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When it comes to family businesses, the conversation often turns to succession planning. What happens when the current owner decides to retire or move on? This is a difficult question for many family business owners to answer, but it is important to have a plan in place. This blog post will discuss some of the most common exit strategies for family businesses and how you can prepare for the next chapter in your company’s history.
It’s not unusual for debates to become heated, with one question triggering another, often resulting in misunderstanding and frustration. Consider how much more stressful it would be if you were forced to leave your family business due to an unanticipated emergency.
Two deliberate exercises are required to prepare for the future:
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A confirmed post-retirement planning: It’s possible that after a lifetime in business, it’s difficult to think about what life after business may look like. How will your life change and what can you do to plan for it ahead of time so you’ll have peace of mind and protect your legacy?
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A precise value of the company: Potential purchasers aren’t concerned that you created this company. They’re interested in two things: “Can the firm produce stable profits over the next several years?” and “Is the organisation set up to operate well on its own, regardless of who is currently in charge?”
Discover your company’s valuation.
Why Do You Need an Exit Strategy for Your Family Business?
There are many reasons why you might need an exit strategy for your family business:
- Maybe you want to retire and pass the business to the next generation.
- Maybe you are faced with unexpected health issues and need to plan for what will happen to the business if you can no longer run it.
Whatever the reason, it is important to have a plan in place to ensure that your family business will continue to thrive after you are gone.
The most important thing to do when choosing an exit strategy for your family business is to think about what you want the future of the business to look like. Do you want it to stay in the family? Do you want to sell it to a third party? Or do you want to take it public? Once you have a vision for the future of the business, you can start narrowing down your options and choose the right exit strategy for you.
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What Are Some Common Exit Strategies for Family Businesses?
Family businesses commonly use a few different exit strategies.
- The most common is to sell the business to the next generation. This can be done through a family member buying the business or through a third-party sale.
- Bringing in external investors is also a great way of removing yourself from a business and having it operate independently, with or without family involvement.
- Another strategy could be to take the business public through an initial public offering (IPO). This can be a good option if you are looking to raise capital to fund growth or expansion plans to fit with the plans of the next generation.
Finally, you could also consider passing the business down to the next generation through a family trust. This can be a good way to ensure that the business stays in the family and is passed down according to your wishes.
Implementing the Exit Strategy
No matter what exit strategy you choose, it is important to start preparing for the next chapter in your family business now:
- This may mean having a plan in place for how the business will be run after you are gone.
- If you want to sell the business, start thinking about who you would like to sell it to and what kind of price you would be willing to accept.
- Start working on your IPO plans if you are planning to bring in external investment or to take the business public.
- If you pass the business down to the next generation, start working with a family trust lawyer to get everything in order.
- The sooner you start preparing for the future of your family business, the better off you will be when it comes time to make the transition.
Making the Transition
The final step in exiting your family business is making the actual transition. This is when the business is sold, taken public, or passed down to the next generation. The transition can be difficult and emotional for family businesses, so it is important to be prepared for it.
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The most important thing to remember when exiting your family business is that it is not the end of the journey; it is just the beginning of a new one.
Maintain Relationships With Family and Friends During This Transition Period
The exit strategy you choose for your family business will greatly impact your relationships with family and friends. If you are selling the business, you may need to distance yourself from the business during the sales process. And if you are taking the business public, you may need to spend less time with family and friends as you focus on the IPO.
No matter what exit strategy you choose, it is important to communicate with your family and friends about what you are doing and why. This will help them understand the changes you are making and why you are making them. It is also important to be understanding of their reactions and give them time to adjust to the new situation.
Have a Family Meeting to Discuss the Business and Everyone’s Role in It
If you are exiting your family business, it is important to have a family meeting to discuss the business and everyone’s role in it. This will help everyone understand the changes that are happening and why they are happening.
Secondly, it is a good time to discuss the business’s future and everyone’s role in it. Family businesses are always evolving, so there is no need to rush into an exit strategy. Take your time and make sure you choose the right option for your family business. And once you have a plan in place, start implementing it and transitioning to the next chapter of your family business.
Enlist the Help of a Professional
There are a lot of moving parts when it comes to exiting your family business. And because of that, it is often helpful to enlist the help of a professional.
