Aug. 10, 2022

This paid piece is sponsored by Eide Bailly LLP.

By Chad Flanagan, CPA, ABV, and Amber Ferrie, CPA, ABV, CFF, CM, AA

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’ 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 because of 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 percent of all family-owned businesses transition to the second generation. When it comes to the third generation, only 12 percent succeed. By the fourth generation, only 3 percent 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.

Importance of succession planning

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

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.

Preparing for what comes next

Regardless of which transition option you choose, 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 adviser 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 adviser 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 adviser can help you pull market multiples that will show how your business’ worth across areas such as 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.

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 every day – 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. This involves the creation of a clear vision and goals for any transaction as well as a road map for how to achieve those goals.

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 percent 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.

Learn more about family-owned business challenges to consider here.