Nine Tips for Family Business Transition Planning

Family relationships and generational value differences can make succession planning for family businesses more challenging than for other enterprises.  Here are some suggestions for family businesses that can make succession planning and execution less trying:

1.  Obtain a valuation of the business regardless of whether it will be transferred between generations or sold:

A valuation establishes a reference point for negotiations with potential buyers and validates or corrects family members’ perception of the value and becomes the basis for wealth transfer planning. 

2.  Maximize the company’s value:

Make sure financial accounting systems are in good order, family expenses are not run through the business, and there are no unusual accounting practices.  Other indicators of sale readiness include expanding sales growth, diversification of customer base, a stable pool of employees and an absence of pending regulatory actions.

3.  Identify prospects:

Outside advisers are usually necessary.  An investment banker can provide market perspective and may be able to develop alternative sale options that help meet the seller’s long-term objectives.  Where a sale to a competitor seems best, an adviser can develop competing proposals before contacting the competition, protecting the seller’s market and perhaps pushing the completion into a higher bid.

4.  Negotiate the structure of the sale:

The nominal price of a deal is reduced by its current and projected tax impact.  If an earn out is proposed, a lower price without that contingency may be more valuable.  Any liability retained by the seller clouds the eventual value of the deal.

5.  Set goals that reflect the family’s core values and legacy:

They may even be established in a mission statement or “family constitution” to which all family members can contribute.  Determining which, if any, family members will remain active participants or passive investor could lead to a creation of exit strategies and personal financial plans for others.

6.  Prepare the business for change:Between initial negotiations and closing the deal, much can happen that will affect the enterprises value and final price.  The nonfamily management team must be engaged in the planning and be given an incentive to stay loyal to the company and family throughout the transition.

7.  Designate a leader to oversee business management during this phase:

It does not need to be the existing CEO and should not be the person primarily tasked with completing the transition.

8.  Plan whether the responsibilities of the current CEO will continue or how they will shift during and after the transition:

When the business is staying in the family, it is important that the current CEO stick with the plan and support the transition.

9.  Communicate the plan to all constituencies:

Observe necessary confidentiality with family members, management and employees, customers, key vendors and banks.  In addition, seek counsel from owners of similar businesses who have gone through a transition.

A little planning can help alleviate unnecessary disputes during the transition.  ShindelRock has many professionals experienced in these areas, and we can stand by you to assist you when completing the transition of your family business.