Succession Planning for a Family Business

Nov 27, 2018

Denzel Washington has been one of my favorite actors for decades.  His performances in Fences, Glory, Malcolm X, and Philadelphia all resonated with me and impacted how I looked at history and the world around me.  I recently watched an interview with Denzel Washington where he discussed the impact his local Boys & Girls Club had on his life.  I am a strong advocate for youth organizations, so the interview was about a subject of interest.  I believe an important element contributing to the positive social & educational development of children occurs playing athletics, participating in music & arts programs, and developing relationships in non-academic environments with peers & community members.  I applaud Denzel Washington for his advocacy and financial contributions to Boys & Girls Clubs. They changed his life and have the potential to do that for future generations of American youth.

Denzel Washington also said something during the interview that resonated with me as a professional mergers & acquisitions intermediary facilitating transactions in the “middle market” in the Pacific Northwest.  The following is the statement he made:

“You’ll never see a U-Haul behind a hearse…Now I’ve been blessed to make hundreds of millions of dollars in my life.  I can’t take it with me, and neither can you.  It’s not how much you have but what you do with what you have.”

Estate planning for the “baby boomer” generation is a significant focus area for the wealth management industry presently in the United States.  IBA, as the oldest business brokerage firm in the Pacific Northwest, and a professional intermediary company with a reputation for facilitating “win-win” business sale transactions while employing “best practices” throughout the sale process is regularly approached by entrepreneurs and their professional advisers for assistance transitioning ownership of privately held companies and family businesses.

One of the first topics of discussion with potential clients is who do you want to transition the business to and when do you want it to occur.  It is a known fact, that “father time” does not stop for anyone, so for the owner of a privately held company or family business it is never a matter of if the executive management of the business will need to be transitioned, but when that transition will take place.  Once the desired timing of the transition of ownership is established, it is always my recommendation that a transition occur at a relaxed pace while the business owner is in good health, able to convey knowledge to & train their successor in an appropriate time period, and the business is doing well financially & operationally, that the demographic profile of the successor be defined. Business ownership successors traditionally come in three general demographic profiles.  The demographic profiles are family member, employee, and outside party.  Each of the demographic profiles have their own unique characteristics, advantages, and obstacles related to transitioning ownership of a business.

Many business owners desire to transition ownership of their companies to younger generation family members.  In many cases this can lead to a smooth transition of ownership, especially if the targeted successor family member or members already work in the business and are familiar with the history and business operations of the company.  Complications can occur in these situations when the desired successor(s) lack the necessary capital or ability to obtain financing to acquire the company, value the business at a lower amount than the founder, or multiple family members relevant to estate planning & future wealth distribution exist.   In these situations, it is prudent to engage professional advisers with relevant knowledge & experience to facilitate discussions and activities related to the transition of ownership to insure family harmony prevails in the present & future.  The last thing most entrepreneurs want in their “golden years” is to create confrontation between family members over legacy wealth that impacts their future interaction with siblings, children, and grandchildren.

A second common group to transition ownership of a business to are key employees.  A transition of ownership to employees can appear logical and conducive to continued company success.  It also has its own set of potential issues that can add turbulence to the transition process.  In addition, to the issues related to financial strength, acquisition funding capability, and company valuation articulated for family members, selling to a key employee or group of employees can have issues related to who gets to purchase the business, what percentage of the company can be purchased, and keeping a sale confidential until money changes hands between the parties.   Keeping a potential sale confidential until disclosure is desired by existing ownership can be especially problematic in an internal succession of ownership within a company as it is common for employees to want to discuss and share information about a business sale with each other, customers, and vendors.  Once this information is in the public domain it traditionally becomes public knowledge.  This can damage a business if the transaction does not occur in a timely basis and/or competitors become aware of the transition of ownership.  It is recommended that professional advisers be engaged to assist with a business sale of this nature.

The final and highest frequency group to facilitate a transition ownership of a privately held company or family owned business to is an outside party.  A sale of this nature commonly requires a longer due diligence period and post transaction period of engagement by ownership.  Advantages of this type of transaction include a stronger ability to maintain an environment of confidentiality related to the business sale, a deeper & more diverse pool of potential buyers for the business, and the ability to verify the owner receives a fair market value for the business at time of sale.  The sale of a privately held business is a sophisticated, nuanced process requiring knowledge, experience, and strong professional skill set.  Business owners wishing to sell to a private party for a fair market value in a timely manner in a transaction employing best practices should seriously consider engaging a business sale intermediary to represent them in the sale.  Poor strategic planning or execution in a business sale can result in a significantly lower market value and/or damage to the business model & operations.

A privately held company is commonly the largest financial asset in an entrepreneur’s estate.  A business is not an asset that the founder can take with them or run from the grave.  Multiple good options exist for a succession of ownership of a business for an entrepreneur.  The first steps in a prudent business sale process are to evaluate sale options and select appropriate professional advisers.  IBA has successfully facilitated over 4000 business sale transactions since 1975 in the Pacific Northwest.  If you are considering a business sale in 2019, we would welcome the opportunity to learn about your business & exit strategy objectives and provide an overview of the services we provide our clients.  All information provided to IBA is held in strict confidence.  100% of IBA’s fees are paid upon performance at completion of a project.

IBA, the Pacific Northwest’s premier business brokerage firm since 1975, is available as an information resource to the media, business brokerage, and mergers & acquisitions community on subjects relevant to the purchase & sale of privately held companies and family owned businesses.  IBA is recognized as one of the best business brokerage firms in the nation based on its long track record of successfully negotiating “win-win” business sale transactions in environments of full disclosure employing “best practices”.