By Cameron Gorski, Associate Consultant, Business Consulting Resources
Family business owners usually ask the same question at some point: what are my exit options? What most owners often don’t know is that there may be multiple opportunities available to them. Every business owner should be preparing for an eventual exit; whether it is to a family member, a key employee, or an outside party. Planning for it creates more flexibility and better outcomes when the time comes.
It’s no surprise that successful transitions are difficult to make happen. According to Businessweek.com, 30% of family businesses make it to the 2nd generation, 13% are passed down to the 3rd generation, and only 3% survive into the 4th generation. Without a plan in place, your exit options become increasingly more difficult to achieve successfully.
6 Exit Options
There’s not always one right answer to how to exit ownership of your family business. Oftentimes you will have to weigh the pros and cons of each. Does the next generation have interest in ownership? Will the future of my family be better off if we cash in on the value of the business now? Is there currently a potential buyer that may not be interested down the line? These are the questions that weigh heavily on a family business owner, and can require outside guidance to objectively come to a conclusion.
Below are the 6 most common exit options that we typically see:
- Sale to Family: Often seen as the perceived option for a lot of owners, there are a multitude of factors to consider. Do the family members or next-generation want to be involved in the business? They might not, or they simply might not have the skills to take over the business. Without a clear succession plan or governance structure, this plan can put strain on both the family and the business.
When it works best: Your children (or other family members) are willing and capable of taking over. You have also given them the time and development to prepare for leadership. - Sale to Management: Also referred to as a management buyout (MBO), this option is great for employees who know the ins and outs of the business. A common challenge, however, is that managers don’t always have the capital to buy the business outright. Creative financing structures, like staged buyouts or selling financing can help make this achievable.
When it works best: You have a trusted leadership that wants ownership and you are willing to structure a deal over time. - ESOP: Employee Stock Ownership Plans transition ownership to employees, often designed to retain employees by giving them a stake in the company’s success. ESOPs can lead to increased productivity, motivated employees, and a stronger company culture.
When it works best: The business is large enough, has stable cash flow, and you want to reward employees while stepping away. - Private Sale: Selling to a buyer, like a competitor or PE firm can maximize value. The trade-off is more of a cultural problem. New owners may change how the company operates, and that can stir problems with existing employees.
When it works best: You want liquidity immediately and are less concerned with keeping the business in the family. - Wind Down: Sometimes the most practical option is to close operations or liquidate your assets. This can be the most financially sound decision at times if market conditions favor an asset sale or if there is no clear successor lined up.
When it works best: There is no buyer or successor in place to take over, and assets are worth more than the operating business. - Gifting Shares to the next-generation: Not uncommon at all, this option transfers ownership through gifting rather than sale; oftentimes for tax planning purposes. With a strong governance structure and succession plan leading up to this, next-generation owners can be in a powerful position to take over, without the financial burden of purchasing the company.
When it works best: You want to gradually transfer wealth to the next-generation, minimize estate taxes, and are committed to educating the next-generation about ownership responsibilities.
What works best for my family?
Every ownership option comes with a few tradeoffs. They can be financial, emotional, and relational. Oftentimes you can narrow it down to a few likely options, but uncertainty can still remain. That’s why owners shouldn’t make these decisions alone, rather use an outside party to help you through the process with a non-biased perspective. With the right planning, you can choose the exit option that secures your legacy, supports your family, and positions the business for future success.
At BCR, we have 44+ years of experience helping families navigate the complexities of exiting your business. If your family is ready to start weighing your options, let’s talk about how we can support you!