Family businesses have qualities unique from other businesses.
A family business is identified as a business that is owned and/or directed by multiple members of the same family. Though daily operations are like those of any non-family-owned business in their industry, decisions about the direction of the company are influenced by family dynamics.
When the decision-making for a business is intertwined with family relations, it complicates the exit strategy for your business. But if you plan your exit strategy well before the day your retirement arrives, you’ll avoid conflict and financial loss. In this guide, I discuss the transfer of ownership, selling the business, and liquidation as the three main types of exit strategies for family businesses, and the benefits and drawbacks of each.
Why you need an exit strategy for your family business
As mentioned before, family dynamics heavily influence how a family business operates. It’s rarely just about the money; family businesses are steeped in tradition, family history and lore, generational expectations, and emotions. This complicates decisions about an exit strategy since it’s not just about extracting the most financial value. It can also be about legacy.
I have seen many instances of a family business lacking an exit strategy or succession plan, and it’s tough to watch.
Some business owners don’t have an official plan in place and opt to do a soft exit, but this turns into a severely delayed retirement and resentment from the person set to inherit the business.
- Often, the lack of an exit strategy leads to confusion about who is in charge, leading to familial rivalries or loss of customers when they sense the business is unstable.
- Sometimes, a business owner will secretly sell the family business, which causes anger and violence once the secret is revealed.
- Even family business owners with the best of intentions can create family feuds and lose business value when they don’t have a proper exit strategy in place.
Planning your family business’s exit strategy sooner rather than later lets you set up the business to have the most value, as well as set expectations amongst family members. You’ll also ensure you can retire on time.
What to consider when deciding on the exit strategy for your family business
You want to have a well-considered, strategic plan to help you, your business, and your clients as you move into this next phase as a business owner. As a starting point, your exit plan should consider the following:
- How long do you want to remain in the business?
- If you are planning to remain in the business, in what capacity?
- Your financial expectations
- Any investor or third-party compensation that must be considered
No matter where you are in this journey as a family business owner, the most essential thing you can do today is to plan for your exit strategy proactively through family business financial planning. By planning several years in advance, you can enhance the value of your business and get more for all your hard work.
Types of exit plans family businesses should consider
There are several strategies you can leverage when it’s time to leave your company. Let’s look at the most common exit strategies for family businesses.
Transfer of Ownership
Transfer of ownership in a family business typically happens when you pass the business on to another family member, and no money exchanges hands. Instead, it is structured as a gift, which can earn you tax exemptions.
Aside from the tax benefits of ownership transferal, there are the familial aspects. Your choice to pass the business on to the next generation in your family will have an impact on your family’s legacy, good or bad.
BENEFITS OF TRANSFER OF OWNERSHIP FOR YOUR FAMILY BUSINESS
- If structured as a gift, you receive tax exemptions
- If you’re not fully ready to retire, it can allow for a slower exit
- If the business is healthy, it can ensure a stable income for your descendants
- If you have heirs that you trust with the business, it can help ensure your family’s financial legacy for generations to come
DRAWBACKS OF TRANSFER OF OWNERSHIP FOR YOUR FAMILY BUSINESS
- If the business has a high value, it reduces the financial benefits to you
- It may make you feel you can’t fully leave the business behind, draining your time during retirement
- If passed on to an heir who is incapable of running the business, it can have a negative impact on your family’s legacy
Selling The Business
If you decide to sell your family business, that means you can sell it to an outsider or a family member. By choosing the latter, it allows you to maintain the family’s legacy with the business while also reaping financial rewards that will help you plan for retirement.
BENEFITS OF SELLING YOUR FAMILY BUSINESS (TO AN OUTSIDER OR A FAMILY MEMBER)
By selling the company, you can (mostly) control the following:
- The price at which you sell your company
- Whom you sell your company to
- Your role in the company moving forward
- Funds gained from the sale can help you in retirement
DRAWBACKS OF SELLING YOUR FAMILY BUSINESS (TO AN OUTSIDER OR A FAMILY MEMBER)
- If sold to an outsider without consulting family members first, may cause acrimony within your family
- If the business has a high value, it will hurt your generational wealth
- If sold to a family member, the sale itself may cause acrimony if the terms of the sale are deemed unfair
- You miss out on tax exemptions
Methods for selling your family business
There are several strategies you can deploy when it comes to financing the buy-sell of a business. While some of these ideas can get a bit in the weeds, below is a list of some standard financing techniques for a buy-sell of a small business:
- Family sale buy-sell agreement
- Coordinating the sale of your business with gifts
- Installment sale
- Private annuity
- Self-canceling installment note (SCIN)
Liquidate the family business
While liquidating is most people’s last resort, any family business owner could choose this route. In this case, you would close the business and sell off any assets related to your company.
Liquidating your company isn’t always ideal because your only profits come from what you can sell. Priceless assets like client lists, business relationships, and other intangibles won’t hold much value, even though these elements would be critical in a business sale situation.
BENEFITS OF LIQUIDATING YOUR FAMILY BUSINESS
- It can be the quickest way to obtain cash
- If you’re possessive, it prevents anyone else from getting their hands in your business affairs
- If no one wants to buy or inherit the business, it’s a way to recoup money from it
DRAWBACKS OF LIQUIDATING YOUR FAMILY BUSINESS
- There is a loss of value to intangible assets like client lists and business relationships
- May cause acrimony among family members if someone in the family was interested in owning the business
- You lose out on certain tax exemptions
- You must pay taxes on any income gained from the liquidation
Your family business holds value, and your exit strategy must reflect it. We can help you create a robust plan that accounts for your present and future goals so you can walk into the next phase of your life and business with confidence and fulfillment.
It is crucial to build a team with a competent lawyer and a financial advisor who can help with tax planning when it comes to exit planning for family business owners. To prepare for your future and create a strategy that truly supports your vision, please do not hesitate to contact us.
Craig Toberman is the Founder of Toberman Wealth – a fee-only, fiduciary financial advisor based in St. Louis. He assists families and businesses with strategic financial planning and long-term wealth management. He has over a decade of experience in financial services and has crafted custom financial plans for hundreds of families and businesses.
Craig received a Bachelor of Science (B.S.) degree in Agricultural and Consumer Economics from the University of Illinois and a Master of Business Administration (M.B.A.) degree in Finance from Saint Louis University. He is a Certified Financial Planner (CFP), Chartered Financial Analyst (CFA) charterholder, and Certified Public Accountant (CPA).
Craig is a member of the National Association of Personal Financial Advisors (NAPFA), Fee-Only Network, and XY Planning Network.
Craig lives in the greater St. Louis area with his wife, Ally and son, Hank.