Succession is an emotive issue for many business owners and managers. Some find it hard to face the fact that the business they started won’t always be a part of their lives and others worry their businesses will collapse without them at the helm. Family businesses face the added issue of choosing between the next generation or an outsider in their search for a successor.

But the case for having a succession strategy in place is strong. Recruiting people at a senior level is both time- and cash-consuming, and boardroom struggles may be the norm if the successor does not know the business well. Planning an orderly transfer will allow you to circumvent a leadership crisis, will help you extract the maximum value for your business and yourself and provide a future career path for existing employees.

Succession options

Succession works in three ways. Firstly, the business can be passed on to a successor. The second option is to sell the business, either via a trade sale, a management buy-out (MBO) or a management buy-in (MBI). The last option is to conduct a voluntary liquidation.

If you wish to appoint a successor, you should ask yourself if there is an obvious internal candidate who can replace you or whether you will need to find a more suitable external person for the role.

If you are looking to provide for your future after you have left, then a sale might be an appropriate option.

Finding a buyer is not as arduous a task as it first seems, argues Diane Blinkhorn of Bibby Financial Services. ‘The big boys often come along and incorporate a smaller independent niche player.

‘An alternative to this of course is to groom a management team to buy out your stake. If this does not suit, you could reduce your stake and remain a sleeping partner.’ Blinkhorn says that this is an attractive option for owners finding it difficult to let go, because it allows you to remain engaged, usually in a non-executive capacity, where you can add an experienced voice to board meetings.

Whatever your preference, Judith Rutherford, chief executive of business advisory service Business Link for London, says that small businesses need to realise that ‘succession is a huge issue. Too often when the founder and driving force in the business leaves, a lot of the value created gets lost.’ Research shows that weak succession planning is one of the main reasons SMEs across Europe fail.

It’s never too early to plan

Business Link for London advises that planning should start as early as possible to avoid conflict and confusion at the time of handover, as well as to increase the chances of future success for your business.

‘If the business remains without a committed leader at the helm for any length of time, this could result in lost sales, defecting staff and clients, and potentially, business failure. It’s therefore vital that succession is included as part of your overall strategy,’ it advises.

Graham Scott is chief executive of diversified sales and distribution company NWF, an AIM-quoted business with an exceptional track record in pleasing the City. Last year to May, the company turned in record results in sales, profits and dividends. NWF had a textbook, ‘tidy’, succession plan lined up for Scott’s retirement, before unfortunate circumstances (the planned successor fell ill) threw a spanner in the works. Scott has put his planned retirement on hold for the time being while he looks for an alternative successor with the help of a headhunter, but he is a firm believer in planning ahead.

‘First of all, a business has to recognise that it has a succession problem,’ advises Scott. ‘And then you need to identify when the succession is going to happen. We started the process 15 months before my retirement date.’

One of Scott’s most crucial pieces of advice on finding a successor is ‘never be tempted to go for a quick fix’. He argues that you should consider an interim manager rather than rush into the wrong successor.

As for the internal/external debate, he says, ‘if you are thinking ‘no’ or even ‘maybe’ on one of your own internal candidates, then you are duty bound to compare your candidate with the external headhunter’s option. And what’s more, the headhunter needs to meet your whole board, so you are all agreed on the type of animal you are after.’

Taking the time to groom your successor is essential. Explains Scott: ‘a divisional manager will be used to focusing on the specific problems his division faces, like his customers, markets, and competitors. But a chief executive has a far more daunting task. He has to face a bigger audience – his divisional managers, the board (including non-executives and other senior people), as well as all other external parties.’

A taxing issue

Any strategy needs to have an eye on the Inland Revenue. If you are selling your business, you will want to minimise any tax liabilities. If you are handing it down, you may need to think about issues such as inheritance and capital gains tax.

Set up earlier this year, Succession London is a specialised consultancy service for owner-managers who wish to retire or move onto something else but have not yet designated a successor.

It has run a number of pilot projects promoting succession strategies around the UK, highlighting the tax laws that have been put in place to encourage employee buy-outs. Succession London, of which Business Link is a founding member, can advise on a range of employee share schemes, the tax implications and the merits of each.

Bringing on private equity

Many businesses outgrow the capabilities of their owners. When this happens, it could be time to consider outside help, possibly in the form of private equity, to help you find your successor. Private equity firms can either buy the whole company from you or they can buy a majority stake and invest alongside management. According to Business Link, MBOs are becoming increasingly popular with younger family businesses. It gives founders the chance to see their business continue to operate in the hands of staff who are already committed.

A crucial advantage for an exiting founder is that venture capitalists can attract quality managers with proven experience in your sector. One such player is Sovereign Capital, which has enabled many owner-managers to exit their business by selling it through an MBO or MBI.

‘We prefer to take a majority stake when it comes to an owner-manager exiting a business, but we’re flexible. We can offer cash on day one or the owner could take some cash out now, but stay involved and have an ongoing shareholding,’ says Philip Conboy, director at Sovereign.

Sovereign has worked with companies that have gone through a variety of succession issues.

‘We see various reasons for an owner wanting an exit. Sometimes it’s a lifestyle change, in other cases age profile, or even an event in the family. Sometimes they simply feel the business has outgrown them. The common thread is they are looking to move on from that business. Typically we make contact with the company. We come in from a different angle. For example, there was a company with four owner-managers, all in their 60s, who had done no succession planning, but they knew they didn’t want to sell to a trade buyer. Our solution was to bring in a chief executive with a shared vision of future strategy,’ explains Conboy.

Case Study 1 — Appointing New Management

In the summer of 2002, Sovereign Capital led the £26 million institutional buy-out of one of the UK’s biggest private education businesses, Alpha Plus Group. Headquartered in London, this family-owned venture had been successfully built up over forty years, but there was a need for a management succession plan and liquidity in the family shares.

Sovereign brought in a management team with buy-out experience to support the existing team. Paul Brett became the new CEO. He had invaluable experience as a former strategic director of Serco’s educational business, whilst finance director James Macnamara had experience as FD of the successful MBO Pall Mall Holdings.

These team members were brought in to work alongside existing management. The agreed buy-and-build strategy has proved very successful, with turnover set to come in at £25 million for the year to August 2004, a significant jump from the £15.5 million produced two years previously.

Case Study 2 — Getting the generation game right

South Derbyshire-based Spencers Drinks, which makes and distributes alcoholic drinks, is one venture that successfully managed to keep it in the family.

Back in 1999, Mark King undertook a successful management buy-out to take overall control of the company from his father. He became managing director, whilst his father, who is no longer on the board today, remained on the board of directors. After the MBO, the company enjoyed rapid growth, although that has changed in a market hit by a downturn.

King had worked in the management teams of several external ventures before going into business with his father, so he believes he was more than qualified to run the family firm and take over from his father.

The succession seems to be working well. Although conflicts and disputes can come to the fore in any business, in a family business they can be even more heated. But as managing director, King has the final say. He claims that he and his father are now able to chat things through informally on the shop floor or in their office, but when he first took control there were very formal meetings held, with pages of minutes and action points made.

King reckons that one of the main reasons the company’s succession strategy has worked is that the family tends to be closer to the needs of both staff and customers. King explains: ‘we have a loyal customer base that has been with us for many years and a number of staff who have been with us through thick and thin. There is a lot of personal pride in the fact that my father built up this business from scratch and I have now taken over the reins to take the firm into the next 15 years and beyond.’