This could be:
- A lawyer
- An accountant
- An experienced local business coach.
These people can help you with the logistics of exiting your family business and make sure you are on track to meet your goals. They can also help you with the technical aspects of exiting your family business and make sure you are doing everything correctly. A business coach is a great option as they have the right skills and experience in transition.
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How Can a Business Coach Help With the Family Exit Strategy
A business coach can help you with various things about exiting your family business. They can help you develop an exit strategy, communicate with your family and friends, and even find a buyer for the business. And because they are impartial third-party, they can provide an objective perspective on the situation.
They can also help you with the emotional aspects of exiting your family business and make sure you are making the right decisions for yourself and your family. If you are thinking about exiting your family business, a business coach is a great person to talk to.
Get in touch with one of our business coaches today: Book a meeting
How to Assign Someone to Be the Point Person for All Exit-Related Communication
When you are exiting your family business, it is important to have a point person who handles all exit-related communication. This will help ensure everyone is on the same page and that no one is left in the dark. The point person should be someone who is level-headed and can handle sensitive information.
Secondly, they should also be someone who is good at communication and can keep everyone updated on the latest developments.
A Business Coach Can Develop a Realistic Goal, Budget, and Timeline
When you are exiting your family business, it is important to have a:
- Goal
- Budget
- Timeline
This will help ensure that you are on track and that the exit process is smooth. A business coach can help you develop a realistic goal, budget, and timeline to complete the exit. They can also help you with the emotional aspects of exiting your family business and make sure you make the right decisions for yourself and your family.
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A business coach can help you with the following;
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Creating and adhering to a written family business exit strategy
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An estimation of how much the business will sell for and the likelihood of it’s success
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Develops a credible plan to depart with a realistic aim, budget, and timetable.
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Development of specific, actionable plans to complete the exit strategy
What Kind of Support Can You Give to Employees During This Time?
If you have employees, it is important to give them support during this time.
This could include things like;
- Offering counseling services
- Financial assistance
- Outplacement services.
You can also offer support in the form of flexible work arrangements, such as;
- Reduced hours
- The option to work from home.
- And if you have the ability to do so, offer severance packages to employees who are impacted by the exit.
Common Mistakes People Make When Exiting a Family Business?
There are a few common mistakes that people make when they are exiting a family business. These include;
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Not having a plan in place.
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Not communicating with family and friends.
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Not having a buyer lined up.
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Not seeking the help of an experienced business coach
Prepare for the Business Exit Process
There are a few things you should do to prepare for the exit process. One is to develop an exit strategy. Another is to communicate with your family and friends. And finally, find a buyer for the business.
The exit process can be a stressful time for everyone involved. Having a plan in place and communicating with everyone can make the process much smoother. And once you have a plan in place, start implementing it and transitioning to the next chapter of your family business.
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Update Your Estate Plan and Beneficiary Designations
One of the things you should do when exiting a family business is to update your estate plan. This includes things like updating your:
- Will
- Trusts
- Beneficiary designations
This is an important part of the process as you will need to update your documents to reflect the new ownership structure of the business.
Review Your Insurance Policies and Make Sure They Still Reflect Your Current Situation
It is important to review your insurance policies when you are exiting a family business. You will need to ensure that your policies still reflect your current situation. This includes things like life insurance, health insurance, and property and casualty insurance. You may need to change your policies or get new ones altogether.
Things You Should Look For in an Insurance Policy
Some things you should look for in an insurance policy when exiting a family business include:
- Coverage limits
- Deductibles
- Co-pays
- Exclusions.
You will also want to ensure that the policy is still in force and that you are still the named insured.
Get Your Finances in Order
One of the things you should do when exiting a family business is to get your finances in order.
This includes things like;
- Getting a copy of your credit report
- Find out what debts you owe
- Set up a budget.
You will also want to ensure you have enough money to cover your living expenses.
Take a look at our blog on How to Get the Funding You Need.
Make a Plan for the Future
When you are exiting a family business, it is important to make a plan for the future.
This includes things like;
- Figuring out what you are going to do next
- Setting up and building an emergency fund
- Creating a retirement plan.
You will also want to make sure that you have a solid plan in place for your family.
