Don’t Divide the Family: How to Exit a Family Business

September 12, 2023Exit Strategies, Family Business, Succession Planning

Undeniably, exiting a family business can be one of the most difficult transitions to deal with. Family politics, emotions and personalities all intertwine with business logistics.

After finalizing the transaction for a non-family business, the buyer and seller often never talk to each other again. Not so in family businesses. Under these circumstances, most business owners envision their business thriving for generations to come. They want to leave a legacy.

But there is an art to successful succession planning for a family business. 

To equip the business to succeed, as well as preserve family relationships, here are a few key elements to consider:


Establish Clear Goals

A dream without a plan will never evolve beyond a wish. This couldn’t be any more fundamental to business planning. Any strategic business measures will be futile without defining clear goals.

There are two fundamental goals for business succession planning. The first is outlining retirement and income goals. This is especially important for the founding generation.

Second is defining specific intentions for the business. Questions to be addressed include those such as:

  • What is the vision 1, 2 or even 5 generations from now?
  • How important will the family’s role in leadership be?
  • How will ownership be structured?
  • What role will outside leadership play?
  • What are options for buying out family members?

Establishing a clear vision, complete will strategic goals, will be the foundation for building a successful business roadmap.


Planning & Execution

Timing is the biggest nuance for family business transitions. Effective succession planning takes several years to formulate and execute. The more time you allot to building a strategic transition, the more attainable your goals become.

Far too many business owners wait until they start entering retirement years to begin preparing. Understand that the dynamics of a family business require more time to navigate. Decisions will need to be considered far more deeply, especially in the first generational exit.

Anticipate the process will take longer than you expect. Start earlier.


Consider Roles

Depending on the goals for the business, there will likely be two separate roles. Some family members will only have stock options. Other will have stock options and be involved in running the business.

It’s essential to clearly outline paramaters, expectations and limitations for both roles. Doing so will help ease resentment, maintain family relationships and give the business the best shot at succeeding.


Account for Family Dynamics

Family dynamics and the variety of personality styles should be given careful consideration. Each sibling has a different personality style. This could be paired with a spouse favoring an opposite temperament.

This results in a melting pot of personalities.

To further add to the mix, siblings maybe have filled different roles. Many times they are treated differently based on that relationship. For example, it’s not uncommon for a business owner to have “taken care of” or spoiled a family member. This leads to an entitlement mentality.

When structuring an exit, these relationships and dynamics come to the forefront. Correcting it will cause tension but is a necessary undertaking. Not addressing this will undermine future success.

Avoiding emotional escalations that come with family dynamics is crucial to a smooth family business transition. But if there is a tendency to avoid conflict due to a fear of rocking the boat, this could prevent involved parties from addressing underlying issues. As a result, businesses are left with a haphazard or non-existent succession plan.

The key to minimizing emotion-based decision-making is to clearly establish the purpose of the exit. Describe what a “win” looks like for everyone. Doing this gives each person the opportunity to step back and view the situation through a business perspective.


Communication

Avoid the desire to wait until everything is “figured out” to include family members in the discussion. This will only fuel resentment, creating divisions in the family.

The harsh reality is that not every family member provides the same value to the business. This will come to the forefront when establishing a succession plan. Any existing resentment must be acknowledged, and differences reconciled through positive discussions. Not doing so will only breed further resentment in future generations.

An open and honest dialogue will remove ambiguity and ease discomfort for everyone involved. Combine this with starting early, and families will be well on their way to a smoother transition.


Conclusion

The good news is that each generational transition will be easier than the first one. Family business owners who are pro-active and start succession planning early will set their business up for multi-generational success.

If you are looking establish an effective and implementable succession plan for your family business, contact us today. Together we can outline and achieve your family’s goals.