The Mid-Point

Recently I was talking through a succession plan, with both a vendor and purchaser. With multiple tranches of equity being sold and brought, it was an interesting discussion. Overall, a timed succession plan, or equity sell down, is designed to balance the growth of a business.

You buy 10% now when the business is worth one million dollars. You buy a further 10% when the business is worth 1.25m. Another 10% when the business value is 1.5m and so on. But why?

In an ideal world, a seller would wait until the business had reached the highest point of business valuation before selling their equity, however that is not necessarily going to work from an engagement perspective. An incoming equity holder does not want to work, for an unknown amount of time, building an asset they are going to buy at a higher price. The potential equity holder might leave the business, start their own, or take an opportunity to become an owner at a competitor’s business. In all financial services businesses, the continuity of adviser generally leads to a more efficient, more profitable solution for the business, with less risk of client loss due to changing relationships.

There is no surprise that a lot of work goes into retaining and engaging key employed advisers. Keeping them hanging with future promises of equity ownership just does not cut it. But neither does selling your business now at a lower value. Here comes the win/win.

As a potential equity holder, buying 10% now, 10% when the valuation is slightly higher and so on means that I’m not paying the end price – presumably the highest valuation the business will have. It also means I have time to touch and feel business ownership, grow into the role of business owner and have a lower capital outlay than later on. It is buying an apartment, then a modest family home, and then the Taj Mahal. It is gradual.

For the outgoing business owner, it means a gradual handover of roles, responsibilities and loss of control, while retaining key people, and securing retirement plans.

It is a classic win/win.

If you would like to talk to us about getting a win/win situation in your business sale process, call us today.

About the Author
Fiona Ettles , Hobart
Fiona is enthusiastic about informing and reassuring clients of their financial position, be it in regard to the value of their businesses, or their tax returns. She enjoys working with clients to understand their problems, consider solutions and implement plans to better their lives, whether this be in the short or long term.
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