The statistics for family business succession are a bit staggering at first glance – 33 percent survive to the second generation and only 5 percent to the third generation.
But not all of those businesses are failures, and in some cases, the family has chosen to sell the business to a third party in order capture the wealth it has created. That’s good business.
Selling the family business is no different than selling a nonfamily business, except for the emotional attachment in the family business. In either case, maximizing value in the business is the goal, along with harvesting that value at some point (sale to a third party or sale to an insider/family member).
Once that value is captured, it creates financial freedom for family members and allows them to focus on other goals or ventures.
Family businesses make significant contributions to economies around the world. They can also be a stabilizing force and a reward to the families who own them, employees who work for them and the communities where they reside. But sometimes, keeping your family business may not be the right answer.
When it comes time to sell your family business, letting go can be very difficult. Years of work, financial capital and often the owner’s identity are tied to the legacy of the business. For many, the decision to sell may be laced with guilt of disappointing the family, failing to fulfill the legacy or feelings of failure.
Successful family businesses don’t fall in love with their family business, they fall in love with business. And that means being on the lookout for triggers that might indicate it is time to sell.
The reasons to sell the family business generally fall into four categories:
- Market dynamics.
- Destructive family dynamics.
- Lack of a successor who can run the business.
- Loss of passion for the business.
CHANGE IN PLAYING FIELD
Market dynamics affect every business, family business or not. Changes in competitor and/or customer behavior, changes in technology and product life cycles are just a few of the areas to have on your radar.
Businesses must adapt to these changes or die.
If you have concerns that the problems your business faces are beyond the abilities of the ownership group to manage, you might consider selling to someone who has the skills or resources to improve the business.
Look to sell or merge before you suck all value out of the company.
Destructive family dynamics are self-explanatory, but it is a good idea to identify warning signs. According to Chicago-based Family Business Consulting Group, if you see any of the following dynamics in your business, you may want to consider a sale:
- Dissension within the family is destroying the economic value of the business.
- Dissension within the family concerning the business is doing lasting damage to family relationships.
- Family employees and/or owners resent the business because of the impact it has had on the family.
- Family members are no longer speaking with each other because of intense conflict over family business issues.
- Family shareholders have resorted to lawsuits to settle differences. Next generation owners can’t work as a team.
If any of these are present in your business, you don’t have to immediately throw in the towel. The first step is to identify the problem and discuss it as an ownership group.
Bring in outside help to help navigate crucial conversations. And by all means, don’t let the business destroy the family.
LET NEXT GEN HAVE ITS SAY
Even if family owners get along, it may be that preservation of the business is impossible under existing ownership. The inability to support a viable business can result from a number of sources:
- The next generation of potential owners may not be capable of maintaining the culture, values or leadership for the organization.
- The next generation may not want to own the business. Give the next generation its voice. If it doesn’t want to be in the family business, eventually it will surface and it likely won’t be pretty.
- If the family doesn’t have the next generation of leadership or the next generation is not ready, but the family wishes to maintain ownership, consider outside management as a bridge. Outside management would span the exiting senior generation and the next generation to help develop the next generation while continuing to create value in the business.
- The business may require a capital infusion to remain viable. If owners do not have access to capital necessary to maintain the business, either through additional equity from family or through debt or equity from other sources, then selling to someone with access to those resources may be best.
- Owners require capital to retire and the business cannot provide the funds. This is a serious red flag. If the business doesn’t have the cash flow (either directly or through outside financing) to pay out exiting owners, everyone needs to go on high alert to understand the status and what, if anything, can be done to improve performance. The worse thing an exiting generation can do is saddle the next generation with a poorly performing business that can’t afford to pay off the exiting generation.
The last, but probably the most important reason to sell, is if owners, current or future, no longer have a strong passion for the business.
Particularly for businesses that require a great deal of owners’ attention, it is crucial that owners maintain enthusiasm. If owner commitment wanes, consider whether holding the business makes sense.
At this point, the decision to sell becomes a purely economic one. If keeping the business is more financially lucrative than selling, absent other issues, maintaining the business with nonfamily management makes sense.
But even then, owners need to be prepared to unlock capital to support the business, at times. If owners are unwilling to reinvest when needed, selling the business might make sense.
COMMUNICATION IS PARAMOUNT
Success with any of these considerations requires open and transparent communication within the family.
Understanding each other’s goals and dreams and not assuming you understand them (senior generation and next generation) are critical to successfully ensuring the life of your family business.
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 email@example.com.