Download exiting a family business: how best to plan and prepare for succession

EXITING A FAMILY BUSINESS: HOW BEST TO
PLAN AND PREPARE FOR SUCCESSION
Succession is often an uncomfortable subject for family business owners. Many owners shy away from planning for tomorrow because it is difficult to face the idea of retirement or because communicating their wishes to family members can bring up a host of emotional issues. However, business succession is an eventuality that needs to be prepared for well in advance of any critical event despite any awkward or difficult conversations that must take place. While most family businesses would like to transfer their business to the next generation, it is estimated that only 30% will survive that evolution and only 10% will transition to the third generation.1 Additionally only 10% of businesses have a formal transition plan. This leaves a lot of uncertainty about how to move the business ahead, whether through strategically planning for a sale or to transition the business to the next generation. In order to look objectively at proceeding with the next stages of a business, an owner needs a frank and honest consideration of all the realities, both positive and negative. CONSIDERATIONS IN SUCCESSION PLANNING: Professional Advice – While most businesses are able to focus on the technical component of succession planning (i.e. Estate freezes, trusts, tax issues), far too little importance is paid to managing people’s expectations, whether management personnel or family members. Having appropriate advisors in place is critical to thinking through all of the complexities. Not all family members are cut out to run a business or possess the appropriate skill set to take on leadership roles. Having an unbiased assessment in determining roles and responsibilities is vital to a smooth transition. Timing – Many business owners wait until the last minute to start planning for succession. They often avoid having the sometimes uncomfortable talk with their family about what their succession plan looks like. Failure to deal with succession in a timely manner and lack of candor with stakeholders runs the risk of alienating key employees and family members. It is vital to open the lines of communication early in the planning process. Profitability – A business must be able to operate without its current owner if the owner wants to maximize profit in the sale of the business or if there is to be a successful transition of the business to the next generation. A business owner needs to prepare the business for sale well in advance of the sale itself. This could include, but is not limited to putting key personnel in place, introducing other members of the business to key customers and suppliers and solidifying key contracts. WHO WILL BUY THE BUSINESS? Typically a business owner has three broad categories of potential purchasers of their business: • Sale to a third party: This is often the best option to maximize the purchase price as there is less incentive to enter into unfavourable terms or a lower purchase price with a neutral party. • Sale to a family member: This can be a good option depending if there has been clear communication with the entire family and the successor is capable and deserving. It is often 1
KPMG LLP (Grant Walsh), Family Business Succession: Managing the All-Important Family Component, 2011
Exiting a Family Business: How
Best to Plan and Prepare for
Succession
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difficult to negotiate the same payment terms from a family member as one would from a third party Sale to existing management: This is the least common path. Existing management may not have the financing or entrepreneurial capabilities to make the deal work. However, existing management often understands the business and may already have an existing relationship with key contacts which is integral to keeping the business on a steady track. HOW TO BEST IMPLEMENT A SUCCESSION PLAN Communication is the first and often most important step. Many business owners fail to properly communicate their intentions about the business to their family and management. The failure to communicate effectively can lead to conflict. It is easier for people to cope with changes if they are informed well in advance rather than just before succession occurs. Communication also lets key people know your intentions and gives you an opportunity to explain what you expect in return of the sale of the business. Actively search for successors: Many business owners count on the sale of their business to fund their retirement plans. You may not maximize the value of your business in a sale if you have not been actively searching for replacements or grooming a successor. Get Help and Work Together: As noted above, potential purchasers want to buy a business that is sustainable and that does not depend on the seller to survive. Proper management and systems should be in place well ahead of a sale. It is often hard to relinquish control, but it is necessary in order to have an effective transition. After considering all the angles and after involving all stakeholders in a dialogue about expectations, roles and responsibilities, the owner will then be able to best to determine how to transition the business to the next generation or position it for eventual sale. An essential ingredient of this process is obtaining legal advisors to guide and inform you along the way. About Houser Henry & Syron LLP
For over 75 years, Houser Henry & Syron has helped entrepreneurs and private companies of all sizes
grow and prosper. We provide a range of business law services - from assisting with day-to-day legal
requirements to providing strategic counsel on highly complex transactions. We are uniquely positioned to
provide high-quality legal advice, tailored to the specific needs of our clients, at a reasonable price.
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