Exit strategy. It’s a shorthand phrase but covers a wide range of possibilities, risks and outcomes. No matter how profitable and lucrative businesses are, owners need to plan not just for success, but for succession. We all age. ‘Golden oldies’ can still keep their hands on the controls for a long time, but eventually, some kind of end is necessary.
That should be planned and executed like any other aspect of business – carefully. You cannot just lock the door and head off into the sunset. Customers, staff, partners, banks/lenders, family – there are lots of stakeholders, to say nothing of stock, premises, vehicles, capital, and all elements of any commercial enterprise to be dealt with.
Types of business succession
The main types of succession are: 1. selling the business; 2. transferring ownership; 3. merging or being acquired. These are what lawyers would call alienation – the whole thing goes to new owners.
Indeed, some purchasers will want to acquire outright and take over immediately. That is a buy-out, but others may be more cautious (or cash-strapped) and want to offer an earn-out.
That slower-burn alternative may suit the retiring owner, who brings in the new blood to build up management responsibility and grow shareholding or equity in stages. After the agreed period, they become the new majority or sole owner. This has appeal for both sides. The buyer has time to pay by instalments or to save up, the seller does not go from ‘hero to zero’, but has time to adjust.
Those are the positives, but it can be a tricky arrangement. Earn-out is more complex, involving payment of the price over months or even years, while the seller stays on as a consultant or manager. Until the final instalment is paid, the seller is at risk of the buyer succeeding or failing in the business. It may be appropriate to take security from the buyer – such as by retaining property title, or taking a security over the buyer’s assets, with personal guarantees or other instruments to provide reassurance while the transition takes place.
Choosing a successor
A key decision is who will step into your shoes, pay you the capital you are worth, take on the risks and the burdens of running the firm? It may be a partner or other senior colleagues in the business, familiar with everything, who know what to do. They could be family, perhaps the next generation. It may be a competitor or another firm in your marketplace. Again, they know your performance, have probably kept tabs for years, and can judge the fair value to offer. Or a new entrant to the market steps up, someone with money behind them who is looking for a challenge.
You want to know two main things: one is that the buyer has the price in place; the other is that you can get away clear from the business without being tied to its performance for too long.
For the first element, you will insist that the buyer shows proof of purchaser funds. This is straightforward: bank accounts or an offer of loan from a bank should be documented, and your solicitor will do due diligence on the buyer – property searches, insolvency reports, credit checking, and more. It is also crucial that you have a non-disclosure agreement (NDA) with the buyer so that if the deal falls through, your business secrets and data will not become known to other competitors.
Furthermore, every commercial proprietor should make a will, and sign both a personal and a business power of attorney.
Dealing with the unexpected
Although we have discussed the options for succession as a deliberate act planned ahead, some businesses suffer the unexpected loss of owner by death or illness, with no provision for replacement, either temporary or permanent. A business without senior leadership may fail completely, or be so hamstrung that it loses value rapidly and substantially.
For sole traders, no one can legally carry on the firm unless the owner has granted a power of attorney to a trusted friend, relative or colleague to carry on in the event of illness or mental deterioration. For sudden death, an executor is the only person with authority to step in – and that means an effective legal will already signed up.
Partnerships are slightly different. With at least one other partner, the business won’t immediately stop, but the partnership agreement, ideally a detailed contractual document, should provide for what happens in the event of partner loss. This will provide for continuity of the business, but also what happens to the partner’s capital and how that will find its way to the deceased’s family.
If the business is a limited company, that is legally a separate entity from the owner, even if he/she is a director and/or shareholder. However, it is essential the company has alternatives ready, especially if the owner who has died or fallen ill is a sole director. The company itself can grant a power of attorney, but if this has not been done, petitioning the court to reorganise the management or shareholdings can be a tortuous legal process, during which time the business may struggle to thrive – or even survive.
Business succession, retirement planning – that exit strategy we started with – these do not happen by chance or by right. The ability to move on successfully from work and management has to be a well-planned and well-constituted process. It is a commercial, personal, and legal operation, which is just as important as any other aspect of the business.
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Austin Lafferty is a Consultant Solicitor at Austin Lafferty Solicitors. Austin founded the firm in 1981 and has experience in all areas of business law.
