What if No One in the Family Wants the Family Business?

  • First Bank
  • 03/06/2019

As generations before us, most family business owners have invested considerable time, energy, savings, hopes, and dreams into the longevity of their business. Like many founders, family business owners often establish their business with the long-term intent of positioning the next generation to one day assume leadership. But, what if assumptions are wrong and they simply don’t want the business or they have other career aspirations in mind? Regrettably, it can—and does—happen.

In fact, a recent survey indicated that only 8 percent of family business owners have selected a viable successor. To make matters worse, approximately one in four successors do not even know they are in the family business succession plan (MassMutual®, 2022 Business Owner Perspectives Study).

The time to ask those all-important questions are as early as possible. A large part of any solid succession plan is knowing who will assume the leadership role once the next generation assumes the reins—even if it means knowing the successor won’t be an actual member of the family.

It’s advisable to have a solid succession plan in place approximately five to seven years before retirement. Closely-held or family-owned businesses can either be extremely valuable or hold minimal value if there’s no plan in place to continue the operations. The value of a business is often tied to the assumption that it will operate effectively in the future. It’s important to ask family members involved with the family business the hard questions as early as possible.

If you haven’t properly prepped your potential successor, it could ultimately destroy the business as well as its value. Director of First Bank’s Center for Family-Owned Businesses Ed Hart said, “It’s often said, the best time to plant a tree was 20 years ago, and the second best time is now. The same is true for starting to think about family business succession. Now is the best time to begin thinking about transition, even if your kids are young, you don’t have any kids, or they’re not expressing an interest, or capability, in taking over. If keeping the business in the family is a priority, then planning for who will lead the company when you are ready to step down should be on your mind, and part of your process now.  Sometimes the best successor in your family business is not part of the family. We encourage all family business owners to look at all possibilities as you think about the next generation of leadership.”

It's advisable to ask a potential successor, “Do you want to run this business as your working career?” If the answer is “yes,” then reach out for trusted advice to help establish sound business structures early on in order to properly transition it to the next generation.

What to Do Once You Understand Your Family Business Won’t Stay in the Family

Once you understand the answer is “no” and there isn’t a viable successor within your family, there are other options. Some business owners may decide they will simply turn the key and walk away, or the business operations will just dissolve when they leave. Other businesses may have a “key man employee,” a group of employees, or a partner interested in purchasing the business. Or, a third option is selling to an interested third-party, such as a competitor, a customer, a supplier, a full-service broker, or an investment capital firm.

Preparing the Business to Sell

There are companies dedicated to appraising and valuing your business. A business has two values: Book Value and Fair Market Value. Book Value is simply the accounting of all assets of the business, such as equipment, real estate, and cash deposits. Fair Market Value is more of an art than a science and is found by adding Book Value to a multiple of the company’s annual EBITDA (Earnings Before Interest Taxes Depreciation and Amortization), the raw earning power of your business.

Once a family business owner has a good sense of who is buying the business, seek out professional counsel in order to set up the proper agreements and transition arrangements. It may be part of the agreement that the business owner must stay working at the firm during the transition period in order to acclimate the appropriate parties. This transition period can be up to a year, especially in a professional services’ business, such as a legal firm or medical practice.

Although family business owners have many items on their to-do list, succession planning should also be added. Don’t leave the business you as well as your family have worked so hard to build or its succession plan to chance.

Reach out to the First Bank Center for Family-Owned Businesses to help position your family business for success now and well into the future.

This article was originally published in March, 2019. It has been updated.