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Written by: 
Ryan M. Gorman, CPA

As the owner of a family business, you have spent your life creating value that can eventually be leveraged to help your family.  Your business has a natural lifecycle, with natural inflection points – including transitions and exits. Thinking now about how your business will negotiate an eventual leadership transition will help you maximize the value you have worked so hard to create.

Few family business owners like to think too hard about succession planning.  They prefer to operate in the here and now, giving all of their energy to building the business and creating a future for their family.  But in doing this, often times families are neglecting to create the best possible situation farther down the road.  By taking several critical factors into account, you can create a plan that allows you and your family to reap the greatest benefits from your work – either through a planned wind-down, or in the event of an emergency.

It’s important to keep in mind that every business faces the succession questions.  Every business has this inflection point – whether it’s because you want or you need it.  Exit strategies aren’t just about getting out – they’re about putting in place the plan that will give your family the best chance of benefitting from your work. 

If you find yourself in a position where the company will not naturally pass to the next generation, there are three basic options for exiting your family owned business: 

  • Wind it down
  • Sell to a competitor or other outside investor
  • Sell to your management team/employees

As you think about these options, know that it’s a good idea to revisit your succession plan annually, giving consideration to your industry, your competitors, opportunities on the horizon, and the considerations for your personal life.

WIND IT DOWN
There are some compelling reasons that a family business owner might want to just one day hang up the “gone fishing” sign and walk away for good.  Some of these reasons are external; for example, the market has become too competitive, there is not much more innovation left in your field (for example, your business manufactures rotary phones), or your margins are no longer sustainable. 

Some of these considerations might also be internal, including the possibility that you have a sense of completion around the mission of the business, or simply that you are tired and no longer have the same level of passion for this work that you used to.              

There are some positive aspects to making the decision to simply close the business and walk away.  In this option, you can exit quickly, with limited stress.  Any cash left in the business can be easily extracted, especially if you own your own building, as many family owned businesses do.  Downsizing or closing is a simple process – just stop taking orders, finish those in process, liquidate your assets, pay off any outstanding liabilities and that’s it.  And there is no need to deal with any third parties: you can undertake the effort on your own timeline, with no need to answer to others – no negotiations, no worries about valuation, no legal fees.

While this may seem like the easy way out, there are some potential drawbacks from this option.  First and foremost, consider your loyal employees.  Often in family businesses, employees are treated like family, and a wind down means the potential layoff of potentially long time and loyal employees.

You lose the opportunity to profit from your “intangibles;” for example, your brand equity, your customer list, your sweat equity, and any special knowledge that you have amassed over time.  Although these assets are not measured in physical products or cash, they do have a value, and you will want to carefully consider whether or not you are willing to give up that potential value by simply walking away.

SELLING TO A COMPETITOR OR OTHER OUTSIDE INVESTOR
Should you find yourself in a situation where there is no next generation to take your place, but maintaining your legacy is important to you, this could be a potential option to consider, rather than simply winding down the business. 

A strong consideration of this option is the potential to protect some of your long time and loyal employees. If you have an attractive management team in place, this can be an excellent way to protect them.  And if you would like the option to maintain some role in the business, but significantly limit your role, this could be an excellent option as well.  

Planning for this eventuality is critical, because if you have the energy to do it, this option will likely net the highest value for your business: no one will pay more for your business than a competitor.  Should you have a product that remains desirable even though you wish to change your role in the company, this is an excellent way to drive up the sale price of your business.

The drawbacks to this option are not only tactical, but can also be emotional.  Are you prepared to actually sell to a competitor against whom you have been competing with for your entire career?  For some family business owners, this would be an untenable position.  Additionally, the sale of a company can be painful or emotional, and if your competitor wishes you to stay on board, you must be ready for potential conflicts of corporate culture and much less authority to influence change.  

In addition, potentially costly negotiations can take a long time – perhaps longer than you would like, and adjustment clauses can elongate the time period for payout to a year or more.

Keep in mind, however, that as the owner, you may have to finance the transaction and be paid back over time.  If your new team is borrowing from you, you may still have more invested in the company than you had wanted. 

And lastly, it could be very challenging to give up control of the company to people you know well and have traditionally managed in the past.

Of course, you don’t want to consider exit strategies right now; but this could potentially be the biggest challenge that your company ever faces.  It is critical to undertake this planning now, not when it’s time to retire, or, even worse, when life circumstances take a dramatic turn.  Doing so means that you will have the right management team in place and avoid potential conflict and power struggles.

Succession planning is a significant undertaking, but it does not need to be daunting, even for family-owned businesses. There are people who can help you with this process.  Tap your accountants for advice; we are excellent sounding boards and can show you available options, give you the pros and cons for your specific situation, and we can help you see things that you might not have considered. 

Giving consideration to your exit strategy today will give you the peace of mind to grow your business to the point where you can reap the benefits tomorrow.  

If you have any questions, contact Ryan M. Gorman, CPA, Member of the Firm, at 413-726-6870 or rgorman@wolfandco.com.