Business succession is a highly sensitive process. Whether it involves a management buy-out, a sale to an external buyer or a family arrangement, it is usually financially significant for everyone involved and often shaped by strong emotions. Both the departing owner and the successor ultimately face questions of value in the broadest sense. Appropriate advice is essential. Three points should always be on the agenda:
- Give the process time. Sometimes succession must happen quickly. Where an owner has time to plan, however, a sound process and careful preparation of the business can unlock substantially more value. This means developing operating and financial structures attractive to a buyer, realising latent value, involving employees, suppliers and customers sensitively, positioning key personnel appropriately, often including the departing owner, and making the eventual transaction easier for the successor to finance. A useful rule of thumb is that a well-designed process can unlock up to 50% more value in a business succession.
- The company’s relationship bank, or another trusted bank, is an important partner for both sides. But a bank is primarily a lender. Its view of the company’s optimal development and risk profile may differ from that of an owner. This often becomes apparent when important assets, such as specialised know-how, cannot readily be sold separately without preparation. Such assets may receive less attention from a bank, but they should matter greatly to both parties in the succession.
- The issue goes beyond banks and financing. Business value increasingly comes from assets that cannot easily be pledged as collateral. These intangibles reflect the continuing shift towards services and digitalisation. Even ‘old economy’ companies generate a growing share of profits from assets absent from the balance sheet. US academics Lev and Gu illustrated this in The End of Accounting (2016). Research and development and selling, general and administrative expenses rose from approximately 20% of revenue in the 1950s to well over 30%. These are precisely the categories in which spending on off-balance-sheet value is recorded. The implication for succession is clear: choose an adviser who understands intangible assets.
VALUESQUE advises on business value, the development of value-oriented structures and valuation itself. All three are central to succession planning and form part of our core expertise. Contact Valuesque.