Preparing To Exit A Family-Owned Business

by Joe Patane

It’s never easy to sell a business. In fact, many successful and accomplished business owners report that selling their businesses was one of the hardest things they have ever done. Succession planning can be especially tricky when a business owner is passing down a family business to the next generation. This adds an extra layer of emotion and planning that can trip up even the most experienced business owners.

There are tax and financial strategies that family businesses need to consider. More important, there are the intangibles that include family dynamics, emotions and interpersonal communication. Those can be the most difficult to handle.

With some careful planning, the advice of third-party professionals and good communication, transitioning a family-owned business to the next generation can be successful.

Here are some of the most important tips:

Think of it as a process, not an event. Succession planning is a long, careful process. Years before you plan to exit the business, have your successor in mind and begin communicating with him or her. Discuss goals, timing and priorities. It is often difficult to persuade a family member to join a family business once he or she has started a career outside the organization. So it’s important to start the discussions and the process early.

Create a formal succession plan. The business owner and the successor together should create a complete succession plan – including target timeline of specific objectives such as training, transfer of level of authority, defining responsibilities, and reporting procedures. The plan should also include potential issues, possible internal family conflicts and a communication strategy involving all stakeholders – customers, suppliers, employees, shareholders and the community. You should then create a transition team to help implement the plan. In addition, it can be very helpful to seek advice from business psychologists, who interview all parties involved and provide a written assessment of the potential success of the plan.

Train your successor and be able to “let go.” The most challenging issue in a family business succession plan is the business owner learning to “let go” of the reins and control of the company, transitioning the authority and leadership to the successor per the succession plan. The flip side of this issue is the successor being properly trained to accept the transition of authority in running the family business. In other words, the business owner needs to train and mentor the successor, especially in the area of leadership, and once a level of authority is transitioned, the business owner needs to stay out of the new leader’s way. The management style of the successor may be distinctly different from that of the business owner, which the business owner needs to understand and accept. Once authority is transferred to the successor, the business owner must focus on not jumping back into any matters that will undermine the successor’s authority and leadership. Unfortunately, sometimes this is easier said than done.

Timing is everything. As the business owner, you should prepare the business for the transition. Make sure the business is healthy, meet with tax and legal advisers. and correct any imbalances while you are still holding the reins. Transitioning a troubled company is far more difficult. Take the time to prepare and minimize the risk.

Don’t wing it; hire professionals. Many small-business owners make the mistake of not hiring professional third-party advisers – such as a lawyer, CPA, business psychologist or leadership consultant – when the business is getting ready to be handed off to heirs. There are many legal, tax, and leadership issues that will make or break a smooth transition.

Prepare for your retirement, both financially and psychologically. Many business owners are so wrapped up in the transition of the business that they forget they are actually retiring as well. Consult your financial adviser early on to prepare a financial independence analysis showing you what your financial life after transitioning the business will look like. This will help ensure you are prepared for this event and have a “life after CEO” financial plan in place. In addition, talk with your spouse about what “life after CEO” will entail now that you will have more free time. Please remember that the last thing a spouse wants is to be bossed around at home by a retired CEO. Now you can begin the next chapter of your life with your spouse and enjoy it to the fullest.

Communication: The key to a successful exit strategy involves communication, honesty and transparency with your successor and the transition team. Remember, there are no secrets.

No family succession plan is foolproof. But by following these concepts, you will have a greater probability of success, both at the business level and, more important, at the family level.

Joe Patane, JD, LLM, CFP, AIF, is the vice president at Plancorp.