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 fewer than half (45.5%) of those expecting to retire in five years and fewer than a third (29%) of those expecting to retire in under 11 years have selected a viable successor. (MassMutual, American Family Business Survey, 2007)
The time to ask those all-important questions are sooner versus later. 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.
“I always advise my clients to have a solid succession plan in place approximately five to seven years prior to their intended retirement age,” said David Frederick, Director of Wealth Planning with First Bank Wealth Management. “From my experience, I’ve found that closely-held businesses can either be extremely valuable or hold minimal value if there’s no plan in place to continue the operations. You see, the value of a business is based on the assumption that it will operate effectively in the future. You’ve got to ask yourself and your family members the hard questions as early as possible.”
If you haven’t prepped your potential successor, it could ultimately destroy the value of your business. Case and point, a well-known establishment in the Delmar Loop of St. Louis was left to the son of successful husband-wife restaurateurs. Their son had moved away and pursued his career aspirations outside of the restaurant business. Frederick said, “The parents left their restaurant business to their son when they passed away but the son was not interested in running the business, which is now effectively being dissolved. Sadly, for St. Louis, we’ll lose a piece of local history due to the lack of an effective business succession plan.”
Frederick commented that you must ask a potential successor before it’s too late, “Do you want to run this business as your working career?” If the answer is “yes,” then the team at First Bank Wealth Management can help establish sound business structures to 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.
“Clients often come to us for counsel once they have a good sense of who is buying, such as a partner, competitor, or an outside third-party,” Frederick said. “Business owners may not be able to leave their business immediately after a sale, as buyers often need the sellers to consult on the business for several months. This transition period can be up to a year, especially in professional services’ business, such as a legal firm or medical practice. After all, with these types of businesses, it’s the services of the owner that you’re selling, so it may take a while to acclimate your clients to the change of hands.”
As a business owner, we realize you have more things on your to-do list than hours in the day, but don’t leave the business you’ve worked so hard to build or its succession plan to chance. Let First Bank’s team of succession planning professionals help set your family business up for success now and well into the future.