There are many options when it comes to transferring ownership when you’re ready to retire or move on. That’s why it’s important to think ahead. Do you want to pass on the business to a family member? Do you want to hand it over to a successor? Do you want to sell it to your employees or an external buyer? Each option requires careful thought, and the decision is often driven by a number of factors including:
- Availability of a successor. For many family owned-businesses, the children are candidates. In some cases, none of the children emerge as qualified or interested in continuing the business. Business owners may or may not be able to find the right person to groom as a successor.
- Financial position of the owner. The financial circumstances of the owner may dictate that the business be sold in order to raise cash for retirement or other financial needs.
- Marketability of the company. Some businesses have little intrinsic value or face financial difficulties due to market conditions, which reduce their value.
Keeping it in the Family
Often the first choice for many family business owners is keeping the business in the family and, if all of the pieces are in place, it offers the best opportunity for the successful continuation of the business. Passing on a business takes a lot of planning that should begin while your children are relatively young. As part of a family business succession strategy, there needs to be a multi-stage development plan for the children who are candidates along with an objective way to assess their progress, their interest, their commitment, and their competencies.
As the family and the business mature, it is important to create definitive ownership transfer plans that include clear objectives, expectations, roles, responsibilities, and timetables. The plan must specify how the transfer of management, control, and ultimately ownership will occur. Short of that, your successor candidates may become discouraged or resentful. It is important to keep their commitment level high by moving them along a timeline with benchmarks and milestones that indicate how the transition is progressing.
It is also not uncommon for a family owned business to go outside to find a successor. Either a qualified candidate doesn’t emerge within the family or none express any interest. So, the business owner who wants to see the business continue must commence a search to identify a possible successor. The search may begin inside the business if there are key people or partners that have demonstrated their commitment and competencies for running the business.
Going Outside the Business
If there aren’t any candidates inside the business, then the search has to go outside. This is a much more difficult path, and, unless you have a well-developed business network in your community, it is usually best traveled with a professional recruiter. This can take some time, as you will need to be as thorough in your search and selection as needed to find the right person.
If you are successful at finding a potential internal or external successor you will need a very detailed business plan that includes a succession strategy, a timeline, the terms of ownership transfer, a method for valuation, and a method of financing. Very specific benchmarks should be established against which your candidate’s performance will be evaluated. If the candidate is brought in as a partner, then a partnership agreement with buyout provisions should be in place. It is very critical to have competent legal and financial advice throughout the succession process.
Even though you may be years away from having to choose an option, the best course of action right now is to plan and prepare. Having a long-term strategy in place along with managing in a way that increases value will typically result in having more options available.