Case Study – A Successful Business Exit Strategy Through Planned Succession

The majority of business owners approach their company from an income perspective, with little regard to long-term exit strategy. Even when they approach other professionals, such as accountants and brokers, with a view to selling or exiting their businesses, the feedback they receive is not holistic or based on their personal goals.

With CPL, a high-level scientific food and agriculture industry consultancy, CMC Partner Derek Allen was able to give a unique insight that changed the way the founders of the company managed their business to prepare the owners for their eventual retirement.

Background

CPL’s activities were based around a number of separate companies, including recruitment, high-level headhunting and consultancy, in the scientific food and agriculture industry.

CPL’s business rested entirely on individuals. The two founders did the majority of sales and representation of both the consultancy and recruitment arms of the business, and a reasonable proportion of the day-to-day work as well. As both founders were in their 50’s, it was time to make a decision about the future of CPL.

Challenge

When a company’s future rests solely on one or two individuals, it is hard to see how it will continue after their departure. It may just be a case of closing up the business once they are ready to retire. However, with a lot of money reposing invested in the business, and of course a need for funds by the founders after the business has closed, this was not an viable attractive option for CPL.

There is of course a case for selling the business, but again as CPL was so reliant on the founders’ skills and management, it would take a long time to build up a business that was ready for such a buy out. The other option for CPL was succession, growing appointed members of staff to have more of a say in the business and be ready to take over management when the day came.

However, there was also a problem. The right staff were in place, and had an interest in the succession, but they did not have the funds in place to buy out the founders. And, of course, if they did have the funds, it would be just as easy to leave CPL and set up their own business.

Using other third parties as advisors would have given a restricted view on the company. Accountants, for example, wouldn’t have been able to explore succession-planning options, and brokers would only be interested in selling the business. Neither have the HR and management skills to nurture the client through to an outcome that suits all, which is where CMC Partners are uniquely placed to guide our owners through such a complicated, and occasionally fraught, process.

Approach – The Business Exit Strategy

These issues regarding succession may not have come to light if it was not for the input of Derek Allen. By reviewing CPL’s business, he was able to ask the critical questions at the right time, acting as a catalyst and giving the founders time to review what they wanted to do and put the steps in place for succession. CMC Partners’ holistic view of the business, as well as the experience of growing and selling companies, gave a unique insight into the way they were managing their business, and the decisions they had to take to prepare for the future.

CPL had to decide:

  • What was the best format of the business?
  • How could they maximise the chances of succession?
  • How do they generate value for retirement?

The answer was to have a cut off point, from which date share options were created for senior management, as part of an incentive scheme. The target was to have 50% of business shares owned by the senior management within a decade, just in time for the founders’ retirement plans to begin.

The conditions of the shares, and a Shareholder’s Agreement protecting the rights of minority shareholders, made sure that employees felt involved and were motivated by the change. They could begin to feel like they had ownership of the company. An important condition was that the shares were only owned absolutely after five years, giving employees a reason to stay with the company over a long period.

With this in place, within the decade time limit senior management owned 46% of the shares in CPL, and the founders began their retirement plans. With the support of their appointed successors, they agreed a progressive buy out plan, changing the ownership of the company and providing themselves with a long term income for retirement.

This approach needed time dedicated to HR management to ensure that the changes were accepted internally. It gave the senior management encouragement to buy in and feel real ownership of the company, essential if they were to be involved in succession planning and ultimately take over the business.

When a business’s success relies so heavily on its founder, Exit Strategies need to be in place as early as possible to ensure a smooth transition that grows the value of the company, finds a willing and competent successor and provides the funds needed to allow the founder to have a comfortable, happy retirement.

CMC Partners can help you make these important decisions now. Our holistic view of your business is founded in our experience and your own personal goals. Contact us today to find out more.

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