We delivered a Master Exit Plan® this week to a business owner for whom we have fielded many calls from potential buyers. His sector is very active with private equity groups (PEGs) rolling up a fragmented industry.
He also has two sons working in the business.
His primary goal in engaging in the exit process with us was to understand which exit strategy would be right for him and his family.
He thought a recapitalization (partial sale) with a PEG, in which we sell part of the business, providing liquidity for him and his wife, while leaving a minority interest ownership for his sons, might be the right choice.
It turns out a partial sale would meet his financial objectives but not his business or personal goals.
A sale to a financial buyer provides resources, both capital and expertise, to grow, but our client is not capital constrained and is able to grow from cash flow. His sons have a solid educational foundation in business and in the industry. Additionally, in their current roles in the company, they have already demonstrated their ability to contribute to a strong growth trajectory.
The owner also liked the fact that he built a business over decades as a family business serving families. A roll up to a larger financial buyer would go against their family core values.
There is a great deal to consider when handing the reigns over to the next generation….
The Emotional Rollercoaster of Family Succession
When determining the future of your business, transferring it to the next generation might seem like the natural choice and you may think it is the easiest exit. Just get Jim or Susie involved, train them up, and then smoothly step aside, right? Not quite.
Family succession is one of the most emotionally charged and complex exit strategies. It requires meticulous planning and a realistic assessment of your family’s dynamics.
The idea of passing your business on to your children can evoke a range of emotions, from pride to anxiety. It’s essential to recognize that every family has its quirks.
Reflect on your own—is your family prepared for the intricacies of running a business together?
Advantages of Family Succession
- Maintaining Family Control: Keeping the business within the family ensures that it continues to operate according to your values and vision. This approach also guarantees a high level of privacy.
- Fulfilling Family Legacy: If your business has been a family endeavor for generations, there’s often an implicit expectation to pass it on, preserving the legacy.
- Quicker and Less Expensive Transition: Without the need to market the business to external buyers, the transition can be faster and less costly.
Challenges of Family Succession
Despite these benefits, family succession comes with significant challenges:
- Financial Considerations: Often, a “family discount” is applied, which may not be as financially rewarding. You must also justify this discount to the IRS.
- Generational Dynamics: According to a PricewaterhouseCoopers survey, 70 percent of family businesses fail to transition successfully from the first to the second generation and only 5 percent survive to a fourth generation
- The first generation makes it.
- The second, enjoys it.
- The third, destroys it.
- The fourth, buries it.
Schwinn, once a top bicycle brand, is a cautionary tale. When the company transitioned to the fourth generation, leadership and innovation stagnated, leading to its downfall.
- Potential for Conflict: Succession can cause friction among family members. Unequal involvement or perceived favoritism can lead to disputes that harm both the business and family relationships.
Key Considerations for a Successful Family Succession
With such a complicated process and emotions running high, how do you stack the odds in your family’s favor?
- Consider Passion and Commitment: Does the next generation truly want to run the business? A lack of genuine interest can spell disaster.
- Proactively Plan Successor Skills and Prepare: Ensure that your successors have the necessary skills and experience. Rigorous planning and early involvement are crucial.
- Get Ready to Let Go: Are you ready, both financially and emotionally, to step aside? Holding on too tightly can hinder the next generation’s ability to lead effectively.
- Create and Follow a Comprehensive Transition Plan: Develop a detailed, actionable plan that addresses all aspects of the transition, from legal and financial to operational and emotional support.
- Enlist Help from Legacy Partners: With emotions running high and family dynamics at play, the most important thing you can do is enlist the help of a professional unbiased third party who is skilled at creating successful family succession plans. We are fortunate to have Tom Rogerson of GenLegCo on our team. Tom is an expert who has been advising families through their successful successions for decades. Learn more about Tom here.
Successful Examples
It’s worth noting that while challenging, successful family transitions do happen. Levi Strauss & Co. and Zildjian, a percussion instrument manufacturer, are examples of businesses that have thrived through multiple generations. Their success is attributed to early planning, skill development, and addressing tax implications well in advance.
Family succession is not just a business decision; it’s a deeply personal one. It requires careful consideration and honest communication with your family. At Legacy Partners, we can help you navigate this complex process to ensure the best outcome for both your business and your family.
