8 factors to consider as you sell or transition your family business
Originally posted in the Kansas City Business Journal on Oct 1, 2024
Exiting any business successfully is challenging, and that’s especially true with family businesses — whether you’re transitioning to outside ownership or the next generation.
Tackling these challenges is crucial because succession planning also involves wealth transfer for the family. Many family enterprises successfully manage these transitions, however, staying relevant in evolving markets and further enhancing the family's wealth.Taking the time to plan is critical to a positive transition — and doing so early is wise to mitigate unforeseen circumstances that may threaten the transition timeline.
Here are eight considerations for the leaders of family-owned businesses as they approach the transition process and plan for the company’s long-term future and preservation of family wealth.
1. Motivation for selling and, ultimately, exiting. Understanding your vision for the business’s future will help guide your exit. It will also inform your succession planning if you sell to the next generation. On the other hand, a transaction to an outside buyer may increase family wealth, allowing a next-generation family member to start their own company or do something they are more passionate about. This allows for investment diversification instead of the bulk of a family’s wealth being tied up in one company.
2. Sale to family member(s). If a nextgen family member is interested in purchasing the company, does that person have the skills and experience to lead it into the future? If that person is not already involved in the company, what will it take to do so and get them up to speed?
How will you manage relatives unsuited for involvement? Addressing this early prevents misplaced expectations and eases future discussions. Conversely, you might discover that no one in the next generation wants to lead the business.
3. External stakeholders. Does selling to a family member serve the interests of employees, customers and others connected to your company? If not, it might not benefit the company and selling to an external buyer could be prudent.
4. Sale structure. Every situation is different. Some buyers may need capital. If so, consider seller financing or involving an outside investor to ease capital requirements and bring industry expertise. Consult legal and financial professionals who can address tax implications, the buy-sell agreement and, if necessary, key person life insurance. If you are to stay in the business for a defined transition period to train a successor and ensure continuity with customers and suppliers, include that in the sale structure and terms.
5. Business relationships. You've built relationships with clients and vendors; ensure the transition process addresses their concerns about the change in leadership.
6. Communication to other employees. Define and communicate clear roles to all key employees, including family members, to prevent any anxiety that could disrupt the transition.
7. Equitable legacy to children. Consider equitable legacy options for children not involved in the business; updating your estate plans may be necessary to balance benefits among all children.
8. Impact on your financial plan. Assess the sale's impact on your retirement plan. Can you meet your financial needs without the business's success? If selling below market value to keep the business in the family, be aware of potential tax implications because it could be seen as a gift.
The CC Capital Advisors team at Country Club Bank has been successfully initiating, structuring, negotiating and closing transactions for more than 30 years. Our team brings extensive experience and expertise in several diverse fields, including generations of experience with family businesses. If you are considering exiting your business, we are happy to talk with you about your situation and the ideal outcome you envision for a transition — which may be keeping the business in the family or maximizing transaction value and creating generational wealth.
Remember, failure to plan can result in strained family relationships, an inexperienced family member taking control and unhappy clients and employees. Each of these situations create negative pressures on the business that can impact profitability and, ultimately, viability.
CC Capital Advisors, Inc. is a subsidiary of Country Club Bank, Kansas City, MO
Not FDIC Insured, No Bank Guarantee, May Lose Value
Member FINRA, SIPC
Check the background of this firm and investment professionals on FINRA’s BrokerCheck.