By Mike Worsnop - 12 Jul 2013
Succession Planning is a critical issue facing many
SMEs. And when you stop to consider that something like 97% of
businesses fall into that category (based on figures published by
Statistics NZ), it's a critical issue for the New Zealand
economy.
Most SMEs have between one and three
business owners, most of these owners are over 50 and a significant
majority of these wish to retire in the next five years - but few
have any real idea of how they are going to achieve this.
Traditionally, business owners could rely on new generations of
family members to take over the business but in our experience this
is now the exception to the rule. Instead business owners are
forced to look elsewhere.
Some look to existing management to buy them out - although
often businesses are sold to management at a discount to their true
market value and management do not have sufficient financial
resources to complete the purchase. If the borrowing capacity
of the business is constrained, the business owner is compelled to
advance funds to enable the buy-out to proceed. Management
buy-outs are easier though in the sense that there is an inherent
level of trust between the parties, the buyers know the business,
due diligence is less fraught and the sell-down can be achieved
progressively if need be.
Others look to a trade sale, usually to a competitor.
Desirable businesses can attract strong interest but many
businesses can take longer to get away. There are often
tyre-kickers to contend with - buyers who have little or no
genuine interest in buying the business but are simply seeking
access to confidential information to provide them with a
competitive advantage. Care needs to be taken as to who is invited
into the process. Due diligence can be similarly problematic,
with a balance needing to be struck between adequately informing
the prospective purchaser and not giving too much away.
Negotiations can be testing and need to be handled well. It is to
be expected that buyers will look to mitigate their risk through
the use of warranties, indemnities, retentions, earn-outs, lock-ups
and restraints.
A few, with sufficient scale, might even consider a partial or
full IPO. The environment and appetite for IPOs has been poor
in recent years; highlighted by the absence of new
listings. However, this is changing as the economic recovery
gathers steam and there have already been a number of new listings
this year and others in the pipeline.
What is key, regardless of the avenue taken, is
preparation. Business owners need to step into the shoes of
the prospective investor and understand their motivations for
buying, what concerns they will have and what will achieve the best
possible price. Two things buyers hate are a disorganised vendor
and surprises. To avoid this, vendors should conduct their own
due diligence, get their financial accounts in order, ensure their
key contractual relationships are properly documented, lock in key
employees and make sure that information and documentation is
readily available to buyers. Having experienced and pragmatic
advisors on board who will work together harmoniously, will also
assist in ensuring the best possible outcome.
If you want to know more about succession planning, we would be
happy to talk to you.
Contact
Mike
Worsnop