Succession strategies - Part 2: Motivating the heir apparent and getting ready for sale
The time and effort you spend upskilling and planning for the future with your operational successor, may be wasted if they become de-motivated by future uncertainty or have their head turned by other opportunities.
Upskilling your operational successor is part of the story, but aligning your interests with those of your successor, making your successes their successes, can be very powerful. A share option exercisable on your exit might, for example, make it harder for them to walk away from the potential future upside that they have worked hard to help deliver.
There are many things to think about in this context. Here are a few of them:
- make sure you take tax advice. The route you take to incentivise your successor can have a significant impact on the tax position of the individual and the company;
- with certain tax advantaged option schemes, the company can obtain a corporation tax deduction on exercise of the option, which can be negotiated as additional consideration to be paid to the selling shareholders on sale;
- if you issue shares, make sure the basics are covered off - what happens if the employee wants to sell his shares? What happens to the shares if he leaves the company? If you decide to sell the company, can you force him to sell too?
Getting Ready for Sale
In stark terms, your Corporate Finance adviser will be trying to help get you the best price you can get on sale and your lawyer will be trying to ensure that none of it is eroded during or after the sale process. Their ability to achieve this will be heavily influenced by the state that the business is in at the point of sale.
"Analyse the risk areas in your business and, to the extent possible, deal with areas that are likely to be problems for a buyer before you get into a sale process."
Your buyer and their advisers are going to pour all over your business and, through due diligence, ask many more questions, and request many more documents, than you are likely to expect.
A clean company means less risk of delay and less delay means less risk of the deal being derailed for some reason. Sometimes it is the delay caused by the due diligence issue that causes the deal to derail, not the due diligence issue itself. For example, when the time taken to investigate and remedy the due diligence issue affords the parties more time to re-evaluate their positions.
A clean company also means a reduced risk of price erosion. The reality is that your buyer is likely to have a limited appetite for picking up the tab in relation to anything eating into value that relates to your period of ownership. Problems un earthed through due diligence can have a range of impacts:
- indemnity protection in the sale documents, where the seller agrees to indemnify the buyer for any loss stemming from the issue;
- retentions or “hold backs” from the purchase price;
- price reductions;
- buyer walking away.
Think about the risk areas of your business. For example:
- is your intellectual property adequately protected?
- do you have robust and legally up to date employment contracts?
- are your customer and supplier contracts properly documented?
- are you anti-bribery compliant?
- are you compliant from a regulatory perspective?
- are you GDPR compliant?
Get someone to let you have a typical buyer due diligence request list. Start to think about how easy or difficult it would be to answer those questions now and what you can do about it.
One service we offer to our clients is a “red flag” due diligence exercise, carried out well in advance of any sale process and aimed at flagging up issues that would concern us if we were acting for a buyer. This gives the owner the opportunity to try and remedy or mitigate any issues before going into the sale process.
Clean and well presented due diligence can also create a virtuous circle. The buyer sees a clear set of responses that explain any issues. As he goes through that process he is likely to be more and more confident in what is being presented to him – and therefore look a little less hard win issues arise. Conversely a buyer who sees a mess will start to see ghosts everywhere.
In the third and final blog in our series looking at planning for the future of your business, we look at selling and legacy issues. Last weeks blog can be found here.
Get in touch
For more information on succession strategies, please contact Principal, Paul Bevington.