Entrepreneurs are risking their business’ profitability and value at exit through ineffective succession planning, a new report has found.
The research, conducted by private equity house NVM, found that one in three owner-managers of small to medium-sized businesses do not have a succession plan in place for their exit.
According to NVM, a lack of planning often leads to vendors losing out on exit, by their inability to demonstrate the sustainability of the business.
The research found that 38% of small to medium-sized businesses facing an exit situation in the next five years think it is to early to start preparing for the impact this will have on the company.
However, NVM has warned that potential buyers will want reassurance and proof that the succeeding management is capable of delivering profitability.
James Arrowsmith, investment manager at NVM, said, “When buying a business a buoyant market or innovative offering may look attractive but markets drop and bubbles burst. However, effective management can steer a business through most unknowns.
“Considering the importance that is placed on management it is vital that businesses demonstrate their contingency planning when the management itself is leaving. It is simply a matter of demonstrating there is new capacity to deliver the ongoing profitability of the business.”
According to NVM, a departing owner-manager with no or an inadequate successor makes buyers nervous and therefore likely to reduce their bid or not bid at all.
© Crimson Business Ltd. 2007
