How M&A and continuity planning can protect and enhance value of family businesses

Cypriot SMEs and family-owned businesses, represent significant value creation opportunities. These established enterprises, often run by second or third-generation owners, can unlock substantial growth potential through strategic planning. Multiple pathways exist to maximise value: trade sales to strategic buyers, financial buyer partnerships for expansion, management buyouts ensuring continuity, partial sales enabling liquidity while retaining involvement, or mergers creating synergies. Early succession planning, shareholder alignment, and professional guidance empower owners to achieve optimal outcomes while preserving legacy and creating lasting shareholder returns.

The reality faced by Cypriot family businesses

Amid the current rapidly changing economic environment marked by radical technological advances, increased competition, changing consumer habits and new innovative ways of running a business, many Cypriots companies face similar challenges linked to the familiar ‘Cyprus reality’. These challenges are often more evident and impactful for SMEs and family-owned or family-run businesses, which represent most companies in Cyprus (estimated to be over 80% of all companies).

Challenges include augmented succession and continuity risk, misalignment of goals and vision amongst shareholders and management, loss of competitive edge, financial and operational instability, just to name a few. The most significant ‘silent’ risk, however, is that such businesses are still closely tied to the sole owner-founder or the family members/shareholders. Many such companies in Cyprus, have been successfully operating for a few decades, now form the backbone of the Cypriot  economy, and are potentially run by the second or even the third generation of family owners. They are called upon to explore viable approaches to enable business continuity or a potential successful exit, ensuring the value created through the years is safeguarded and potential return going forward is maximised. When there is no clear successor, the issue is not only who becomes the leader or the CEO; it affects value, bankability, customer confidence, day-to-day resilience, as well as financial and operational viability.

The founder’s dilemma

Such businesses demonstrate various key common characteristics, such as:

• Key relationships, namely key client accounts, suppliers, landlords, regulators, typically sit with the owner.
• Decision-making predominantly lies in the hands of the owner (in the case of a sole shareholder) particularly around pricing, recruitment, resources, and operational matters.
• Multi-stakeholder decision-making (involving family members and shareholders) risks delays and inefficiencies due to competing interests and conflicting viewpoints.
• Know-how and governance are typically under-documented and poorly recorded.
• Under-empowered second line of capable managers who can take on the business and move forward.

Assessing the risks of inaction

The short- and long-term impact on such businesses is multifaceted and may manifest itself in several ways. Impact could affect:

• deal value achieved in a potential sale, with lower multiples, earn out, or retention holdback mechanisms to account for the perceived ‘key person risk’ element;
• operational fragility where the absence of key decision makers and availability restrictions could slow or halt decisions and compromise execution and delivery;
• customer and supplier risk as major customers may wish to reduce their exposure based on disruption perception in service and impact on quality, suppliers may tighten credit terms based on perceived financial or operational instability;
• people and talent risk: as an unclear future leadership structure may trigger uncertainty and lack of vision, resulting in high performers and key staff departures; and
• legal, tax and estate complexities, where should the owner become incapacitated in the absence of appropriate corporate authorisations, authorities, decision making and estate planning are at risk.

Strategic pathways and options for continuity

Early action and detailed analysis of potential options, depending on the culture and appetite of each organisation (each with their own pros and cons), can enable companies to relieve themselves of these challenges depending on where the respective business is in its lifecycle, its financial, operational and commercial stability and liquidity. Such options include:

• Trade sale to a strategic buyer typically involving a sale to a competitor, customer or larger group or entity entering the Cypriot market or the particular sector.
• Sale to a financial buyer typically by selling to a fund interested in retaining robust management and team, a stable cash flow business model, focusing on scalability, growth and expansion.
• Management Buyout (MBO) or Employee Buyout with the acquisition of the company by a capable second line of existing managers or employees, allowing continuity and often supported by bank or vendor finance.
• Partial sale of a minority or majority stake of the business whilst retaining a proportion of the equity and/or a Board member position and role. This option allows the shareholders to enjoy some liquidity whilst still retaining the benefits of a full exit and may use the capital to drive growth.
• Merge with another entity (business combination) where synergies can be generated and realised by combining the business with a peer or complementary entity via a cash or in-kind consideration (shares), offering the owners the opportunity to step back over time.

Securing the legacy and proactive preparation

Awareness, early preparation, succession and continuity planning, emotional disengagement and shareholder alignment are fundamental success factors. When executed properly and with the appropriate support and advice, they can considerably improve deal value and reduce potential deal timelines.

Navigating through complex transitions requires objective guidance, and our team at Deloitte, has the experience and expertise to advise owner-founders and family-owned businesses in understanding the ‘as-is’ state, identifying underlying risks, evaluating the possible options and actions tailored to the needs of each organisation helping to ensure sustainable value creation.

Published in Gold Magazine's special feature: "Mergers & Acquisitions Specialists & Consultants"