Caroline McDonald is the Head of Content for SME-focused bank Aldermore. In this guest post, she lays out the steps business owners should take before they retire to ensure their company stays on track.
When mature entrepreneurs decide it’s time to step back and retire, what do they need to consider to ensure a smooth transition?
While it is true that many of today’s business owners are choosing to postpone retirement and work until later in their lives, there will still come a point when they decide to take a step back. When this time comes, there are a number of different exit strategies they can pursue, but each requires thought and careful planning if it is to be successful.
Keeping it in the family
Many entrepreneurs will plan to hand control of their business over to a family member or long-standing member of the company, especially if the business has been run by family members for several generations. Accountancy firm Francis Clark found that half of all family-run businesses in the south west intended to give or sell their business to the next generation. However, worryingly, over 60 per cent of those planning to pass their business to a family member had no formal plans in place to achieve this.
Commenting on these findings, managing partner Les Burnett said:
“This would indicate a general lack of understanding of how complex the process can be and how it can be confounded by family conflict, the next generation not being sufficiently skilled or simply not wanting to work in the family business which can be more demanding than working elsewhere.”
This lack of preparation could be causing issues for family-run enterprises, as PwC’s Family Business Survey found that only 12 per cent of family businesses survive into a third generation of ownership. To counter this, PwC recommends planning ahead, beginning the succession process several years before the planned departure.
Entrepreneurs should be putting aside a set percentage of profits each month into a business savings account to help build a contingency fund. This means that if unforeseen circumstances negatively affect cashflow during the transition period, the business can keep operating.
It may be that the firm has surplus cash in its current account that isn’t earning the business any interest. Those funds could be transferred to a business savings account and earn interest whilst the changes for the business are planned. There are some banks who offer business savings accounts where the saver can choose the exact maturity date for the funds, meaning effective planning can be made whilst maximising returns. Using the business’s savings and reinvesting is an ideal scenario but it may be that other lines of external finance could be available, should the business need it.
Choosing a successor
Extra care must be taken when choosing a successor. It’s important to acknowledge that choosing a family member who doesn’t possess the necessary skills or mindset to lead the company could end up putting unnecessary strain on the business, as well as your personal relationships.
Juliette Johnson, a family business consultant, suggests allowing potential successors to spend some time within the company while the current owner is still there, to give both parties a chance to see whether it would be a good fit.
“Some companies create structured programmes that allow young family members at different educational stages to sample the family business working environment, from holiday jobs to gap year internship programmes,” Johnson comments. She adds: “In laying down rules for these schemes, it’s made clear that they involve no commitment on either side – an important two-way message, because the schemes also help companies assess the quality of the next generation.”
However, Johnson makes it clear that working within the family firm should not be seen as a substitute for external learning and experience, stating:
“Young family members should ideally go and obtain outside work experience before deciding whether the family business is right for them. When I speak to the senior generation in family firms, who often joined from a young age, they are unanimous in wishing they’d worked somewhere else first. Working outside helps young people develop an objective view of their abilities and talents, it builds confidence, builds a better CV, introduces new ideas and learning, and – very importantly – it helps foster legitimacy and credibility among those more sceptical non-family employees.”
Selling your business
If business owners don’t have any potential or suitable successors, selling the company can be a way to hand over responsibility while also supplementing retirement income. Choosing this option will still require proper planning in order to be successful, however, with Intelligent Business Transfer estimating that as many as 80,000 solvent businesses are closed down rather than being sold on each year by those aged over 60.
To minimise issues, Intelligent Business Transfer suggests enlisting the services of specialists, such as an accountant, business transfer agent and solicitor to oversee the sale process, as well as how any taxation could impact the eventual proceeds from the sale.
Any potential investors will want to see proof that a business will deliver a strong return on their investment, which means business owners will need to provide evidence of a well thought out growth strategy, possible for the next five to 10 years.
Nick Brown, managing director of corporate exit and business consultant on BBC Radio 2, emphasises the importance of demonstrating profitability as well as a healthy cashflow. The entrepreneur, who sold his own business in 2004 for a seven-figure sum, provided a number of useful tips for those looking to sell: “Track previous acquisitions in your sector. You will probably already be aware of a rival organisation that has been sold. Take a closer look at what made that company appealing to the purchaser.”
He adds: “Your strategy should also include who you would like to sell your business to. Draw up a list of three companies that you feel would be an ideal fit for your own organisation. Then start to work out what would make your business attractive to those three companies.”
The quality of the workforce can have a direct impact on the future performance of the company too, which is why potential buyers will often take an interest in employee retention rates. Incentives should be carefully reviewed to avoid losing valuable members of staff. Other positive signals potential investors may look for include strong client relationships, including long-term contracts, and high levels of customer satisfaction.
Founded in 2009, Aldermore is a modern, SME-focused bank which challenges the established view of what banking should be. They deliver award-winning business finance, mortgages and savings to Britain’s SMEs, homeowners and savers.