Cambridge Caledonian

Managing Succession - The Seven Biggest Fallacies

The Six Biggest Fallacies about Succession Planning

I meet lots of business people who want to talk about putting in place an Exit Strategy, and planning for this as well as grooming their companies for value growth prior to exit.   Surprisingly its less common to find folk prepared to talk about succession.  

Why don’t people like to talk about succession – here’s some understandable reasons.

• Its not a crisis yet so let’s defer it.
• I don’t have a suitable successor – so I don’t feel I can retire
• I don’t have any obvious and outstandingly good candidates – how can I chose – better to wait until I find a suitable candidate
• How do I get paid out?
• It’s the wrong time to sell – so I’ll wait till things improve

But its important – like death and taxes the need for succession won’t go away.   So here are some things not to do – or the six biggest fallacies about succession planning.   Listen carefully – you may here some of these in the corridors of your company.

 “What this place needs is more people like me” –  Leaders who hire or promote in their own self-image run the risk of creating a band of “Mini-me’s” rather than a well-balanced team in which the challenges of one member are balanced by the strengths of another.  Good leaders surround themselves with individuals who have complementary skills and strengths.

“What this place needs is new blood” – Bringing in new people may “shake things up” but it can also de-motivate the individuals who have been contributing for years by robbing them of their opportunity to shine.  Before adding “new blood” to the team, assess the skills and potential of existing employees – the company’s next CEO may be languishing in another role.

“Managing ‘things’ qualifies you to manage people” – Promoting the best functional specialists without assessing and strengthening their management skills can be a recipe for disaster.  Make sure you have a process to identify which of these performers have the potential to be effective people managers.

“Let’s keep this to ourselves” – Identifying high potential candidates for future leadership roles is the first step, but not letting them know about it is a mistake.   You run the risk of losing top performers to a competitive job market, but you also miss a valuable opportunity for development.

“Everyone wants to be a senior exec” – Not all managers want to face the stress of a leadership role. But these same managers can be a big asset to an organization.

“Blood is thicker than water” – Just because a son or daughter is in line to take over the family business doesn’t mean they’re qualified to be an effective leader. Call it the third generation curse but only 24% of UK Family Businesses survive as such through to the second generation and only 14% make it beyond the third generation.

 

So start planning now, whether your business exit options are through a trade sale, or through a management buyout, you will need to have a plan for succession in management as well as succession of ownership.    To address these issues we are running an updated version of our Business Exit Strategies Seminars.    They will also cover tax mitigation, management buyouts, grooming, and selling  your business.   The events are practically focused with interactive sessions, and are aimed squarely at business owners.   This time around we are holding them in Hemel Hempstead, Milton Keynes and Brentwood.  Have a look at our events page for more details.

With acknowledgment to John Szold of www.planningforsuccession.com

Selling your business - who writes the Information Memorandum?

I have been reading "Local Heros" a book by David Erdal about the employee buyout of theLoch Fyne Oysterbusiness.    I was interested in this book because I drive past the original Loch Fyne Oyster business near Inverary at least a couple of times each year on my way to Oban.   Also because I like the restaurants. 

At one point Erdal describes how, following the death of one of the founders the business was to be marketed for sale.    Of course when selling your business you need a decent document to describe it and present it in the best light.    Erdal reports that the team were surprised how much of there input was required to the document given that they had appointed an Edinburgh firm of corporate finance advisers to help advise on the sale of the company.  

I was interested in this comment, as it is a reaction I have often come across.   Folk do sometimes expect the adviser to produce a slick document after being given a few random documents.  

 In reality the best sales documents (or information memorandums)  are produced by advisers and management working as a team.  Only the directors can produce the core material to describe the business, however the advisers can work on it to bring out the best points of the business, and to fulfill a vital copy writing and editorial role.    I am often surprised how people underrate some features of their businesses - simply due to over familiarity. 

The lesson is that its important for both parties to understand their roles at the outset.

In April the Chancellor announced the Capital for Enterprise Fund (‘CFE’) for businesses that the banks weren’t supporting – but the wheels of government turn slowly and  it has taken until now to finalise the terms and make the cash available.   The fund is to be invested/managed jointly by Maven Capital Partners and Octopus Private Equity

This could be a good source of finance for businesses finding it difficult to raise debt in today’s market.  Qualifying businesses are likely to be profitable, have a good management team, a sound business plan for growth, and meet the EU definition of an SME e.g. revenues below €50M.

CFE will provide equity and/or mezzanine (high yielding debt) finance at a cost below that of traditional venture capital or private equity. Mezzanine finance could allow funding without having to give away a shareholding in the business. But you need to move quickly as CFE has a short timescale and is to be available only until April 2010.

What does all this really mean.  Well the money will go do decent businesses which have already achieved some scale - in practice £500k EBIT and upwards.   It also means, I suspect, is that this equity or quasi equity money will be available SLIGHTLY more cheaply than otherwise, and in SLIGHTLY smaller lumps.    

The possibility of getting some as of as mezzanine finance is quite unusual at the level of the market - and for the right deal very helpful.    So for example some deals might be structured using high yielding debt with a bullet repayment after a number of years - useful for investing in a project which will generate the cash flows to repay later. 

For once the government is - by accident or design - targeting this support at good businesses who can do something purposeful with the money.

Selling your business v managing succession

This is a choice that business owners face.  Do you plan to sell your business when the time is right?  Or do you plan for some kind of succession?   Of course the two needn't be mutually exclusive - a succession buyout or VIMBO can be partial with the owner retaining a meaningful stake.  And this can then be followed by a trade sale for example.   

We have done a number of management buyouts of this pattern where the plan is to groom the management team who are to achieve the succession over a period, and then the entrepreneur can exit fully at a later date.    

