Making a success of succession

Confidential© Equiteq 2017 equiteq.com
Growing equity, realizing value
Making a success of succession

Agenda
2
Why succession
planning is so
important
Sharing
Equity
Q&A
How to choose
and mentor your
successor
Wrap
up

1. Why succession planning is important
3
The profitability and
growth track record of
your business
The current M&A
market demand for
firms in your sector of
consulting
Will profit growth
continue into the
future? The mission
critical factor
How important the
acquisition of your firm
is to any one particular
buyerValue =
Adjusted
EBITDA
Equiteq Risk
Factor
Market
Premium
Synergy
Premium
1 2 3 4

Equity value determined by 8 levers of equity value
4
Market
Proposition
Intellectual
Property
Quality
of Fee
Income
Sales &
Marketing
Process
Consultant
Loyalty
Client
Relationships
Sales
& Profit
Growth
Management
Quality
Equity
Growth
Wheel
How much are you
worth to a strategic
buyer ?
How will a buyer
structure a deal to
reduce risk ?
Succession planning & management
diversification underpins
Capability and capacity to grow and unlock synergies
Equity incentives underpin
Reasons to stay and grow value
Buyers confidence in low flight risk

Sustainable growth is valuable
Equiteq: 2016 Buyers research
Average current year Enterprise Value / EBITDA multiples by buyer group
Management
consulting
IT
consulting
HR
consulting
Media
consulting
Engineering
consulting
Private
equity
Overall
10-20%
EBITDA growth p.a.
20-30%
EBITDA growth p.a.
30-40%
EBITDA growth p.a.
6.2
7.3
7.9
6.5
7.6
8.2
5.6
6.6
7.7
7.1
8.0
8.7
5.8
7.1
7.8
7.4
9.0
10.0
6.4
7.5
8.2

Value escalation from management diversification and
incentives
6
0
5
10
15
20
25
30
35
Yr1 Yr 2 Yr3 Yr4 Yr5
Immature business Management structure
Incentives Earn out
Succession and incentives value
Earn out
Dependency
Growth
Management diversification increases growth
potential and reduces dependency
Succession planning can reduce earn out component
Incentives increase attractiveness to buyers and
likelihood of achieving earn out targets
Incentives may accelerate value growth

2. How to go about choosing and
mentoring your successor
Antonio Bonet
International Development Consulting. Sold.

Evolution of founders role
8
Founder centre
of decision
making and
operations
Founders
start to delegate
coordination,
processes,
controls.
Board decision
making for common
strategic objectives
designed for scaling
and attractiveness to
buyers
Founders role

How to choose your successor
9
Succession planning is a process not an event
Plan for your replacement well in advance
Don't wait for a crisis
Do it purposefully - it's the key to unlock future value

Succession planning is a process not an event
STEP 7
Commitment
to the plan
and Investment
STEP 5
Transition
founder role
STEP 3
Evaluate and
assess
STEP 6
On-boarding
STEP 2
Define what
good looks
like
STEP 1
Consult
STEP 4
Grow or
appoint or
both

Step 1: Consult
11
STEP 7
Commitment
to the plan
and Investment
STEP 5
Transition
founder role
STEP 3
Evaluate and
assess
STEP 6
On-boarding
STEP 2
Define what
good looks
like
STEP 1
Consult
STEP 4
Grow or
appoint or
both
Ensure Board are agreed on future
direction of the business.
Discuss succession broadly with all stakeholders.
Look at all your options.

Step 2: Define what good looks like
12
STEP 7
Commitment
to the plan
and Investment
STEP 5
Transition
founder role
STEP 3
Evaluate and
assess
STEP 6
On-boarding
STEP 2
Define what
good looks
like
STEP 1
Consult
STEP 4
Grow or
appoint or
both
Identify traits, skills, experience, competencies.
Create success profiles.
Whole management team.

Step 3: Evaluate and assess
13
STEP 7
Commitment
to the plan
and Investment
STEP 5
Transition
founder role
STEP 3
Evaluate and
assess
STEP 6
On-boarding
STEP 2
Define what
good looks
like
STEP 1
Consult
STEP 4
Grow or
appoint or
both
Potential as well as performance.
Motivation and resilience as well as capability and
readiness.
Independent view.

What tools / assessments can you use?
14

Step 4: Grow or appoint
15
STEP 7
Commitment
to the plan
and Investment
STEP 5
Transition
founder role
STEP 3
Evaluate and
assess
STEP 6
On-boarding
STEP 2
Define what
good looks
like
STEP 1
Consult
STEP 4
Grow or
appoint or
both
Build vs Buy.
Tailor a development plan.
Chair and Founder to be involved in mentoring.

Step 5: Transition founder role
16
STEP 7
Commitment
to the plan
and Investment
STEP 5
Transition
founder role
STEP 3
Evaluate and
assess
STEP 6
On-boarding
STEP 2
Define what
good looks
like
STEP 1
Consult
STEP 4
Grow or
appoint or
both
Plan for how you move aside.
Founders play a unique and important role.
Communicate the strategic significance of the
transition.

Step 6: On-boarding
17
STEP 7
Commitment
to the plan
and Investment
STEP 5
Transition
founder role
STEP 3
Evaluate and
assess
STEP 6
On-boarding
STEP 2
Define what
good looks
like
STEP 1
Consult
STEP 4
Grow or
appoint or
both
Role clarity, authority and decision making.
Knowledge transfer.
Coaching.

Step 7: Commitment to the plan
18
STEP 7
Commitment
to the plan
and Investment
STEP 5
Transition
founder role
STEP 3
Evaluate and
assess
STEP 6
On-boarding
STEP 2
Define what
good looks
like
STEP 1
Consult
STEP 4
Grow or
appoint or
both
Successor finds their stride.
Regular review.
Ongoing evaluation and development of the
management team.

3. Sharing equity
Nick Kent
Management Consulting. Sold.

How to share value and accelerate growth
20
A large investment. Get the commercials right.
Full business plan, current and future financial value assessment.
Exit alignment. What’s the plan?
Share in the increase in value – from a fair base.
Shareholder agreements for control and a clean exit.
Commercial tax awareness important when working through the commercials
but the actual tax structuring comes LAST.

Different incentives approaches
21
Options Hurdle
shares
Annual
growth
shares
Phantom
shares or
bonus
Share of the increase in value
Financial engineering to make
affordable and tax efficient.
Shadow schemes
Tax collectors favourite
Right to subscribe on exit
Often unattractive for overseas
management. EMI schemes in UK
tax efficient.
Annual allocation linked to value
increase
Can confuse short term performance
with longer term value. Often tax
inefficient

Raising capital to finance succession
22
Partial exit and personal de-risking can re-invigorate
risk taking and growth
Raising finance for partial exit creates the hurdle for
sweet equity shares to be issued to management.
Passing the baton to a team able to work with private
equity or remaining CEO for the time being (and
potentially receiving sweet equity as well!)
Potential to use as a two stage exit with succession
being work in progress. Also a route to access new
capital for acquisitions and expansion
Private equity illustration (£m)
Debt PE loan stock PE ordinary shares
Founder loan stock Founder ordinary shares Sweet equity
70
60
50
40
30
20
10
0
Initial Future
Cash
Founder roll over in
loan notes and shares
Private equity
Sweet equity for
management

4. Wrap up
23
Succession and management diversification is the
fundamental driver of equity value.
Succession is a process.
Equity incentives go hand in hand. A very large
investment deserves a strategic review of business
plans, shareholder options and capital needs.
Don’t delay.

More resources
24
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Making a success of succession

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