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Succession planning: future exits

Even if you have no intention of exiting your business anytime soon, have you thought about its future beyond your involvement? Could it operate without you? The DBA’s Adam Fennelow explores succession planning, and why starting early is key.

Last month I looked at the importance of financial planning and agency owners understanding what they ultimately want out of their business. The lengthy process of succession needs continuous reassessment and is inextricably tied to your long-term business plan.

I recently spoke with an agency owner who had decided to shut his studio’s doors. He had fallen out of love with what he had been doing for the last 20 years – or rather he was no longer doing what he wanted to be doing when he set up the business 20 years ago. He enjoyed the creative process – but he now found that the day-to-day running of his own business had become a grind. So over a period of 6 months he wound the whole thing down. Fortunately he had enough in the bank to pay redundancies and make sure staff and suppliers were well looked after, but he admitted that just closing was not the ideal ending for the agency he had grown from scratch. He had not had an exit strategy.

All his effort was put into “keeping the business going” rather than thinking “if I keep the business going do I still want to be in it?” In the end it got too much. He was burnt out and needed to get out now. He sleeps better at night, but could have gained far more if a plan had been in place from the start.

What are the options for the all important succession plan? And what needs to be in place for it to work?
  1. When first writing a plan you don’t have to have a definitive end goal in mind. The timing and type of exit do not need to be defined. You just need to have a plan to make sure your agency is in a position so that those decisions can be made further down the line.
  2. You need to be able to prove that the business can operate without you. Otherwise what are you selling? If you are an essential part of the business and you are leaving, what would a buyer be getting? If, with only 6 months notice, you can’t take a 6 month sabbatical from your business then it is not ready for sale.
  3. Process and delegation are key to getting your agency to the point where you can exit. Everyone in the agency should understand their role within it. The way your output is developed should be formalised and everyone brought into it. It should become second nature for all – and manageable without you in it.

So you think your agency can now run without you? But how do you prove it? Financial acumen is the main factor dictating the sale or takeover of an agency. The buyer doing due diligence wants to make sure that they are buying a financially secure business. You can illustrate this through having years’ worth of financial data going into detail such as profitability by client, income per staff head, utilisation rates, accurate sales pipeline predictions etc.

Once you have made yourself dispensable, and you have enough financial data to satisfy the most ardent analyst what are your options?

Outright sale – this could be to a holding group (such as WPP or the numerous smaller entities), or to another independent looking to grow through acquisition. Think laterally – Marketing and PR businesses might be looking to extend their reach into the design sector, specialist agencies in one discipline might be looking to broaden their scope.

Management buy-out – this offers increased continuity for clients, but the right people need to have been brought into the business at the right time to share the journey.

Staff ownership – the “John Lewis” model. Offering share incentives on a smaller scale are a good introduction to this. Enterprise Management Incentive (EMI) option schemes are a tax efficient way of allowing individuals to own part of the company – and can lock in key staff through the succession process.

Sale to a client – an option that was highlighted in 2015 with the high-profile acquisition of Seren by EY (formerly Ernst & Young). These agencies either tend to be highly strategic in their output, or can slip into the in-house design team role, so often have one large dominant client already.

Regardless of the option chosen there will probably be a tie-in clause which keeps the owner(s) actively involved with the business for a number of years to ensure continuity. This can be the hardest part for the owner who has relinquished control. Ensure that the negotiations around this part are thorough so everyone understands their roles and responsibilities.

Those who have successfully exited their business find that their financial security gives them creative freedom to make choices for the future. This might involve starting again, or finding a new way – remaining small and concentrating on the bits that got you interested in the design business in the first place.

Expert advice

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Annual Survey Report

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About: Adam Fennelow

Adam Fennelow is Head of Services at the DBA.

For more information on DBA membership click here.
E: adam.fennelow@dba.org.uk

 

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