In almost every family transition, the business is the funding mechanism for a transaction. This is because it is incredibly rare for a next generation family member(s) to have enough liquidity to buy the business outright from the senior generation. Since the next generation is often light on collateral, obtaining financing can be more challenging.
In every family business ownership transaction that I have been involved with, an inevitable goal is to not over-stress the company. A structure needs to strike a healthy balance between what is rational and what is reasonable for the business. Careful consideration must be given to layering a transaction structure on the company’s existing capital structure and cash flows. It’s critical to evaluate what the impact will be to the business as well as whether the senior generation’s needs will be met.
Below are key action items when structuring a family transition plan.
- Achieve goal clarity amongst the senior and next generations. This is one of the most overlooked and underappreciated steps in a family transition process. Not knowing what is most important to each of the parties impacted will inevitably create more work and frustration down the road, so make sure you’re on the same page early in the process.
- Know the value of your business. Many business owners struggle with knowing how much their business is worth. They have spent years dedicated to working and growing their business and in many cases, it represents their largest personal asset. Making a small investment to estimate the value of the business can go a long way and allows everyone to have realistic expectations when you eventually structure the transaction.
- Evaluate and structure a plan that supports everyone’s goals and objectives. Understanding what everyone needs on the front end provides the proper guidance for the structure on the back end. The analysis required for a thoughtful structure can take several months because it involves reviewing historical operations, future expectations, and tax consequences.
Investing in a process that accounts for both the interests of the family and the sustainability of the family business will take time and financial resources, but in the end it will lead to a more thoughtful and successful outcome. Implementing the items above will give you the ability to positively impact the business while meeting the needs of the exiting senior generation.