 This allows the rest of the team to become stakeholders, and the business often benefits.   Work life balance issues for the original owner can be addressed as it might yield the opportunity to go part time.   Each deal is different as no two companies, and especially no two directors have the same objectives.

To address these questions, and the thorny questions of when IS the time right to sell given the current difficult climate we are running an updated version of our Business Exit Strategies Seminars.    They will also cover grooming the business to build value or protect value in recession.

Even if a transaction in the short term is neither practical nor desirable, it is more than ever time to make plans for an eventual exit - or cash realisation.

The events are practially focused with interactive sessions and aimed squarely at business owners. 

They run in April in Ipswich and Cambridge, and again in Norwich and Peterborough in June.      Have a look at the events page on our website for full details of these and other events that we are running.

Sticking to our last........

We got a mention in Accountancy Age in an article about how smaller firms are faring in recession.    They spoke to firms in Cambridge, London, and Sussex - good to see London based journalists traveling far and wide for news!

They interviewed PEM managing partner Paul Chapman,  who was quoted as saying the corporate finance practice was deployed in marketing and research.   That's true - we are.   But its a quote in isolation from a longer interview.  To read it you'd think that was all we were up to which is certainly not the case.

Things are certainly slower than last year, but we have some interesting assignments at the moment. Despite the economy it is still the right time for some businesses to buy, sell, or make plans and so M&A activity doesn't dry up.   Retirement for example can't always be delayed for example and this can lead to management buyout opportunities, or to trade sales.   Also for some businesses it is the right time in their business cycle due to what's happening in their market,  or their technology road map may dictate it,  or simply because they've been approached by a strategic buyer.    Of course acquirers are seeking value at the moment.

So we're not diverting the team to do insolvency work, as are so many of our competitors.  And the research and marketing is aimed at supporting our current work load, and wining more.    The nature of the work is changing, we are seeing clients bidding for businesses in insolvency, and some succession deals are being done with an increased proportion of vendor debt as bank funding is just not available at the levels we saw before.

Brand Identity and Website

We’ve been up and running for a few years and have done quite a few deals.  So we felt it was time we had a decent website to showcase our activities.   At the same time we have worked with leading local design house Mobas to establish a distinct new brand identity for PEMCF to sit alongside that of the “mothership” Peters Elworthy & Moore.

 

Underpinning the new branding is professional market research done with our clients and local intermediaries in the corporate finance community such as bankers and lawyers.     Happily they said lots of good things about us – and this is reflected in the branding which includes real quotes from satisfied clients.      

 

The new strap line “Understanding what’s best for your business” also reflects client feedback – in short we listen, and it is very important to us to understand our clients’ personal goals, and to thoroughly understand their businesses.  This way we can personally deliver real insight, and get result for our clients.

 

Have a look at the new site on www.pemcf.com and let me know what you think.

Software Vendor Speak

I've always enjoyed the "venture speak" humourous glossaries of what VCs really mean when they talk.  We are currently working on a sale mandate for a technology company, and while doing some research recently for a sale madate I came across somthing similar for software vendors which made me smile.

24/7/365 Customer Support
Any customer can call and talk to the support company's automated telephone system at any hour of any day.

AJAX Powered User Interface
Looks pretty, crashes often.

Highest Growth Company For ...
We just received a check from a venture capitalist and have finally moved out of Mom's basement to a real office.

Open Source
Your mission critical CRM application will be supported and extended by several high school students in undisclosed countries.

Security Compliant
If we can't access your data, we don't believe anybody else can either.

SOA
Sometimes Overextended Application

Software To Be Released Next Quarter
The calendar quarter has been specified; the year has not.

Web 2.0 Company
We're bringing back the ideas and business models from the dot com era.

Business Exit Strategies Seminars

Despite all the gloom in the media about the credit crunch and the banking crisis we continue to meet people who are looking to do deals.  Of course there is more caution, and funding will undoubtedly be harder but there will be opportunities. 

Distressed corporates may seek to sell non core activities to raise cash - we are working an acquisition already where this has been the trigger.   I'd expect there to be management buyout opportunities too.  Anyone out there working for a business with an Icelandic parent company? 

Even if you're not planning a transaction in the short term, such pressures mean that is all the more important to plan now for an eventual exit - or cash realisation.  

To this end we are running a series events on the topic “Business Exit Strategies”.  They are practically focused with interactive sessions and aimed squarely at business owners. 

We hope that attendees will come away with a realistic view of what needs to be done to evolve and implement a strategy for growth, exit, or succession.   The events run in November in Brentwood, St Albans and Milton Keynes.   For further details visit www.pemcf.com

Investment advice

If you had purchased £1,000 of Northern Rock shares one year ago it would now be worth £4.95.

If you had purchased £1,000 of HBOS shares earlier this week your £1,000 would have been worth £16.50

If you had invested £1, 000 in XL Leisure it would now be worth less than £5

But if you had bought £1000 worth of Stella Artois one year ago, drank it all, then took the empty cans to an aluminium re-cycling plant, you would get £214. So based on the above statistics the best current investment advice is to drink heavily and re-cycle.

Doing deals in the crunch - or not

I don't usually go in for economic predictions.

Last week I submitted an article for a business magazine on doing deals (mergers and acquisitions, management buyouts etc) during the cruch.    Writing it early last week I tried to be reasonably upbeat - some deals will still be done, although being honest at the bigger end, or the more marginal end raising finance has become more difficult.   Since then the financial system has melted a little more.  

So when the magazine gets mailed out at the end of October will things have got better, will I look balanced and wise, or if it is this bad or worse will I look rather over-optimistic?    Who knows?  Watch this space.