All in the Family: Intergenerational Business Transfers

Robertson Family Business

Unlike the Robertson family business, it is no longer guaranteed that the next generation will take over the business.

A significant wealth transfer is occurring and it is creating anxiety for many owners.  In a 2012 PricewaterhouseCoopers study of family business owners 32% of respondents were already apprehensive about the transfer of the business to the next generation.  The same study reported that 41% of respondents intended to pass on both the ownership and management of their business to the next generation, although more than half were unsure whether the next generation has the necessary skills and enthusiasm. (Study)

Aging boomers and high valuations mean that from a financial standpoint, now is a great to time transfer a business interest. However, with the tension that the above statistics represent, how do you do it effectively?  We asked a few professionals for their insights.

Get it in Writing: Richard Hayman and his brother purchased the family business from their father in the early 80’s with very little documentation.  Thankfully, it was successful and all the parties lived up to the commitments made in the terms.  In the ensuing years, Richard and his brother grew their point-of-sale business and eventually sold it to a large public company taking it outside of the family.  Despite this success, Richard wouldn’t do it the same way today.

“Today, if I were doing it with my children, I would treat it no different than selling to a third party at arm’s length. The terms can be generous because it’s family. But the language of the agreements must be precise, thorough, complete, and very formal.”  He has used this advice while investing in his son-in-law’s business.  “Those documents might become very important if and when the s&$t hits the fan.” Hayman says.

Assess: Sarah Bridges, a CLP partner, is a consultant who often coaches owners and their families on intergenerational transfers.  Sarah starts by sitting down with the next generation of family business owners.  She wants to see what these potential successors are thinking and capable of.  What are their desires? What are their skillsets?  Are they able to run a business  Through her assessment process Sarah attempts to find the degree of fit between the person being considered and the job of running the business.

By identifying specific behaviors that are key to success in a given role and by assessing individuals against each of these behaviors, Sarah helps current owners determine how well a potential successor is suited for a particular role. Determining this degree of fit provides owners with relevant information they can use as the basis for helping select the most appropriate successor and preparing them for the future role.

Start Early: John Lafferty who is an interim and virtual CFO at CFO-Pro has witness and assisted numerous sales within family businesses.  “Plan the sale well in advance of the desired exit date. Executing an insider transfer takes longer than executing a sale to a third party.”  John goes on to explain. “Typically in a third-party sale, both parties have agreed to move forward towards a transaction closing date somewhere between 3 months and 9 months, pending the results of due diligence by both parties.  In an insider sale, thought processes and discussions can go on for an extended period before proceeding towards a transaction closing date.  The owner will be considering who on the inside he will sell to.  There is no third party pushing for a transaction, but there could be an insider pushing for a transaction.  The owner just may not be as close to considering such a move until a number of things happen.  That can take far longer than 9 months.”

Work with a Specialist: David Braun is the founder and CEO of Capstone Strategic and has over 20 years of experience in M&A with over $1 billion in transactions.  He emphasized the importance of working with professionals who not only understand the technical aspects of the transfer but also understand the family dynamics.  “Because you are dealing with what can be an emotional decision, it is critical to have an attorney who specializes in M&A and has the temperament to work with family dynamics.  Bedside manner can be what gets a deal done.”  David also emphasized putting things into perspective. “In my opinion, it is better to keep your family than lose them over a business transaction.  Know what issues are important to everyone and, with a good advisor, you can hopefully complete the deal and still have Thanksgiving together.”

Being purposeful and having a plan makes success in transferring your business possible.  In 2014, allow time to account for the financial and non-financial aspects of transferring ownership.

Collaborative Legacy Partners wants to hear your story and help you make a smooth transition into the next stage of your life.  Contact us today.