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Who is going to take over the business?

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.

Mike Worsnop blogMost 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.


Mike Worsnop


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