Why a clear succession plan is the secret to retail’s biggest acquisitions

What retail owner hasn’t observed a major acquisition or sale play out in their industry and dreamt of their own irresistible offer from a potential buyer?

Zimmermann changing hands for $1.75 billion. Bondi Sands being snapped up for $450 million. Tattarang sweeping up the iconic RM Williams and Akubra brands. All were life-changing deals for Australian company founders and executives.

The deals were all impressive in scale with a common factor: a clear succession plan that allowed the company to react quickly when a sale opportunity came along.

Despite the obvious soundness of succession planning, there remains a deep disinclination to create such plans among many middle-market business leaders.

Businesses should seriously consider addressing this. Australia is preparing for the mass retirement or exit of as many as 1 million business leaders. And it’s estimated that the owners of 40 per cent of Australia’s businesses are within 10 years of retirement age.

Succession planning is the best avenue for these departing leaders to avoid a legacy vanishing without a trace. If a sale is part of the plan, an introspective look at all the options is necessary to determine which buying market is most suitable.

Existing management

For many years, existing management is the first option. Confidentiality isn’t an issue, with the management team already having a good working knowledge of operations.

Management was probably hand-picked by the owner or founder as seen as a safe pair of hands to carry the business forward, which is reassuring for staff, investors and suppliers.

One key element to consider in a management buyout is funding. Often the management will not have enough capital to fund the full acquisition price.

In this scenario, the founder may need to offer vendor financing, which generally requires several years to be fully settled.

If you are a founder who may struggle to let go of running the business with a vested interest, this can create problems for both the founder and the management team after the deal.

Local competitor

Confidentiality comes into play when considering a sale to a local competitor but that could be a logical home for a business, even when it is on the smaller side.

This plan has privacy hurdles to negotiate in sharing detailed information with a competitor, not to mention that a founder may have to take a deep breath, especially if a rivalry was somewhat bitter or tense.

Synergies with a local competitor may result in job losses, the consolidation of brand names and other combined effects, which may not be palatable to the selling founder and will require a communications plan to reassure staff and other stakeholders.

On the plus side, there are opportunities to push for a higher price as a result of the benefits that the buyer stands to gain from the absence of a competitor.

International competitor

An overseas buyer’s objective is usually to obtain an access point into Australia and potentially the broader Apac region, or to widen its existing footprint.

There are fewer concerns with respect to confidentiality, as the acquirer is not a direct competitor, although in some cases it is a group that holds competing brands.

Typically, to attract the attention of an overseas buyer, the business for sale should be of a scale that justifies entering a new geography or territory.

Given a buyer usually has little on-the-ground presence, an owner or founder typically will have to continue working in the business, at least for a transitional period.

Private equity

If your business has earnings of $5 million or more, and strong growth prospects, private equity might be your preferred outlet.

Private equity firms typically don’t acquire 100 per cent of the business upfront, but they do allow the owner to take some cash off the table now while still sharing in the future upside of the aforementioned growth.

These sales can be attractive for the owner or founder who wants to keep the band together and stay in the business over the medium term, but despite some of the eye-watering sums you’ve heard, private equity players typically don’t pay as much as trade acquirers.

Private equity generally isn’t a long-term home for the business being sold, given it seeks rapid growth before selling out within the medium term.

The common thread

A successful sale, whether to management, a competitor, or a private equity firm, is not just about the right buyer – it’s about being ready when the time comes. It also pays to know your potential buyer.

The data suggests that the time and complexity involved in passing the torch is being heavily underestimated.

The latest “Pitcher Partners Business Radar Report” found one in five business leaders either didn’t have a succession plan in place or didn’t know if one existed.

A further 4 per cent didn’t think they needed one. This reluctance to plan ahead is putting the future of many middle-market businesses at risk as Australia prepares for an exodus of business leaders.

Don’t ignore the issue that risks putting that legacy at risk and don’t wait for impending change. Start succession planning conversations early, know your buyers and be ready when the opportunity presents itself.

This story first appeared in the November 2024 issue of Inside Retail Australia magazine.

The post Why a clear succession plan is the secret to retail’s biggest acquisitions appeared first on Inside Retail Australia.