Succession Planning for Family-Owned Businesses

Succession planning is the process of identifying and developing new leaders to replace current leaders when they leave or retire. This is crucial for all businesses, but especially for family-owned businesses, which typically need to consider the family legacy and values they want the company to sustain in the future.

Succeeding with Succession

Family-owned businesses may hesitate to plan for the future because they are uncertain of how the interests and decisions of family members will play out over the years. However, effective succession planning will mitigate any uncertainties and set the stage for a successful transition.

Succession planning should be a strategic process, and it should start with an evaluation of the company’s current state and then with an outline of its desired future state. To begin, the leadership team should define and address the company’s goals and potential challenges. With those in mind, they should then identify the qualifications and expertise needed to meet those goals and deal with those challenges. It will then be easier to evaluate potential candidates for the role.

A Succession Journey

The next step is to seek out and prepare a list of the potential candidates. Family-owned businesses should consider options that will preserve family ownership but that also meet the needs of any shareholders, trusts, or foundations. After all options are explored, it’s time to create and execute an actual plan. With a formal plan in place, leaders will be able to more easily manage the transition and focus on the future of the company.

There are many decisions regarding the future that should be kept in mind while planning. Who should lead the business? Who should own the business? What are the common values the company needs to preserve? How should the wealth transfer? Family-owned businesses should develop answers to these questions to properly plan for the future. Seeking help from an advisor will make the process more manageable. Our team of advisors at Symmetrical can guide you through the succession process and explain the role it plays in future success. Contact us today for more information.

For many business owners, there comes an appropriate time to step away and hand over operations to a new owner. If you decide that selling your business is the right exit strategy, you may find yourself with a variety of different buyer options – and then it’s decision time. Should you sell to someone within your family? How about a private equity firm? How do you choose?

This, of course, can be stressful, especially if there is pressure to keep the company within your family. While the selling process differs with every company, the types of buyers present usually remain consistent, and there are pros and cons to each option.

Transitioning to Family

While this is a specific type of sell-out deal that may not apply to every company, it remains a very important option for those owners who are facing pressure to sell within the family. There are a couple of things to consider when deciding to go through with a sale of this nature:

– Family business sales allow for special financing – if the successor lacks the financial resources to participate in a lump-sum cash transaction, financing can be structured so that you, as the owner, receive a stream of income in exchange for your business.

– Buy-sell agreement & gifting program– A buy-sell agreement will allow you to arrange the terms of a business sale now for a deal that will occur in the future. You can also partake in a gifting program, in which the seller gradually gifts portions of the company to the family member. This has the potential to reduce estate taxes, as well as allow your successor to ease into ownership.

– Special tax scrutiny – While you may want to strike a good deal with your family member, the IRS closely examines such business transactions to make sure that the sale reflects fair market value. This is important to keep in mind.

Private Equity Groups

When faced with un-invested capital, private equity groups (PEGs) actively pursue new investments. Business owners are attracted to these strategic buyers if they wish to get substantial liquidity, while also remaining in operational control. You should familiarize yourself with the following before you decide to sell to a private equity firm:

– PEGs acquire companies as either new platforms or add-ons to current investments – a PEG that is adding the business to one of its current portfolio companies will have a different strategy than one that is acquiring the business as a new investment.

– Capital structure – Leverage may be placed on your business to enhance returns and provide access to capital for further growth. In order to keep the business moving forward, the PEG may require the business owner to retain minority equity.

– Private equity vs. seller expectations – While selling to a family member may ensure an unchanged business model, PEGs may have other plans in mind such as eliminating existing ownership and consolidating facilities.

Management Buyout

As we discussed in our last blog, management buyouts are another common exit strategy for business owners. Rather than allowing your company to be acquired by an outside investor or company, an MBO will give ownership to the company’s own management team. During a management buyout, some owners will intend to sell 100% of the company, while others will retain a residual interest.

While there are many options for business owners who want to sell their company, the best choice is dependent on the current condition and potential growth of your business, as well as the owner’s intentions of staying involved with the company.

If you are having trouble deciding who to sell your business to, Symmetrical can help. Our team works closely with middle market private equity firms and family offices who are seeking highly qualified investment and buyout opportunities. Contact us to further discuss your selling options!

Get the Latest

Subscribe to our newsletter to learn more about current mergers & acquisitions strategies