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Managing a family business transition: 5 big considerations

Oct 20, 2021

Because of the interpersonal and family dynamics involved, family business transitions are more complex than a standard business transition. Money is a big issue, to be sure, but family harmony can often be a larger part of the process.

In order to manage such a transition effectively, it’s important to start digging into each party’s individual goals and assumptions. One approach is to use a structured interview process, which encourages honest discourse and facilitates an exchange of ideas around both business and personal issues. Interviews should be performed individually with each party across a range of dimensions, including:

1. Ownership

Owners must understand that ownership is not a single thing. It’s actually comprised of several parts, and these parts can be broken apart and transitioned separately. We encourage you to understand ownership as:

  • Equity: the value of shares in the company
  • Income: the cash flow produced by the company
  • Control: the ability to affect the decision-making process of the company

2. Involvement

Business involvement means different things to different people. It’s important to consider the operational, economic and emotional changes ahead.

Ownership or oversight: To what extent is the owner prepared to step away?

  • Does the exiting owner want out of all involvement with the company (i.e., a clean break)?
  • Does the owner want to retain some control? Is that strategic, high level or day-to-day?

Financial obligations: Will the owner be required to maintain a financial relationship with the company?

  • Is the owner holding any personal guarantees for business debt?
  • Is the owner needed for bonding? (Do the intended new owners have the collateral required to meet the business’s bonding needs?)

Relationships: Does the owner maintain any key relationships that are necessary for the business to continue? Is there a risk, for example, that employees, clients or vendors will leave when the owner leaves?

Emotions: What’s it going to take to maintain family harmony going forward?

  • Who are the family stakeholders, and what is their emotional connection to the business or owner?
  • How can family relationships be nurtured/honored in this process?

3. Time horizon

Timing matters from both a financial and a leadership standpoint. Long-term succession planning can give your next-generation owners time to learn the ins and outs of business leadership.

When selling to family or other insiders, payments are often structured over an extended timeframe — sometimes 10 years or more. That can create risk for the seller. What if new leaders aren’t fully prepared and the business flounders in the years ahead? The owner may not receive full proceeds from the sale, potentially putting their own retirement and financial future at risk.

A financial advisor can help you coordinate your financial needs with a business transition. It’s a good idea to have these conversations well in advance of an intended transition. A formal succession plan can help prepare your successors for both the operational and financial obligations ahead.

4. Value

Business value can be a sensitive issue, particularly when transitioning the business to someone you know and care about. You may be willing to accept a lower value in order to transition the business to the people who helped you build it. But how much lower?

On the opposite side, you want your “insider” buyers to have full confidence in the value being transitioned. Imagine there’s some kind of blip ahead, and suddenly your nephew is struggling to make debt payments and silently wondering if his trusted aunt and uncle overcharged him.

An independent third party business valuation can help both parties find peace of mind that the transaction was fair to all involved. Ideally, you could start getting summary valuations for your business on a regular cadence. These valuations can be used for internal planning and can help set a baseline value that everyone agrees to — before you talk about succession.

5. Structure

When selling to family or other business insiders, your buyer typically won’t have the cash to buy 100% of the business up front. There are different ways to structure a family transition that takes these buyers’ financial limitations into account, including installment sales, seller financing or stock redemption plans. When choosing the best approach, consider the tax ramifications, financing requirements and how soon you’re looking to retire.

Another way to transition a business over time is to sell, bonus or gift shares of stock. These are usually small interests gifted over time. Again, talk to your advisors about the tax implications involved. Are you gifting the business at a fair value? Or are you gifting as a way to better manage estate taxes — and if so, are you doing it within the proper boundaries?

Putting it all together: Is everyone on the same page?

Once your advisor has conducted these individual assessments and examined each party’s goals, it’s time to determine whether everyone is in alignment.

Ideally the current owner’s goals overlap with the recipient’s goals, and a clear path is readily determinable. Should there be gaps between the current and future owners, your advisor can assist both sides to work together to determine if a workable solution can be found.

If you’re thinking about transitioning your business, the first step is to talk to advisors experienced in helping owners with these types of decisions.

At Wipfli, our business transition group uses a structured interview honed over thousands of hours of interviews to best understand the needs of current owners, key executives and future owners.

We can help you create a business transition plan that takes into account the tricky mix of family, business and finances. We provide objective advice to help you achieve your transition goals — while avoiding family conflict. Talk to us to get started.

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Tina Nazier, MBA, CPC
Director, Strategic Alignment
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