The Transfer of Ownership: What are Your Options?
Many family businesses are started with an eye toward establishing a lasting family legacy for future generations. If life unfolds as one hopes, the family and business mature, a successor emerges, grooming begins, and plans for transferring management and control are unrolled and implemented - ideally. But life doesn’t always happen the way it is envisioned. Key pieces of the puzzle may be missing, forcing the consideration of alternative plans or options never envisioned. This happens often for family business owners, so assessing your options as far in advance as possible is essential.
A number of factors drive the decision as to which option to consider:
- Availability of a successor. For many family-owned businesses, children are successor candidates. In some cases, none of the children emerge as qualified or interested in continuing the business. Business owners may be unable to find the right external person to bring in and groom as a successor.
- The owner’s financial position. The owner’s financial circumstances may dictate that the business be sold to raise cash for retirement or other financial needs.
- Marketability of the company. Some businesses have little intrinsic value or are facing financial difficulties due to market conditions, which reduce their value as an ongoing concern.
Any one or a combination of these factors will be the primary determinant for which option you will need to consider.
Business Transfer Options
Make it a Family Affair
Keeping the business in the family is often the first choice for many family business owners. If all the pieces are in place, it offers the best opportunity for the successful continuation of the business. It takes a lot of planning, which needs to begin while your children are relatively young. As part of a family business succession strategy, there needs to be a multi-stage development plan for the children who are candidates along with an objective way to assess their progress, interest, commitment, and competencies.
As the family and the business mature, it is crucial to create definitive ownership transfer plans that include clear objectives, expectations, roles, responsibilities, and timetables. The plan must specify how the transfer of management, control, and, ultimately, ownership will occur. Short of that, your successor candidates may become discouraged or resentful. It is important to keep their commitment level high by moving them along a timeline with benchmarks and milestones indicating the progress of the transition.
Going Outside the Family
It is not uncommon for a family-owned business to go outside to find a successor. Either a qualified candidate doesn’t emerge within the family, or none expresses any desire. So, the business owner who wants to see the business continue must commence a search to identify a possible successor. The search may begin inside the business if some key people or partners have demonstrated their commitment and competencies for running the business.
If no candidates are inside the business, the search must go outside. This is a much more difficult path, and unless you have a well-developed business network in your community, it is usually best traveled with a professional recruiter. This can take some time, as you will need to be as thorough in your search and selection as necessary to find someone with the skills and commitment you need.
If you successfully bring in a possible successor, you will need a very detailed business plan that includes the succession strategy, the timeline, the terms of ownership transfer, a method for valuation, and a method of financing. Very specific benchmarks should be established against which your candidate’s performance is evaluated. If the candidate is brought in as a partner, then a partnership agreement with buyout provisions should be in place. It is critical to have competent legal and financial advice throughout the succession process.
Prepare for Your Best Option
Even though you may be years away from choosing an option, the best course of action right now is to plan and prepare. Businesses that have a long-term strategy in place and are managed to increase their value will typically have more options available to them.