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

First Copy Management Buyout

Another deal announcement.    We've recently completed a management buyout at First Copy Corporation which is one of the top Xerox franchises in the UK.    It operates in the East Anglia region selling the whole range of Xerox equipment from colour photocopiers for the office to large scale digital printing equipment for the printing industry – some machines retail for over £350,000 each and are leading a massive change in the way printing services are delivered.  It is a fast growing business driven by the increasing trend to colour printing.   

The was an interesting deal as all of the employees of the business have become shareholders.  Dave Honeyben the MD will remain in post with a significant minority holding, but all of the employees can now benefit directly from the success the company is currently enjoying.    The buyout was funded by the Coop Bank.   This was their first deal locally since opening a corporate office in Cambridge.    In these difficult times it's good to have a new bank in town - that is still lending.    Adam Bradley and Sian Scanlon at Taylor Vinters did the legal work for this one.

In the photo are Adam Bradley, Sian Scanlon, Tim Jones (Coop Bank), myself, Dave Honeyben.

Succession by Management Buyout

Securing succession is a big issue for all business owners.  One could sell to a trade buyer, but a Succession Buyout (I suppose this is an SBO but I feel there are too many three letter acronyms in this business already) is an increasingly viable and popular alternative.  This involves selling to the rest of the management team.  Here's five reasons why you should consider one.

1. You'd like your successful independent business to continue beyond your retirement.  This is most likely if you sell to your team.  A trade sale might lead to big changes in the company.
2. Tax efficiency; the deal can be structured to mitigate your tax liabilities, and can be tax beneficial to the MBO team.
3. Rewarding management.   You've worked with them for ages and you want to give them their chance.
4. Customisation: as a “friendly” deal it can be tailored closely to your personal objectives.  You could for example withdraw from the business in stages both financially and operationally.   
5. Funding, finance for SBOs (oops sorry used the acronym) is available from banks and equity providers.  Vendor finance often forms a significant part of the funding if the vendor is to retain some involvement in the business for a period.
   

Is your business suitable for a Succession Buyout?  Provided it is profitable, and you can reach a suitable valuation, the answer is probably yes.    As you will see from my last post we have just completed a succession buyout, and we have two more in the pipeline.

Bourn Bioscience Buyout

Another completed transaction.  PEM Corporate Finance were lead adviser to the Management Buyout of Bourn Hall from Serono.   Bourn Bioscience as it is now called trades as ‘Bourn Hall Clinic’, the world’s first in-vitro fertilisation clinic, and as ‘LCG Bioscience’, offering clinical research and development services to the biotechnology and pharmaceutical industry.

  Apart from the high profile of the business the deal was noteworthy for the speed with which we had to put it together.  Only around six weeks elapsed from signing heads to completion, with completion just before christmas.  Much more detail on our website.  Thanks to many but especially Tom Pickthorn and his cast of thousands at Mills & Reeve,  and to Nick Baker at Barclays.

Photo Caption (left to right): Mike Macnamee - Chief Executive Director, Bourn Hall Ltd. Tom Pickthorn - Partner in Finance Corporate Team, Mills & Reeve. Nicola Graver - Human Resources Director, Bourn Hall Ltd. Neil Burton - Senior Solicitor, Mills & Reeve. Lake Falconer - Partner at PEM Corporate Finance LLP. Dawn Wilkerson - IT and Core Services Director, Bourn Hall Ltd. Lisa Gibbons - Clinical Research Director, Bourn Hall Ltd and Simon Barton - Finance Director, Bourn Hall Ltd.

The role of the lawyer in a Management Buyout

In a typical Management Buyout the Corporate Finance adviser gets involved well before any deal happens, and often prospectively when no deal ever happens.  This is typically with a fee at risk - i.e. no deal no fee.  In contrast the lawyers get involved towards the end and with much less risk.  However they do do huge amounts of work at this stage - especially if its a complex deal that must be done speedily. 

I completed such a transaction before Christmas - PR to follow - and thought this photo of the completion meeting illustrates well the volume of work the corporate lawyers do.  They are shy retiring folk and I promised not to mention them by name in this blog - but they know who they are!  This MBO was complicated and the completion agenda had approx 90 documents to be executed in the right order.  They're shown lined up in three rows on a long table in a London lawyers office.

8 Steps to an Management Buyout

I recently attending an excellent presentation skills talk from Andy Bounds of Abnormal Results.  He offers is a free 37 minute consultation.  Why 37 minutes?.....well who would remember a free one hour consultation.  Everyone remembers the quirky 37 minute consultation.   

With that in mind I have come up with 8 steps to a successful Management Buyout.  37 would be far too many.  Why 8?  Why not?  A quick googling tells me that in numerology 8 represents hard work and lessons learned through experience, and more than any other number, eight seeks money and material success.  Doubt if I believe it, but it seems appropriate!

So here they are:

Step 1 - Assess the opportunity. Be confident in your decision and if you have any fundamental doubts about doing an MBO - don’t do it. You will typically have to invest the equivalent of one years gross salary in the deal. You can borrow this relatively easily, and can usually increase your salary to cover the interest costs; but you will still be expected to take the capital risk. This is generally thought to be the level at which you will be fully committed to the business but still able to sleep at night.

Step 2 – Assess the Viability of the deal - Work out how the business can grow and make money. You don’t have to have a growth plan to do an MBO but it certainly helps and will allow you to grow the value of your shareholding.

Step 3 - Create a credible business plan. This must have a good executive summary as financiers DO make quick decisions.  It should also show that you have a firm idea of what you will do once the deal is done. A good plan can form your initial budget for running the business, a poor one will sit on the shelf.

Step 4 - Reach agreement with the seller. Usually you will want to avoid doing this negotiation yourself as it can become fraught. It is useful to have an adviser to be the “bad guy” and negotiate on your behalf.

Step 5 - Raise finance. Whether its venture capital and banking, or just banking you should allow plenty of time to raise finance. This is about getting the right deal, but also you are selecting a business partner – especially if you are raising outside equity – and its important to go down the aisle with the right one.

Step 6 - Kick the tyres. Do some purposeful due diligence on the areas where you need financial comfort. This might be elements of the business you have not managed if the owner, or a group headquarters have handled some aspects of the company’s affairs. Your financiers will also want due diligence to support their process.

Step 7 - Close the deal. If all goes well you will be drinking champagne in the solicitors office. Enjoy it while you can, for now you will have to get down to the real work.

Step 8 - Build the company. It’s all yours now, if you have bought at the right price, properly funded its an opportunity to run your own ship, and build real value in your shares.

And of course get yourself a good adviser who has been through it before.

Telecomms Technology MBO

At PEM Corporate Finance we advised on the recently completed Management Buyout of Cambridge based telecoms technology company C3 Limited. 

C3 develops communications platforms and applications to automate call-handling.  Its products  are designed to meet the mass calling requirements of large corporates, service providers, network operators and the public sector. They are PC based, run under Windows NT, use MSSQL and are SNMP compatible.  Customers include Vodafone and O2. 

C3 equipment is used to support TV phone ins, monitoring lone workers, and helping loved ones keep in touch with troops abroad. 

An interesting company in an buoyant sector; we were pleased to help Wayne Starsmore and John Wood to acquire the company.

Have a look at the full press release at Cambridge Network or on our site.