Why Next-Generation Family Business Planning May Not Be Easy

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Tips to Help Your Family-Owned Business Prepare for the Future

The values and qualities that form the foundation of a family-owned business are also what make it such a strong asset for future growth and exit. The business’s overall brand becomes an extension of the family’s values, and that informs their culture. Further, these types of organizations have been found to have better workforce retention and less employee turnover, in part due to the culture they’ve created. They keep an eye toward the future, with a focus on the next generation of family members who could become eventual owners working to develop the business further.

But what happens when the family business transition to the next generation is no longer an option? According to the Conway Center for Family Business, more than 30% of all family-owned businesses transition to the second generation. When it comes to the third generation, only 12% succeed. By the fourth generation, only 3% will still be operating as a next-generation family business.

Are you prepared for the next step of your family business, if next-generation succession to your children isn’t on the table? Make sure your family business is prepared for the future.

The Importance of Succession Planning in Family-Owned Businesses

Transition planning for the next-generation family business is critical, regardless of whether it is to family or non-family members. Proactive, strategic transition and succession planning allows an organization to define their value, improve operations, identify leadership, and put themselves in the best possible position to move forward and maintain success without issues.

Being prepared for exit is essential to the lifecycle of your business. To begin, ask yourself these questions as you prepare to draft your exit plan:

  • How much longer do I plan to work or stay involved in the business?
  • How much control do I want after my exit?
  • How do I plan to replace myself?
  • Do I know what my business is worth?
  • Are my records in order?

Exiting your business takes time if you want to do it responsibly and profitably. Ideally, your exit strategy will be part of your business plan, keeping in mind that the strategy you create may change over time. Starting the planning process early will allow for flexibility and preparation, regardless of what comes your way, allowing you to find the best opportunity for the business.

Alternative Options to Next-Generation Family Business Succession

While succession planning is vital, it’s often the biggest hurdle when it comes to family-owned business continuity. Studies have found that approximately 70% of global family businesses do not have a formal succession plan in place. Other research has shown that less than one third of family-owned businesses are successful in the succession wealth management process.

Planning begins by identifying your exit objectives and goals. It also involves answering the key question in next-generation planning: where do you want your business to go?

Non-family member options include:

To truly align with the goals and objectives you have for exit, as well as gain optimal value for what you’ve built, you’ll need to put careful thought and consideration into each of these options.

Preparing for What Comes Next

Regardless of which transition option you choose, prior planning is key. To start, ask yourself:

  • How much money do I want to make from the sale of my business?
  • Do I know what my business is worth?
  • If I had an offer today, could I take it?

Business Valuation
One of the first steps we encourage family-owned businesses to take is a business valuation. Having an independent appraisal of your company’s worth can help you with succession and wealth planning. Specifically, business valuations are helpful for companies planning two to three years out for exit so they have time to set up gifting and estate options. It’s also helpful in identifying key value drivers, risks and opportunities.

However, if your goal is to go to the market now, it’s important to speak to a transaction advisor as soon as possible.

Merger and Acquisition Activity
What if you’re ready to sell your business in the next six to nine months? Knowing the value of your business as you prepare for sale is still important.

This is where the help of a trusted transaction advisor comes in. These professionals are trained in merger and acquisition activity and can help you understand what your company will go to market for. Specifically, a transaction advisor can help you pull market multiples that will show how your business’s worth across areas like revenue, industry and EBITDA.

Understanding the value of your business is critical for a family-owned business, regardless of your company’s transition plans. Without it, you’ll have no idea what needs to be improved or how to get the full value for what you’ve built. The important point here is to understand the impact of planning and to contact the right professional to help you reach your goals.

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Sell-Side Readiness
If you choose to sell to an external third-party, it’s important to be prepared. Sale opportunities can come at any time. With advanced planning, you can not only understand the worth of your organization, but also know how to answer should an option arise.

For family businesses, the preparation for sale might be more emotional than initially thought. That’s often because family businesses are looking to transfer more than just their financial wealth. They also want to ensure the buyer can maintain values and connection. As one client put it, “it’s not like selling a product you sell everyday – it’s way more personal. It’s like selling an entire being.”

Sell-side readiness can help family businesses prepare for the personal and business impact of transition planning. Sell-side readiness involves the creation of a clear vision and goals for any transaction, as well as a roadmap for how to achieve those goals.

Action steps include:

  • Positioning your company financially for sale and preparing yourself psychologically for the transaction.
  • Understanding the steps in the transaction process and how long each step will take.
  • Knowing what needs to happen when it comes to due diligence.
  • Preparing your team for new ownership.
  • Optimizing the value of your business now.

Selling your business, especially when it’s family owned, is not a straightforward process and there’s no one-size-fits-all solution. Preparing early can help ensure you have the optimum selling experience.

Next Steps to Take with Your Family-Owned Business

Family-owned businesses are critical to the economy. In fact, research has shown that family-owned businesses account for 70% of the global GDP. This makes them not only significant job creators, but also uniquely situated in company structure and strategic planning opportunities. Their values, dedication and unique cultures make them valuable places to work and strong potential options for merger and acquisition activity.

Yet for all their strengths, family businesses continue to lack a clear path to exit. Without a solid succession plan, even the best family businesses may lose what they’ve created. And with the added stress of lack of next-generation family business buy-in, it’s time for these entities to look at other means for exit.

Careful, proactive planning can ensure that your family business carries on for years to come, even if it’s not family owned.

What if succession to the next generation isn’t an option?

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