Below are the most commonly asked questions about family business exit strategy
What should I do to prepare for my family’s transfer of business?
It takes, at most, a few years to prepare. While it is possible to transfer a business quickly, it can be difficult to train your successor and plan the best tax-efficient exit. Your advisers will appreciate your early discussions about your plans.
What are the most important areas to think about when planning for succession?
You should consider the following areas:
- Whether you wish to retain any investment in your business
- Whether you are looking to realize capital or if the business requires additional financing.
- How ownership of the company will be divided between you, your spouse, and your children, as well as any other owners
- How can assets or shares be transferred tax-efficiently?
- Who will manage the company, and if you will be able to take on any other management roles in the future?
- Training your successor and planning for the transfer of control
Is it a good idea for the family to inherit the business?
Many times, passing on the business to your family is a personal decision as well as a commercial decision. It is important to consider the commercial implications.
Transferring business ownership can save you a lot of money and disruption from other sale options, such as a trade sale to new owners. External investors can be a hindrance to the business’s growth. Family ownership can also lead to the concentration of family investments in the business. This could put the family at risk if there are problems.
The most important concern when it comes to management is whether or not any family members are both interested in the job and have the necessary skills and experience. Even then, if management is kept in the family, it can cause a narrow-minded outlook and a lack of ambition. Family managers can understand the company’s culture and often see the long-term perspective of what is best for it.
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What other options do I have for passing on the family business?
There are many options for shareholders in companies. Here are some examples:
- Arranging a Trade Sale for the Business
- You can flotilla the company or publicly sell all or part of your shares.
- Privately selling your shares to existing shareholders, new investors, or the current business management team (a Management Buyout or MBO).
- You can sell some or all your shares back at the company.
You may have limited options due to the company’s financial situation, such as its profitability or cash position. Any shareholder agreement or company articles of association may limit your options. You might have to offer shares to existing shareholders before outsiders can buy them.
You can also choose to retain shares but have the family recruit directors or managers from outside.
If the business isn’t a company, your options may be different.
You will need to sell your business or assets if you are a sole trader. You can also form a limited business, transfer the business and sell shares.
If you are a partner of a business partnership, the agreement will usually specify how much capital you can withdraw upon retirement.
You will need to be advised on which option is best and what tax implications.
What is the best time to pass the business on?
Many businesses are transferred when the owner retires. However, many owners don’t want to give up control and ownership. Flexibility is a better approach considering when your successor will be available to take over the business.
Transferring assets sooner than expected may be advantageous due to tax planning.
How can I split the ownership of my business between several children?
It is common to give each child shares of the company’s ownership. A shareholder’s agreement will clarify the business’s operations and reduce conflict.
Splitting the business into separate entities may be an option if several children wish to play an active role or if family members have differing views about the future direction. This eliminates any complications that could arise from family members managing a business.
How can I split the control of my business between several children?
You should not split management responsibility among children. However, you can split ownership by giving each child shares of the management responsibility.
Update or prepare a shareholders’ agreement. Discuss all key issues, such as the company’s business plan. Discuss how to resolve disputes and what happens if one of your children wants to take over the business. Consider how the children will finance the purchase of those shares if they are required to purchase them.
Also, consider the possibility of conflict between children working in the business and those who own shares. They could have different rights. You could give them different rights. For instance, voting shares could be given to the business’s children, while non-voting shares would be granted to others with preferential rights to dividends.
How can I treat my children fairly when some employees work for the company and others don’t?
Children who work for the company may have an advantage in practice. This could be due to their ability to control decision-making and overpaying for their work. In some cases, it may be the reverse. A suitable shareholder’s agreement is the best way to avoid this. The agreement may stipulate that family members are paid on the same basis and promoted as employees. It may also contain measures to protect the voting rights of relatives with a small percentage of voting rights.
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What should I do if my successor doesn’t want to take over my family business?
Looking for an interim successor to help you transfer control to your child may be a good idea. It’s best to let the interim successor know. You will likely find out about the interim successor anyway, and they may be better equipped to plan more efficiently if they clearly understand the timeframe. You must ensure that the contractual arrangements of your interim successor reflect your plans. You should know that some potential successors might not want to accept the role under these circumstances.
