There are essentially two paths when it comes to transitioning the ownership of your family business – an internal transfer or an external transfer. Each path offers several options.
How do you determine which one is right for you? For a family business owner, few questions require as much soul-searching as the issue of who becomes the new owner when it's time to retire.
That's no surprise. Your business has likely consumed your days and nights, let alone a bunch of weekends. For years, you have focused on building and nourishing your business to be self-reliant and continue its legacy.
Getting out of your business will end up being much harder than it was for you to get in. This has become your baby, and likely you have a lot of net worth tied up in the business.
Most family business owners have more than 90 percent of their net worth locked inside the business. There are myriad implications in a family business transition, including family, financial, personal (what is next for you) and taxes, let alone leaving the business in good hands to continue its legacy and buy you out.
It's hard to know where to start with so many moving parts.
Peter Chrisman, co-founder of the Exit Planning Institute, likens ownership transition to a three-legged stool.
Leg one ensures you have maximized the value of your business; leg two ensures you are personally and financially prepared; and leg three ensures you have a plan for the third act of your life.
If one of the legs is weak or missing, the stool topples, along with your exit plan.
It's more than a metaphor. If you have not figured out if you can depart the business and retire on what you have saved and what you will get upon departure (the second leg), no one is going anywhere.
This stall is a killer in family businesses, as the next generation is left in limbo waiting for the senior generation to make a decision.
The fastest way to this decision is to get a financial adviser to build a financial road map to understand what you have and how long it will last.
Even if the news isn't what you desired, at least you know, and you know what to do to the business (the first leg) to improve your personal financial position.
Equally important is the next chapter of your life (the third leg).
Many business owners hang on simply because they have no idea what to do if they weren't running the show.
Whether it is ego, self-actualization or filling time, many family business owners simply can't let go.
But the stall is putting the next generation on hold, and, at some point, it will either check out (quit and stay) or depart the business. In either case, the outcome is not good.
Too often, family business owners fail to adequately plan for ownership transition or plan too late. This limits the choices, and the business owner may have to settle for a solution that is less than perfect.
By planning early, and specifically for all three legs of the stool, owners have more options and can begin taking steps.
Here are the ownership transition alternatives for a family business:
• Transfer to a family member.
• Management buyout.
• Employee stock option plan.
• Sell to other shareholders.
• Sell to a third party.
• Sell to a private equity group (recapitalization).
• Initial public offering.
These alternatives move the ownership in very different ways.
Some may not be viable options to some businesses. Each has its own benefits and limitations.
The alternative that is right for you can only be determined after careful analysis of several factors with advisers.
The message is to start. Use time as an ally, not the enemy.
Life has a way of throwing curve balls that even the best-laid plans have difficulty dealing with.
With nearly 50 percent of all family business ownership transitions as involuntary (disability, death, divorce, distress and disagreement), planning your transition now is critical to your business' legacy.
Either your plan is executed to its intended end or it is positioning the company to respond for the unexpected end.
Start by meeting with professionals who can help you navigate all nuances of family business ownership and leadership transition.
You don't figure this out in a day. It takes time and is sometimes painful – but always worth the effort when you see the legacy of the wealth you have created continue to the next generation.
Tom Garrity is managing partner of Compass Point Consulting LLC in Hanover Township, Northampton County. He is a certified coach with Gazelles International and a certified exit planning adviser with the Exit Planning Institute. Compass Point provides growth and business transition consulting to small- and medium-sized businesses. He can be reached at 610-336-0514 or firstname.lastname@example.org.