Many business owners in South Africa who decide to sell their companies have completed the obvious tasks, such as organizing their financials and appointing advisers. However, the sales process often disappoints or succeeds on terms that the owner did not intend to accept. According to RMB Corvest, a leading private equity firm, the issue often lies not in the financials but in the question of who, apart from the owner, can actually run the business.
RMB Corvest's view of value rests on whether earnings are repeatable, and earnings are only as repeatable as the people producing them. Succession planning is not just a governance matter to be attended to in due course but an input into the valuation of the business. Business owners generally agree that succession matters, but in practice, it is often deferred due to a trade-off between building a second layer of leadership and chasing revenue and protecting margin.
Finding the right people is also a significant challenge for business owners. Most owners have built their businesses with people they know, and a senior external appointment is a decision they rarely get to practise. It is infrequent, consequential, and expensive to get wrong, so it tends to be deferred rather than risked. As a result, succession risk remains in the background but can drive outcomes when an owner comes to exit their business.
When succession risk reaches the deal table, three scenarios tend to follow: a process can fail outright, it can complete at a valuation that is not optimised, or it can complete at an acceptable headline number on terms that keep the owner more or less where they were. RMB Corvest believes that succession planning cannot be rushed and that a successor needs to have owned real decisions through at least one full cycle before a buyer will fully credit them.
RMB Corvest suggests structuring around the risk rather than relying on price alone. This approach involves taking a significant minority stake, with the owner remaining materially invested and therefore aligned with the firm on building the next generation of leadership. The firm also takes responsibility for identifying and preparing the owner's eventual successor, rather than leaving this with the business itself.
RMB Corvest's investment approach has created liquidity for founders while a management team who had been employees rather than shareholders took the business forward as owners. The firm's network, built over three decades in the South African mid-market, consists of people who have run businesses of this kind, allowing it to often reach candidates a conventional process would not.
For business owners wondering where they stand, RMB Corvest finds an honest appraisal of three questions to be helpful: Can you take yourself out of the business for a defined period? Which revenue and supplier relationships sit with you personally rather than with the business? And is anyone on your team accountable for a profit line, rather than responsible for a function? The best outcome is to have done the work around succession risk early enough that it is nobody else's problem to solve.
Key points
- Succession planning is crucial in business sales to ensure a smooth transition and optimal valuation.
- Deferred succession planning can lead to disappointing sales outcomes or terms that are not in the owner's favour.
- Structuring around succession risk can help business owners achieve a better sale outcome.
