A rapidly changing market is not for the faint hearted and, for some, it is considered too big a mountain to climb, whilst others relish the idea of embracing change, meeting the challenge and tackling it head on.
Here we speak to Ollie Newbold and Will Abbot, both of whom are partners from the specialist accountancy and advisory firm Randall and Payne as we consider the issue of succession planning in the sector and explore the various options.
Planning ahead to maximise value
“After working with a client for many years in the oil distribution sector, the shareholders decided that the time had come to explore all their options for succession planning. We continue to take the same approach with any client seeking to plan an exit. When approached by businesses we look at all options available to them including Management Buy Out (MBO), Employee Ownership Trusts (EOT), a trade exit and, potentially, handing down to the next generation.”
Telling us more about his experience of succession planning within the industry, Ollie notes that the first top tip he would have for anyone considering an exit would be: “Ensure you set out a clear succession plan well in advance.”
“By thinking about your succession plan 3-5 years in advance, an effective exit strategy can be prepared and adapted. This is particularly important as it allows business owners to understand the current value, allowing you to compare this to your personal requirements.
It also allows you time to establish areas that are eroding business value and areas which are improving it, thus providing clarity over how to maximise business value in readiness for exit.”
“Notably there are some key areas specific to the industry that can be addressed during this planning period. Essentially, the shareholders then have peace of mind that the business is well placed when the time comes for an exit”.
Considering the head and the heart
As noted in previous Fuel Oil News articles, part of the industry charm is that many oil distributors are family-owned and run. These businesses have been nurtured over the years through generations and have required time, energy and investment. Ollie notes that when he discusses exit with business owners, it is important to ascertain what factors meets the vendor objectives.
Ollie recollects: “When advising the Darch family on the sale of their family business it was important to all members involved that the business was not commoditised, and that the legacy of the business would continue under new ownership. We appreciate that there is great deal of history and emotion attached to these businesses. We therefore accept that a decision to commence a plan to exit can take some time to make.”
Whilst much of the emphasis of this article is around exit planning for a trade sale, there are other options open to those planning for the future also considered.
Management buyout (MBO)
Some companies enjoy a long-standing relationship with their employees, many of whom have steadily climbed up the employment ladder into management positions. Ollie has advised on a number of MBOs and observes: “MBOs allow a strong second-tier management team to combine resources to purchase shares from the business owner.
“This gives them the opportunity to develop the business using the skills, experience and knowledge that they have gained in their employment. It is important to note that an MBO does require significant levels of funding, however, there are different sources of finance that can be utilised to facilitate the transaction”.
Employee Ownership Trust (EOT)
Many readers will be familiar with the well- known high street brand, John Lewis, which is owned by its employees and is a standard bearer for companies which are owned in this way. The Employee Ownership Trust model allows the employees, as a body, to hold the shares of the business in trust, as well as having direct input on how the company is run.
The model encourages greater commitment and engagement from staff, as well as business resilience, whilst stimulating profitability and productivity. As Ollie notes: “Up to now this is a less commonly used method of exit, although it is starting to become more popular with a recent example being the sale of Richer Sounds.
“It can be equally as effective as more traditional strategies, when used in the right environment, and there are tax benefits for both the seller and the employees. These transactions are generally more effective in companies with a very strong team-based culture.”
Passing the business to the next generation
Family business succession is the process of transitioning ownership of a business to the next generation of family members. In order for this to happen, there are a number of technical processes which need to be undertaken.
Will remarks: “The first piece of advice we would give would be to ensure there is a very clear vision of how the business would be owned and managed in the future.”
Whilst a trade sale might need to be planned 3-5 years in advance, family succession planning is likely to have a longer time scale.
It can be viewed as a more straightforward option but family succession has all the same challenges as any other form of exit with the added layer of the complexity of family relationships.
The ‘IIGE’ approach – Improve. Invest. Grow. Exit.
Succession planning requires time and commitment. Where it is done well, it can often, in the early phase, identify unrealised opportunities which have the potential to build further value in the business.
By using this knowledge to build a strategic plan, business owners can analyse the business, as it is today, in order to create a formal plan for tomorrow. Explaining the IIGE approach Will comments: “Our approach involves breaking the exit strategy in to four steps: Improving profit and cash generation; Investing this cash appropriately to drive Growth; timing the Exit to take best advantage of the resultant increases in value.
Improve:
Improvement comes from within and must be regularly monitored with actions taken in order to deliver results as Will explains: “It is important to note that improvement is not just based around finances, there are other interpretations which are equally as important such as managing efficiencies as well as strategic planning to maximise resources.
“By reviewing a breadth of issues, business owners can identify ways to optimise business performance and subsequently drive growth and profit.”
