Family relationships and values can make succession of family
businesses even more challenging than for other enterprises. Here are
some suggestions for family businesses that can make succession
planning and execution less trying.
Obtain a valuation of the business regardless of whether it will
be transferred between generations or sold. Some
owners resist this step if a sale is contemplated, believing the
market is a more realistic measure of a company’s value. However, a
valuation establishes a reference point for negotiation with potential
buyers and validates (or corrects) family members’ perception of value
and becomes the basis for wealth transfer planning.
Maximize the company’s value by making sure
financial accounting systems are in good order, family expenses are
not run through the business, there are no unusual accounting
practices, and full audits of financial statements are completed
annually. Other indicators of sale readiness include expanding sales
growth, diversification of the customer base, a stable pool of
employees and an absence of pending regulatory actions.
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
competition into a higher bid.
Negotiate the structure of the sale. The nominal
price of a deal is reduced by its current and projected tax impact. If
an earnout 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.
Set goals that reflect the family’s core values and
legacy. These 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 investors could lead to the creation of
exit strategies and personal financial plans for others.
Prepare the business for change. Between initial
negotiations and closing the deal, much can happen that will affect
the enterprise 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.
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.
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.
Communicate the plan to all constituencies
(observing necessary confidentiality), including 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.
(This article is adapted from a free white paper by the authors available at tinyurl.com/5uv6oy6.)
By James A. Fitts, CFP, ( jfitts@harvestcap.com ) director, wealth counseling; and Marshall G. Rowe, ( mrowe@harvestcap.com ) president and CIO, both of Harvest Capital, Concord, N.H.
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