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Baby-boom retirement could cause succession planning problem for small firms

March 6, 2013

A leading law firm has warned that the retirement of the so-called ‘baby-boom generation’ could cause a crisis in business succession planning, and businesses may need to look for alternative funding solutions as traditional lending options continue to be difficult to access.

According to leading law firm, Hugh James, over 850,000 family-owned businesses expect to close down or transfer ownership to a third party within the next five years. However, as a result of the lending drought, the firm warms that many successful family firms may have to close down as their options for selling on to new owners have shrunk in recent years.

The problem is compounded as Management Buy-Outs (MBOs) are attracting less investment – the amount invested by members of the BVCA (British Venture Capital Association) in MBOs fell from £7.3bn in 2007 to a mere £2.9bn in 2011, and small firms were hit the hardest.

For MBOs where the investment was under £10m, the total invested over the same period fell from just over £700m to a mere £98m.

Could an MBO be a suitable alternative to traditional funding?

Gerallt Jones, a partner in the law firm, said that many small firms don’t appreciate the benefits of using an MBO to inject new capital into a business

“An owner approaching retirement can be bad for a company’s future as cash generation is prioritised over long term investment.”

“Older owners are understandably less willing to take the risk to launch new products or enter new markets, and may sometimes allow the business to take second place.”

“Traditionally an MBO would provide a route for the younger management team to buy into the business and take it in a new direction.  But with a lack of funding available for MBOs, businesses need to start planning earlier to work alternatives into their plans.”

MBO options to consider

Hugh James said that there are a number of options open to small firms, who may be facing succession planning issues:

  • A ‘phased MBO’ where the management team buys the owner’s share of the business in easier to manage chunks.
  • An MBO which is backed by the seller of the business – and repaid from future company profits.
  • An asset-finance based solution
  • Some kind of joint venture or trade sale.
  • Enterprise Management Initiatives could also be used by smaller firms