“Frequently, when reviewing this point in the succession plan, we are able to gain an understanding of how the business works and, through our experience, often provide advice on issues that have previously been overlooked.”
Invest: What do I invest in and how do I do it?
Once areas of improvement have been determined, a clear strategy can be defined which will help identify the areas of the business that would potentially benefit from investment. This may be a combination of human and capital investment.
A case in point: Applying investment in the correct areas should then act as a catalyst for growth in business value. An example of this was when Ollie worked with Hobbs Bros. Limited and led strategic discussions around the need to invest in their depot to allow the business to move to the next level and prepare for exit. This culminated in financing and building a £3 million, state-of-the- art, purpose-built facility in Gloucester, allowing the company to increase oil reserves and serve a much wider client base. This helped them to expand the business and complete a successful sale to an ideal buyer in Ford Fuels Limited – a South West firm built on the same family foundations as Hobbs Bros. Ltd.
Ollie comments: “Our work with Hobbs Bros. Ltd, clearly demonstrated how succession planning and expert advice in business investment is so important, prior to exit, in order for vendors to achieve a fair price upon sale.”
Growth:
Improvement and investment will become the driving force behind organic growth however, there are other options business owners can explore when reviewing their succession plan.
“We have worked alongside business owners who are looking to acquire an additional business as part of their own succession plan,” Ollie explains. “Through the acquisition of the right business as part of the plan, business owners can create a larger, more diverse company with greater synergies which will, in turn, create a stronger business for a successor or when preparing for a business sale.”
Exit:
An exit from a business is a complex and detailed process that most business owners will only do once in their lifetime, and it is important that it not only achieves the best future for the business, but also ensures that the owner is ready for life after exit.
Being prepared for exit is not just about knowing when the business is at its maximum potential sale value or understanding that the time is right to hand over the reins, but it is also important to ensure you are ready too as Ollie comments: “Business owners become inextricably linked to their business and being the leader can form part of their own identify.
So, when planning to exit, don’t just consider futureproofing the identity of the business after you have left and safeguarding the brand and the employees, you must also prepare yourself for the lifestyle adjustment.”
Facing a choice
For oil distributors the current marketplace is one of rapid change. Given that a large number of oil distribution businesses are small or medium-sized, the additional, impending changes in the industry may be daunting, such as:
- adopting new fuel types e.g., HVO and other future fuels
- new legislative regimes e.g., red diesel, coal usage
- adopting new technology e.g., adapting software and websites to the changing needs of consumers
Fundamentally, despite the changes that are afoot, established and reliable oil distributors have a fantastic asset that must be protected. In order to do so, there is a choice to make:
“Do we relish the opportunity that this changing marketplace provides us, or do we recognise that we are not prepared to invest hard earned reserves in new skills and technology?”
Whichever route is chosen will be the right choice for the individual distributor, however, both require careful planning in order to maximise the opportunity.
Relishing the challenge of change
If you relish the challenge of the changing market, perhaps you need to consider:
- How do we become a frontrunner in this changing marketplace?
- Who would be our target customer in this instance?
- How do we use the strength and credibility of our existing brand to best effect?
- How do we demonstrate our commitment to the adoption of future fuels?
- How and when do we upskill our team for these changes?
Ready for a different future
If you are not ready or prepared to adopt the level of changes that will inevitably be required in the coming years, perhaps you need to think about:
- Is now the time to consider an exit to crystallise the value of the asset we have nurtured?
- Should we understand the value of the business now so we can establish whether there is a value gap to address?
- How can we maximise value in a relatively short time frame?
- Have we got some legacy issues we need to consider dealing with such as environmental issues at depots?
- Have we got a strong second-tier management team that a buyer can rely on? If not, what can we do now to address this?
- Are there other regulatory issues that need to be dealt with or that we can use to build confidence with a buyer such as Operator’s Compliance Risk Score, DGSA reports and Vehicle maintenance reports?
Standing out from the crowd
In summary, there are a number of ways in which an exit can be achieved, however, there is certainly no shortage of cash rich potential buyers that are hungry for acquisition opportunities. The expectation from these buyers is that, with the changing marketplace, there may well be a number of opportunities available to them in the coming years.
Given that expectation, it is even more important that a business is in great shape financially, operationally, commercially and from a legislative perspective in order to maximise sales proceeds by being the standout opportunity.
Ollie Newbold, corporate finance partner, works with ambitious businesses and their owners, handling company acquisitions and sales, financing, due diligence and valuations.
Will Abbott, business advisory partner, helps business people achieve success by bringing clarity to their strategy and to solve business problems so that they can be the best they can be.
