As we wrote previously in our article on management buyouts (MBOs), owners have several viable succession options. One is an MBO, or sale of the company to the management team. Another common strategy is a sale to the next generation of family, typically the owner’s child (or children), grandchild or niece/nephew. There are a few key considerations for owners when selling a company to the next generation.
The first consideration: Is the proposed successor ready to take over the family business?
Ideally, that means they’ve spent ample time working at the company – perhaps from the time they were small children – learning every aspect of the business. They may already be responsible for some of the day-to-day operations, or perhaps they run a particular division exceptionally well. They clearly show pride of family ownership and treat the business as if it were their own with an eye toward eventual ownership.
A second consideration is the owner’s confidence in the successor’s leadership and management abilities.
All constituents should be comfortable with the proposed successor, and there should be mutual respect between them.
Is the successor a good leader? Essentially, the family business should be “in their blood,” and that should be apparent in everything they do at the company. In some cases, a family member may be adept at their current role in the company, but may not be ready to own and lead it.
It is important to assess their skills carefully and honestly and prioritize what makes the most sense for the business over the near and long-term.
If an owner doesn’t think the next generation is quite ready for the responsibility of owning the business, one option might be to connect them with a peer-to-peer leadership or CEO mentoring group such as Young Professionals (chapters are typically local) or Vistage Worldwide to provide them the opportunity to interact with other like-minded professionals and help them develop the necessary leadership and managerial skills. Another option is to hire an “interim” president to “mentor” the heir apparent. The mentor is typically a well-seasoned executive in the twilight of their career that accepts the president role with the understanding that they are mentoring the family member for future succession.
A third consideration is timing – when is the “right” time to transition ownership of the business to the next generation?
This is often a matter of preference, but there may be some catalysts that prompt a sale sooner rather than later. Perhaps the owner is under pressure from their spouse to spend less time at work. Or their proposed successor does something particularly exceptional in the business — makes a decision that moves the company forward significantly or saves a tremendous amount of money for the business, for example — and the owner has an “ah-ha” moment that it may be time to consider their leadership in a more meaningful way. Or perhaps the owner experiences a health issue and they can no longer expend the same amount of time or energy necessary to run the business. In this case, it becomes imperative to transition the company to someone who has the energy and risk tolerance to take the company to the next level, with a family member emerging as the most likely candidate. Or it may simply be time to transition ownership to the next generation because it’s necessary for the longevity of the company, and the time is right for a younger generation with, again, a higher risk tolerance and longer time horizon to take over and carry on the owner’s legacy. In general, an owner will likely recognize the right time to transition the company to the next generation when it arises.
The fourth consideration: Can the proposed successor afford to purchase the company?
Is the owner willing to finance a portion of the purchase price or perhaps transition the ownership of the company to the next generation via a combination of a sale and gift of shares? Regardless, it is important that the transactions(s) occur at fair market value in order to avoid a disguised gift.
In conclusion, there are many factors for owners to consider when selling their company to the next generation. However, keeping the company in the family may ultimately result in a more expedient and streamlined sale and assure the owner that the entity they worked so hard to build is being run by a trusted party who will act in the best interests of the business and safeguard the family legacy.
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