All business exits are emotional. As the business owner, you have poured your heart, soul, blood, time, money, and energy into this endeavor. Letting go will be the most difficult element yet.
For family businesses, it becomes even harder. Take a normally challenging situation and times it by 1,000.
What’s interesting about family businesses is that the dynamics and difficulties extend far beyond the founder’s relationship. Every family member involved in the company, either by choice or with another family member envisioning their involvement, develops a unique connection. Those can either be positive or negative.
Before we dive into the challenges, let’s touch on the structure of a family business. The founders are considered Generation 1 (G1). As you move down the line, you have family members working for other family members. When you have someone working for their parents, in-laws, aunts or uncles, that is Generation 2 (G2). While the classifications continue down the line (G3, G4, G5, and so on), I find the most challenging transitions tend to revolve around G1 and G2.
The founders (G1) have the hardest time exiting the business. Handing over the reins to G2 can be like pulling teeth. Many times the official handoff is only ceremonial, with the original founder staying involved in the day-to-day operations. Their inability to transition often taints the culture or limits the abilities of the new family member taking over.
Additionally, bloodline-based business comes with certain spoken or unspoken expectations depending upon the culture. These come into play as the business extends into G2 and beyond. Many times the preceding generation expects their lineage to continue working in the business, filling their shoes, if you will.
For the following generations, leaving the business isn’t solely a career decision. It plays into family relationships.
What’s the Objective of a Business Exit Plan?
A business exit plan is designed to ensure the successful transition of a business to an individual, investors, or another company. An exit plan gives business owners an opportunity to reduce or eliminate their stake in the business and to maximize profits from the sale of the business, or at least mitigate losses.
In the case of family businesses, there are often persistent challenges to implementing these strategies. Unresolved family issues may rear their head in the potentially stressful process of transferring ownership.
But an exit plan isn’t necessarily meant to end a business. Rather, a family business exit strategy may drive a business into a new phase of operations in which long-term goals can be best achieved in their market.
How and When to Get Started with an Exit Plan
Ideally, a business exit plan should be drafted as early in the organization’s lifecycle as possible, not on the eve of the founder’s retirement. But of course, many business owners don’t start their business with a focus on the exit.
According to a recent survey, the best time for established businesses to draft their exit plan is about five to eight years prior to the expected transition. The more time owners take to develop their exit strategy process, the better the outcome tends to be.
Most successful exit planning starts with an assessment of the business. The assessment helps family business owners to identify and resolve any pressing issues before exiting. Next, owners should decide upon a target timeframe of departure.
Then, financial objectives must be analyzed. Owners should determine how much money they need from the transfer of the business in order to maintain financial security. Tax implications are also important to consider since business owners will still have tax responsibilities after retirement.
A preliminary valuation of the business will provide more detail in regards to what the business is worth and, in turn, can have a significant impact in helping them to receive the best value from potential buyers.
But perhaps most importantly for family businesses, an exit plan must involve a targeted successor.
Who Should Be Involved in Your Business Exit Plan?
Individuals from across business operations can be involved in the exit plan to varying degrees. Investors and stakeholders will want evidence to support your plans and ensure they are repaid properly. Employees may have the opportunity to voice concerns. And it goes without saying that in family businesses, family must be involved.
I’ve worked with clients where G2 will be excommunicated from the family or removed from the will if they leave the business. G2 feels trapped in a future where exiting will cause more problems than it’s worth. I don’t blame them. There are a lot of relationships in the mix. Siblings, children with parents, in-laws, and spousal politics blend into business decisions. This blending can cause dysfunctional family dynamics.
Those surface when someone wants out.
The difficulties of mixing family and business are real. Communication and thoughtful planning are essential to navigating the two, particularly when it comes to succession planning and exits. The worst experiences stem from bottled-up emotions that are held in. One day, that individual reaches their limit and explodes. When individuals hit that point, a downward spiral ensues. Words are said that cannot ever be taken back. Relationships are severed. Families are fractured beyond repair.
Those scenarios don’t need to be the story of your family’s business. That happens when a thought-out succession plan is either ignored or not openly communicated to the stakeholders.
I’ve seen it go downhill, and I’ve seen it happen successfully. The defining factor is a strategic, thoughtful, and communicative exit with time to process emotions and recalibrate relationships. Those stories continue with both the business and family intact.
I much prefer the latter.
4 Exit Strategies When Leaving the Family Business
Passing the Business to Another Family Member
In this strategy, family members, often from the next generation, are trained to successfully manage the business.
Selling the Business
Leveraging a well-developed plan before selling, the business is sold to an individual, investors, or another organization.
Management Buyouts or Employee Buyouts
This strategy involves the management team of an organization (CEO, senior vice president, etc.) buying the assets and operations of the business. It may also involve an employee stock ownership program (ESOP).
Takeover or Phased Exit
A business owner sells a stake to a partner or successor and incrementally relinquishes managerial responsibilities.
If you would like advice on establishing a succession plan for your family business, contact me today. Together we can navigate the family dynamic and set up your business (and family) for multi-generational success.
- What is an Exit Strategy in Family Business?
- An exit strategy is a plan designed to ensure the successful transfer of a business to another owner. The exit strategy should help owners reduce stake in the business while maximizing value. This involves comprehensive planning around business finances and operations and the personal financial objectives of the owner.
- How do you Close a Family Business?
- Closing a family business involves filing dissolution documents, canceling all registrations and permits, resolving financial obligations, and maintaining records for legal or tax purposes. Most of all, closing a family business requires the difficult decision to close, which should be signified with a written agreement after consulting with your attorney.