Selling a Business

Succession, Business and Exit Strategies

Selling a Business Stategies

Succession And Exit Strategies Explained

Succession & Exit Strategy

Every business should have a succession plan and strategy – either already implemented or working towards implementation. Failing to do this could result in serious damage to the value of the business as an asset should something unexpected happened to the owner and main driver of the business.

Although this seems to be a very logical comment it is the experience that a very small percentage of micro, small and medium sized enterprises have ever given any consideration to such a plan. The perception is often that it is very difficult to hand over the control and activity over to an employee and/or manager and that it will be much easier to hand over to a buyer when the time is right.

This is however far from the

truth and basically shifts the risk to the buyer. The buyer would however factor this risk into the offer and the seller would realise a lower price as a result.

The Succession & Exit process should take the following natural progression:

Process of identifying specific functions and personnel to carry out these roles:

The objective for the business owner would be to identify ALL of as many as possible routine functions and activities that he is involved in and to start the process of handing these over to employees in the operation.

The more routine activities are transferred to employees, the more time the owner will have to focus on added value projects such as product diversification or a new security system or new software or preparing a business plan etc.

Some of the steps to follow are:

  • Identify the role or function that you wish to hand over.
  • Define the competency that an employee needs to assume this role.
  • Assess the skills and competencies of current employees and establish if there is a competency gap.
  • Appoint, train and develop the selected person to assume the role.
  • Set clearly defined roles and responsibility guidelines.
  • Monitor and measure progress.
  • Re-train and implement systems and procedures to support the functioning.

Sell a portion or all of the business:

It is seldom a bad strategy to first sell a small portion of the business, especially if some synergies can be generated in the process. Apart from liquidating a portion of the asset value it also improves the perceived risk profile as seen by future buyers.

It could also be a great method of enriching the job of some employees or alternatively to achieve BBBEE requirements. If done correctly it can happen without loss of control but would certainly enhance the succession plan and reduce the risk profile.

Most companies consider the sale of 25% or 35% of the equity in the company as a good start. This can be extended by selling more to the same buyer/buyers or completely new partners can be considered if more synergies can be arrived at. Some of the steps to follow are:

  • Prepare the business for sale. Optimise the profits, create a positive trend, reduce the dependence on the owner, some paint, improved lighting and signage….
  • Marketing of the opportunity. The open market can be considered in addition to the obvious choice of employees or family or friends in order to assess alternatives that may provide different dynamics. A marketing plan / prospectus is a must to present to potential buyers and investors.
  • Contracts and structure. In addition to the sales agreement it is highly recommended to negotiate and conclude employment contracts and shareholders agreements with clearly defined roles, responsibilities and defined benefits between the parties that take a position in the organisation going forward. It is the absence of these agreements that result in the majority of all disputes in partnerships.

Various other strategies to be considered

  • These are normally unique to the specific circumstances of the business and could include some of the following:
  • Liquidate the assets. It often happens that the value of the assets when liquidated in the market exceeds the value of the business when sold as a going concern. This solution is simple and is certainly a lot easier and quicker. There is no goodwill in a business like this.
  • Listing on a stock exchange. The business will have to be large in order to afford the cost and effort to go on the exchange. In order to overcome this it may be possible to merge two or three businesses, especially if synergies can be extracted before this bigger business considers a listing.
  • Donate it to family or friends. This happens very often with disastrous consequences. A solid succession plan could however mitigate many of the risks of transfer.