The Owner-Manager Retirement Trap

The Owner-Manager Retirement Trap

“Retirement is the ugliest word in the language” said Ernest Hemingway. For many small business owners this often rings true. When you’ve put your heart and soul into building a business over the years, letting go of the reins can be a very tough decision to make. Even if you’re ready to walk away, many owner-managers end up feeling trapped, unable to find a buyer for their business and working-on well past their planned retirement age, with dwindling motivation.

Every situation is different of course, whether you are looking for a clean break, to carry on as long as possible or to transition from “living to work” to a less hands-on role, where your business provides an ongoing interest as part of a more relaxed way of life in retirement. There are challenges with every option and as ever, preparation and planning are key to realising your goals.

According to the Forum of Private Business in 2015, 59% of business owners intended to sell their business to help fund their retirement. This is not a surprising statistic but in our experience, we would estimate at least two thirds of businesses marketed for sale don’t find a buyer, resulting in the owner-manager staying in the business and ultimately pushing back their retirement plans.

Alongside continuing to operate the business, the owners often find themselves spending additional time working to enhance its saleability before trying to sell again in a year or two’s time having “exposed itself” to its competitors in the previous attempt to sell. All pretty disruptive for the owner, business and staff.

If you consider the ONS statistics for sales of all types of UK businesses, on average from 2009-17 there were only about 500 transactions per year (above £1m value, selling >50.1% shares) which seems like a very small number relative to the 245,000 small and medium sized businesses (10-249 employees) in the UK in 2018.

Selling up at retirement seems to be the goal for the majority of owner-managers but for many, this ends up being far more difficult and time consuming to achieve than they expect. Why is this?

These businesses may be well-established and consistently profitable but still don’t attract a buyer. In our experience as both investors-in and advisers-to SMEs, there are a few key areas that owner-managers should consider to help navigate this retirement trap…

Is the owner-manager the key asset of business?

Many owner-managers hold the critical customer and supplier relationships and buyers may consider this intellectual property the most valuable part of the business. This can be a major concern for buyers worried about the sustainability of the business under new ownership.

Gradually transferring these relationships from the owner-manager to the senior management team can mitigate this but this is clearly not an overnight fix. Many years of planning are often required to ensure the right people are in the right positions so that the business being sold genuinely “owns” these relationships.

The well-trodden compromise here is for a portion of the sale value to be deferred, making it conditional upon the performance of the business under new ownership, which is obviously not ideal for the vendor who is handing over control of the business whilst wanting to protect their deferred consideration – an uncomfortable compromise.

The business may or may not need a replacement for the retiring owner-manager depending upon the buyer but if the key relationships have been ‘handed down’ to the management team, this should help achieve the highest value and cleanest exit at retirement.

Maximise your chances of finding the best buyer

You may spend a lifetime building value in a business and it has probably generated a very comfortable living but, for many, the pay-day when finally selling your company is the most important of all.

The team here at Seneca have come across almost every scenario you can imagine, from owners selling up over a pint in the pub to trying to hire City investment banks to sell their companies, before discovering their fees will be more than the value of the business!

There is no right or wrong way to do it, in our opinion the key is good, old preparation. “By failing to prepare, you are preparing to fail” said Benjamin Franklin. And you only get to sell your business once so it’s worth doing it properly.

So…where do you begin?

A good place to start is getting to know more about the process of selling a business.

Initial discussions with your accountants, corporate finance advisers, lawyers and potential investors can be held without commitment or cost and are incredibly useful in helping formulate your own objectives and testing how realistic they are. Quietly engaging in these discussions a few years before you plan to retire is quite sensible.

When committing to starting a sale process, we would always recommend taking appropriate advice which would, as a minimum, include an experienced corporate lawyer and in our view (as a potential buyer of businesses) hiring a corporate finance adviser is generally an investment that will more than pay for itself. Your advisers will help ensure the business is presented accurately but in the optimal way to attract interest. They will manage a large part of the process ensuring you have time to continue to focus on the performance of the business, as the last thing you need when trying to sell is a downturn in trading.

Advisers will also plan a process that maximises competitive tension, even if you think there is only one good buyer. It’s important to keep control of the transaction, with competitive tension being the best way to achieve this. Also, a corporate finance adviser will usually be able to review and access overseas buyers as well as companies which you may never have come across or even considered as acquirers. There is a significant amount of inward investment activity, with over one third of buyers of UK businesses between 2009 and 2017 emanating from overseas.

Carefully consider who is being approached as a potential buyer

Very large trade buyers may appear to have the strongest rationale to acquire your business but getting high enough up their agenda for them to prioritise your transaction can be a real struggle. As with all trade buyers they never have to make an acquisition – it is always easier to say no! Competitors present different problems – are they just fishing for information? A carefully managed process can help mitigate this risk and ensure they don’t walk away with your trade secrets.

The other, often overlooked pool of potential buyers for owner-managed businesses are private equity (“PE”) investors. One obvious difference is that it is their business to buy businesses. It’s unusual for them to outbid the most interested trade buyers where there may be significant commercial synergies but private equity can present many benefits for the retiring owner-manager when compared with offers from trade. Introducing private equity buyers into a sale process will, in our opinion, only increase the likelihood of meeting the vendor objectives. It will drive competitive tension without the commercial sensitivities of talking to a broad range of trade buyers and ultimately significantly increasing the chances of delivering a deal.

So why would you consider Private Equity over Trade buyers?

As private equity typically invest in businesses on a standalone basis and don’t have the ability to generate revenue and cost synergies, sellers may be concerned that they won’t achieve the optimal valuation for their company. However vendors rarely find a trade buyer who is both acquisitive and willing to pay the vendor for the synergies they plan to deliver, so this valuation differential is not as common as perceived.

The flip side of this coin is that PE buyers are more likely to preserve the independence of the business and will look to deliver growth, which may lead to better opportunities for staff, as opposed to the risk of redundancy as cost saving exercises are carried out. The legacy of the business and impact on staff are often key concerns for many owner-managers whether their name sits above the door or not. PE can offer exceptional opportunities for the management team going forward, including a share of the equity, as they seek to align themselves with key members of the team. PE can also offer owner-managers the opportunity to stay involved, typically as a Non-Executive Director and retain an investment in their business which is often seen as a win-win for both buyer and vendor.

It’s worth noting that Private Equity comes in all shapes and sizes. There are hundreds of investors in the UK alone, from business ‘angels’ and family offices through to large international PE houses investing in multi-$bn deals. Your advisers will be able guide you to the most suitable based on their investment criteria and approach.

Could Seneca Private Equity buy your business?

Seneca Private Equity looks to invest up to £5 million into SMEs across all sectors, typically generating profits of up to £2 million. We position ourselves as true partners of the management teams we invest in and we will work constructively to deliver growth, ultimately creating value for all parties.

There’s a lot to think about as an owner-manager approaching retirement. If you are looking to realise value from your business, we’re always interested to discuss your plans and help you establish your objectives. We might not be the right investor to buy your business and we might not be the right adviser to help you sell your business but Seneca is entrenched in the SME market. We are always interested to meet business owners and ambitious management teams and we certainly have the tools to help owner-managers navigate the retirement trap!

Please contact us if you’d like to hear more…

Andrew Stubbs – Head of Private Equity

Paul Leyland – Investment Director

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