How much money needs to be taken out of the business during transition?
What level of capital do the current business owners, generally the parents exiting the business, need to extract from business at the time of the transition?
The higher the level of capital need the greater the pressure that will be placed on the business and the equity stakeholders.
In the majority of cases, the incoming generation will not have sufficient capital to buy out the exiting generation.
This will require the vendors to maintain a continuing investment in the business or for the business to take on an increased level of debt. Either scenario needs to be assessed for its sustainability either at the business or shareholder level.
In many cases the exiting generation will want to maintain a level of equity investment. This might be a means of retaining an interest in the business or alternatively staging their transition. In either case, it is important to map out the capital transition both from a business and shareholder perspective. This needs to be documented and signed off firstly from the business’s perspective and then by both generational groups. No generational transition should be undertaken without a clear and agreed capital program.
