent time developing the right future leadership team and have got to know them well over a longer period of time.

6. Funding a buyout for your successors

The biggest concern for most owners trying to create a succession plan is how the successors will fund the buyout.

Specifically, how will younger successors with no significant assets at this stage of their lives find the borrowings to pay you millions?

This is absolutely solvable.

What allows a succession plan to succeed is two foundational issues that have nothing to do with what you are worrying about (funding, people, tax, multiples etc):

a.) The owner or owners who are selling don’t really need the money.

Or if they do need some money it’s not necessary for them to secure the greatest price of all time.

I’m not suggesting they give the business away, but clearly the financing terms and time frames can be a lot more flexible when you are already financially secure as a selling owner.

b.) The owner or owners are ‘ready’ to make room for the successors.

That is, they don’t want to stay and meddle in decision-making. When you’ve sold your business, you don’t own it anymore. If you’ve mentored and coached your successors well, trust them to get on with it.

That doesn’t mean you won’t be kept informed (that’s essential during the sale process until you’re paid in full), but it does mean you give them decision-making control and only get involved when asked, or where there is a clear deterioration in how the business is performing (which never happens in my experience, so stop worrying).

(For more detail on the succession planning process, check out my blog, How To Create Your Own Succession Plan)

Clearly, there’s a lot for you to consider.

But remember, begin with the end in mind and start with a clear answer to this question:

“What do I want at the latter end of my career?”

Let me know how you go.

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