Considering your funding options can reform your succession - Forvis Mazars

However, how you use cash and debt, doesn’t have to be just about survival. It can also help businesses exploit growth opportunities, and it can unlock your succession plans. This is particularly true for family businesses that have the added layer of family ownership and legacy to contend with.

Every family business owner should take time to think about succession and what it means to them. For some businesses, it can be a clear and simple process when there are two generations who are willing (and accepting) to exchange control and ownership, however, this isn’t always the case. We have seen a growing demand for external funding to help businesses re-shape their succession and enable a cash extraction for retirement and personal wealth.

Succession can take many different forms, from a 100% sale of shares to family members or a competitor to phased succession through Private Equity investment, Management Buy-Outs, and Employee-Owned Trusts.

External funding can help owners achieve objectives that may not be realised from a traditional sale to a competitor, for instance; to gradually retire, to retain the legacy, to protect the workforce, and to receive cash now as a reward for the years of hard work. External funding can also provide a way for a business to transition between generations in a way and timescale that suits all stakeholders.

What are the main financial factors that funders investigate when looking at businesses?

Performance – What are the historical and forecast trends for sales, margins, and profits? How secure are future sales and supplies, and what potential external market factors might impact the sector?
Position – How asset-rich is the Balance Sheet? Is there a strong level of assets such as property, machinery and debtors compared to liabilities? Debt linked to available asset security can attract cheaper pricing metrics.
Cash generation – How efficiently do profits turn into cash? An important factor to assess is whether the business can pay future debt service costs (capital and interest) with sufficient headroom to manage fluctuations in working capital and trading performance.

What other considerations are important?

An appropriate debt structure needs to ensure the business’s future performance is not impacted by over gearing the business. This should be a shared aim of both business owners and external funders.
Who is driving the business forward? In the case of a Management Buy-out (family or non-family led), external funders will assess the strength of the management team and their incentive to continue the businesses success. These individuals will be integral to ensuring the business continues to perform well to repay external debt.

How does a funding process work?

Making a funding request as efficiently as possible will generate the best results.

Preparation is key:

Compile a funding pack to discuss with lenders that include:
- A background to the business, its history and transaction structure
- Integrated financial forecasts showing historical and future performance
- Key customers, suppliers, and operations
- Available security within the business
- Information on key management
Share the information pack with lenders appropriate for your business and requirements.
Lenders will discuss with internal credit teams and propose initial terms.
Once terms are accepted, due diligence from an independent advisor will likely be a requirement to give the lender additional confidence to provide the funding.
Lenders will then submit final credit applications based on due diligence findings whilst progressing to legals and completion.

So what do you need to do?

Firstly, step back and appraise your key drivers for succession, for instance, are you looking to:
- Retire and retain legacy?
- Look after and incentivise key employees?
- Protect all the workforce – an ‘extension’ of your family?
- Maximise value and move from equity value to personal wealth?
Secondly, speak to advisors to consider your options including an assessment of how external funding can fit with your objectives.

We have significant experience in structuring transactions to meet your succession objectives alongside a network of contacts across all types of lenders such as high street banks, asset-based lenders and alternative funds. We help our clients understand all debt options so we can tailor the transaction to your needs.

Don’t forget:

If you extract a significant sum of money from your business, what will you do with it?
If you are looking to retire, what will you do next – do you have hobbies to fill your time?
Always seek financial planning and tax advice to ensure you are structuring succession efficiently for your family, both now and in the future.