You may want to transfer ownership even if your child is not ready. This could be because you are worried about inheritance tax. You might consider putting assets in the trust or issuing shares that are non-voting if you don’t feel your child can make the right decisions. This is an area that requires expert advice.
Can I choose who I want to succeed in my business?
Directors are typically appointed by the board of directors and then approved by shareholders. The company’s articles and any shareholder agreement will determine the mechanism. If you have a majority of shares and control the board, you can nominate anyone you wish to be your successor.
What can I do to ensure the business stays true to my values once I have passed them on?
You can keep control by, for example, retaining a majority vote. This is not always a good solution, as your successors will likely be resentful.
You can also discuss your desires with your successors and decide what values you would like to retain. These can be enforced through a shareholder’s agreement or amending the company’s articles of association.
You should not limit the ability of your business to respond appropriately to changes in the future.
How can I create a family successor?
Consider what experience and skills will be most useful to your successor. Your strengths may not be the ones that allowed you to build the business.
It is common to have your successor work in various areas of the business, so they are familiar with everything. Your successor should be exposed to new ideas and other business methods. You can work in another company and receive the right training.
It is a good idea to plan for a handover date. Your successor may be able to work with you during the last month. This time can be used to ensure they have all the necessary information and are introduced to key contacts within and outside the company.
Who should participate in succession planning?
It is a good idea for everyone to be involved in business affairs, including shareholders and major lenders. You can better convince them of the benefits and overcome concerns by discussing your plans.
What are the most prevalent problems in family succession? How can we minimise them?
There are potential problems like:
- The business would lose direction, especially if the founder were a dominant leader.
- If not enough effort has been made to find and train a suitable successor, the business will be underperforming.
- Management can become confused and disillusioned when the retired founder continues interfering with the business or if the long-term plan is not effectively communicated.
- If they are unhappy with a strategy or feel unfairly treated, key employees may resign or become disillusioned.
- Key supplier and customer relationships would be in danger if these were personal relationships.
- Contracts with clauses that allow for termination in the event of a change in control
- If the founder invests too much capital, the business can become financially unstable.
Planning and seeking out the right advice can help reduce these risks. Like any major change, it is important to involve key personnel as soon as possible.
Do I need to continue working as an advisor after I have retired from my family’s business?
You may be able to remain as an advisor, provided that you only provide advice when requested. If this happens, both your successor and employees may become confused about who is in charge, and the business can suffer.
This would usually mean you would resign as a director of a family business if you were a director. Remember that you could be considered a shadow director if your influence extends beyond the other directors. You could be personally held responsible if the board of directors is later sued (for example, for “wrongful trading” – if the directors allowed the company to continue trading when there was no reasonable prospect of it avoiding insolvency).
Do I have to keep a financial stake in the company after retirement?
A financial interest in a business can be problematic, especially if it represents a large portion of your capital or generates a substantial amount of your income. You may be exposed if the business goes under, and you might find the temptation irresistible to interfere.
How can I transfer the business to my children while protecting my spouse?
It may be possible to provide sufficient security for your spouse, regardless of whether the business is profitable, depending on your financial resources and the company’s financial situation. For example, you could make life, investment, or pension insurance arrangements.
You may also want to consider a trust. You can structure it, so your spouse receives benefits throughout his or her life while the children can run the business knowing their future benefits will be there for them. Expert advice is important in this complex area.
Is there a way to get the most money out of business during a succession?
Many options are available to you, including selling shares to new or existing investors, returning shares to the company, paying dividends, making payments to your pension fund, and selling shares to existing or potential investors. It may be a good idea to borrow more money to finance these payments, depending on the company’s financial situation. You may be able to sell a portion of the business or one of its assets. It is important to get advice about the tax implications of each option and which option is best for you.
Business Exit Strategy Coach
There are a few reasons why it is important to have a business exit strategy coach when exit planning for your family business;
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They can help you figure out what is best for your family business.
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They can help you plan and implement your exit strategy.
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They can offer impartial advice and support during a time when you are feeling overwhelmed.
If you are considering exit planning for your family business, reach out to ActionCOACH West Herts today. We can help you determine what is best for your family business and help you plan and implement an exit strategy. We have over 50 years of experience in handling and managing businesses from all over the world. Schedule a free call with one of our business exit strategy coaches today.
