Succession Planning
Greg Cusack
Aston Ryan Malcolm
ARM Financial Advisors
Succession Planning
Options for outgoing shareholder
• Sell External
• Sell Internal
• Combination of both
Focus today on Internal transfer of shares…
Succession Planning
A potential change of ownership impacts everyone…..
• Existing Partners/Shareholders
• Managers & Staff
• Clients
• Banks
Succession Planning
Considerations – Outgoing Shareholder
• What are their expectations?
• What is their timeframe? (immediate or gradual exit?)
• Will they remain in the business post sale?
Succession Planning
Considerations – Incoming Shareholder
• Who are they?
• What are their expectations and needs?
• Are they a good fit?
• How will other staff react?
• Are they able to fund a purchase?
• What are their future plans?
• How many shares would be offered?
Succession Planning
Considerations – Other
• What type of valuation model is applied?
• What does the existing shareholder agreement allow for?
• Is the offer attractive and fair to all parties?
• Can the business assist with funding? Under what terms?
• Partners Salaries – At what point will new shareholder be
entitled?
• What are the new shareholders voting rights?
• How many shareholders do you want? “too many cooks…”
• Will shareholders personalities match or clash?
• Directorships?
Succession Planning
Valuation Model - Sample
Tangible Assets
• Cash + Debtors – Long Term Debt – Staff Entitlements
Intangible Assets
• Goodwill (varying methods of calculation)
• Less Discount??
• Accounting Practices – cents per dollar turnover
• Financial Planning – multiple of recurring income/EBIT
Note – All practices have differing circumstances which makes no set
formula possible.
Succession Planning
Example 1 – Gradual Sale
Share Available – 40% over 4 years ($1,200,000)
• Offer 2 x Senior Managers – 20% each over 4 years in 5% tranches
• Funding – 50% from Business & Balance Self Funded
• Funding from business P & I – 7 years
• Price of each parcel purchased depends on annual valuation
• Partners Salary Package when 20% equity is reached
• Profit – 50% paid as dividend, 50% invested back into business.
Succession Planning
Gradual Sale – Challenges / Road Blocks
Funding - Generation X
• Own Mortgage
• Available Equity to borrow additional $300,000
• Available Cash Flow – To repay total borrowings (6.5% pa) over 7
years cash return on investment would need to be approx 18% per
annum or there would be negative impact on personal cashflow
($8,900 p/mth for $600,000 loan).
• Incoming Shareholder – ‘The more profitable I make the business,
the more I have to pay for my share’
• After one year, exiting partner may have diluted shareholding <20%
therefore no Partners Salary – Better off selling in one tranche – 4
years time and get partners salary.
Succession Planning
Example 2 – Share Options
Share Available – 40% over 4 years ($1,200,000)
• Offer 2 x Senior Managers – Provided options to purchase 20% over
4 years – Option expires in 4 years
• Exercise price set at start (not future valuation) i.e $600,000 = 20%
• Funding – 50% from Business & Balance self funded
• Funding from business – I/O – 2 years P & I – 5 years
• Business Guarantees Dividend meets interest for first 2 years.
• Partners Salary Package when 20% equity is reached
• Profit – 50% paid as dividend, 50% invested back into business
(subject to dividend guarantee)
Succession Planning
Share Options – Challenges / Road Blocks
Funding - Generation X
• Own Mortgage
• Available Equity to borrow additional $300,000
If incoming shareholder exercises option in 4 years then has had the
opportunity to increase the value of the business therefore decrease need
for borrowings. E.g Exercise Price of $600,000 for 20%, Business grows to
valuation of $880,000 then 50% business borrowed = $440,000 therefore
self fund of $160,000 (Depending on current shareholders)
• Available Cash Flow – To repay total borrowings (6.5% pa) over 7
years cash return on investment would need to be approx 18% per
annum or negative impact on personal cashflow ($8,900 p/mth for
$600,000 loan).
If incoming shareholder exercises option in 4 years @ 20% would then
have entitlement to Partners Salary which increases cashflow. 2 year
interest only with a Guarantee may be an incentive for manager to buy in
due to reduced impact on cashflow initially.
Succession Planning
Sample 2 – Challenges / Road Blocks
• Incoming Shareholder – ‘The more profitable I make the business,
the more I have to pay for my share’
Now = The more profitable I make the business the more equity in my
shares I will have in 4 years.
• After one year, exiting partner may have diluted shareholding <20%
therefore no Partners Salary
Exiting Partner maintains partners salary and probably increased dividends
as incoming shareholders incentivised to improve valuation/profitability.
Succession Planning
Summary
• Different succession models suit different practices
• Cultural is important consideration
• Funding can be the biggest Roadblock
• Plan well in advance – 3 - 5 years
Succession Planning
Questions