Is a Family Succession or a Third-Party Sale the Right Exit Strategy?
THE SITUATION: Multi-generation hospitality company owned equally by two siblings ready to retire. Two children working in the business were interested in taking over ownership.
Key Owner Questions
- What is the value of the business if sold to a third-party in the current M&A market?
- Would a family succession transfer meet the owners’ and the next generations’ financial goals?
- Are the children emotionally and financially prepared to take over the entity?
OUR APPROACH
Our Master Exit Plan® approach addressed the owners’ business, financial, and personal concerns:
- Valuation: We performed an in-depth quantitative and qualitative analyses to calculate the Enterprise Value of the business in the current mergers and acquisitions market. It was critical that the owners and children understand the value in order to assess the financial viability of a family succession executed with debt financing.
- Optimization Plan: The valuation identified the current and future improvements that would need to be met in order to realize the forecasted future growth. A strategic plan was identified with associated capital costs.
- Personal Financial Plan: A financial plan, which accounted for the owners’ available assets to be used to fund their retirement, including the projected net investable proceeds from the sale of the business, was created. The financial plan gave the owners the necessary clarity to assess whether a family succession or a sale to an outside buyer would be the best exit strategy to meet their goals at this time. The plan also served as a guide in developing a tax mitigation strategy which was incorporated into their wealth management and estate planning.
- Exit Strategy: Based on the valuation, the owners’ personal financial plans, and our assessment as to the capability of the organization to meet the debt funding requirements with a family succession, and also an evaluation of the next generation’s skills and personal goals, the owners opted to exit via a sale to a third-party.
Assessments made during the Master Exit Planning process to determine the viability of a family succession:
- Does the next generation have the business aptitude, interpersonal skills, and emotional resilience to run the business?
- Will the sale structure meet the current owners’ financial goals?
- Will cash flow generation be enough to service the debt used to buy out the family members?
- Will the current owners truly step back and allow the next generation to fully take the reins allowing them freedom to execute their growth strategy?
Result
The business was sold for just under $60MM by one of our Boston-based strategic partners which was within 4% of our calculated enterprise value. The two children transitioned into positions under the new ownership. The father also provided seed capital for them to start their own businesses in the future that are more aligned with their personal passions.
According to a PWC survey, only 52% of family-owned companies expect that a member of the next generation can run the business on their own.
- Family Business Review reports that current intergenerational transfer success rates are as follows:
- 1st to 2nd - 30%
- 2nd to 3rd - 2%
- 3rd to 4th - 3%
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