Getting Business Succession Done When You Want It
Chia-Li Chien, PhD, CFP®, PMP® May 8, 2018
“Succession is the process during which managerial control of the business is transferred from one generation to the next: it includes the dynamics preceding the actual transition as well as the aftermath of the transition,” according to a research study in 2000 (Shepherd & Zacharakis, 2000). For family businesses, there are greater challenges. Some families want to have control remain in the family; some prefer to sell to third parties. But only 23% of family businesses have formal success plans in place, according to PwC’s eighth family business survey (PwC, 2017). Without a formal succession plan in place, especially for internal transfers, the next generation may not have the attitude, aptitude and readiness to take over or assume leadership responsibility.
Ed started his business in 1968 while he was a law professor at a university in PA. Ed wants to retire and would like his three children—Tara, Jerry, and Mary—to take over the business. The children were not in the business at the time of Ed’s succession planning. He divided the companies into equal shares among the children. Tara and Jerry took over the business in 1983. Unfortunately, Mary was a school teacher and not interested in the business. “There was not even a phone line set up when I took over dad’s mail order business in 1983” said Tara. Ed’s succession plan was simple stock transfer, but luckily two of the three children were willing and able to go into the business.
Tara and Jerry transformed Ed’s business from a small mail order business into 14 full-time, four part-time employees, and eight contractors, as well as servicing thousands of customers today. Tara and Jerry would like to retire after years in business. They began asking the next generation about their interest in the business back in 2000. Unfortunately, there was no interests.
Tara and Jerry engaged a business broker late 2016 and began searching for a suitable third-party buyer. Tara and Jerry interviewed eight qualified potential buyers in two years and the search was not easy. Finally, in mid-2017, there was a good match from a strategic buyer, a private equity firm. They closed the deal in March 2018.
Tara and Jerry are not unique to seek out a business broker due to retirement. According to recent research from Pepperdine University, 25% of business owners sell to third parties due to retirement when the deal size (selling price) is between $5 to $50 million (Everett, 2018).
“Two-thirds of family firms have some kind of plan, even if just an informal one” according to PwC’s eighth family business survey (PwC, 2017). As with Tara and Jerry, there was an informal succession plan; ultimately, they let a business broker guide them through the process.
Every owner of business eventually likes to retire and enjoy his or her well-deserved time off regardless of who the successor is. Time is on the owner’s side only if the owner takes action to plan for succession and seek out succession counselors or advisors. Like Tara and Jerry, when they realized the internal transfer is not viable, they took action to engage a business broker to guide them through a third-party sale. Both Tara and Jerry are very lucky; there were 5% to 7% of third-party sales due to owners’ illness, which may not maximize the equity value for the owner. Unless you—the owner—have all the time in the world and believe you’re Moses, it is in your best interest to seek help and capture the maximum equity value for your lifelong hard work.
Reference:
Everett, C. R. (2018, Mar 23). 2018 Private Capital Markets Report. Retrieved from Pepperdine University Graziadio School of Business and Management: https://digitalcommons.pepperdine.edu/cgi/viewcontent.cgi?article=1010&context=gsbm_pcm_pcmr
PwC. (2017). The missing middle: Bridging the strategy gap in US family firms. Retrieved from PWC Private company services: https://www.pwc.com/us/en/private-company-services/publications/assets/pwc-family-business-survey-us-2017.pdf
Shepherd, D. A., & Zacharakis, A. (2000). Structuring Family Business Succession: An Analysis of the Future Leader’s Decision Making. Entrepreneurship: Theory & Practice, 24(4), 25.
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