Finance

A succession plan will help the fit

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Once a new owner starts to put their stamp on operations, the entrepreneur who offloaded their baby may not fit in, so transitioning business knowledge becomes paramount. By TOM McKASKILL.

By Tom McKaskill

Succession plan

Cashed up entrepreneurs don’t make very successful employees. In fact, most smart acquirers realise this and so look for a solid succession plan knowing that they are unlikely to want to keep the former owner or that the owner won’t want to stay.

 

When transitioning ownership of a business, the logic is actually quite simple. Your entrepreneur is now cashed up and no longer has the motivation to put in the same level of energy and long hours.

Furthermore, this is also an individual who is used to making decisions quickly, often from gut feel, and probably dislikes having to justify what they do.

At the same time, they probably want to use their new-found wealth to take some time out, pursue another venture or become an angel investor. Basically they don’t fit in, and smart acquirers recognise that.

Using this logic, it is not unreasonable to imply that the same conclusion may well apply to most of the senior management team. It is unlikely that the vendor CFO will want to give up dealing with bankers, auditors and being part of the strategic decision-making team. The sales and marketing director is unlikely to want to go back to being an account manager or branch sales manager.

It is also entirely possible that the senior management team will share in the sale proceeds and may wish to pursue other opportunities. While some may transition across to the new owner, the acquirer is probably best to assume they will leave at the date of sale or shortly after. Certainly all the research on mergers and acquisitions would support this conclusion.

Given this scenario, the best preparation for selling a business is for the vendor to put in place a succession plan for the senior management team with employees who are likely to transition to the new ownership.

However, it would not be unreasonable for the buyer to foresee risks in keeping these newly acquired staff, so even though there is a succession plan in place, additional incentives are needed to reduce buyer risk.

The buyer needs to have time to transition the inherent business knowledge to employees who are likely to be employed longer term with the acquirer.

Since most resignations of newly acquired staff are likely to occur during the first year of the acquisition, putting in place incentives for key acquired employees to stay during the transition period can significantly reduce buyer concerns.

Where the vendor has arranged this before the sale discussions, the buyer has some assurance that a major risk can be averted. This not only places the vendor in a more positive light but can positively influence the value of the business being sold.

The vendor needs to anticipate buyer concerns and address those proactively. By understanding the motivations and intentions of his senior management and key employees, the vendor can construct a succession plan and a retention plan that ensures that the knowledge in the business can transition across to the buyer.

This greatly enhances the likelihood of the buyer achieving their own acquisition objectives and thus should be reflected in a lower risk profile for the acquisition. Lower risk should itself be translated into a higher valuation for the business.

 

 

Tom McKaskill is a successful global serial entrepreneur, educator and author who is a world acknowledged authority on exit strategies and the Richard Pratt Professor of Entrepreneurship, Australian Graduate School of Entrepreneurship, Swinburne University of Technology, Melbourne, Australia.

 

For more Business for Sale stories click here.

 

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