At some point in time, every family business owner will retire and either sell their ownership interest or leave the company to others.
The key to a seamless transition is to identify exit strategies that address the needs of not only the departing owner, but also the business and its other stakeholders. Your goal is to create an organization that can sustain itself, even if you are not there.
A business valuable to a buyer or successor is one that is easy to step into and run with some confidence that it will be successful for years to come. Whether you leave your business to family members or sell it to an outsider, its valuation and sustainability are impacted by a myriad of factors:
• Competitive advantages such as recurring revenue, exclusive sales agreements, proprietary and attractive products in high demand
• Upward growth trend in sales and profits, with a focus on earnings.
• Suitable location that can accommodate future growth
• Trained staff and management team members who are knowledgeable and empowered to assume responsibility
• Reliable financial systems that include financial statements and management reports, including strong internal controls
• Up-to-date facilities and equipment, recording assets properly on your balance sheet
• Standard policies and procedures in place
• Focused marketing programs
• Regulatory threats or potential litigation managed
• Broad and diverse customer base
• Longevity of customers
…and many more
Map the course
The most common exit strategies for family businesses include:
• Buy-sell agreements, which can provide liquidity upon the owner’s retirement or an unexpected “triggering” event, such as death or disability
• Gifts and inheritances, which work well for owners seeking to transfer ownership to relatives or a worthy charity
• Related-party sales to employees or other potential buyers, such as suppliers, customers and competitors
• Private equity transactions
It is important to work with your business professionals to familiarize yourself on the transition process, strategies employed and terminology. Your Certified Public Accountants, attorneys and business valuation experts will be your allies in helping you put together a plan that meets your goals and can assist you through the entire process — valuation, deal structure, tax implications, terms, negotiation, purchase price allocation and more.
Ursula Scroggs, CPA, is managing director at DKSS CPAs + Advisors, with offices in Troy and St. Clair Shores, Michigan. Jean Stenger, CPA, is a senior accounting manager with DKSS.