We have outlined three different methods to consider when you think about your exit strategy – maximize price, maximize continuity, and maximize legacy. We will now take a deeper dive into each strategy and how you can approach thinking about each one.
The final exit strategy to discuss is the Maximize Legacy strategy. This strategy takes internal succession one step further. The end goal is to pass your business to your family in the most efficient manner while placing less emphasis on the price and deal structure for you, the owner. If keeping your business in the family is important to you, planning for transitions is essential. The more time you have before your exit, the more levers you can pull to make this strategy work, both financially and relationally with your family.
A successful family transition carries many benefits. You get to see your business continue to serve your family into the next generation, and you have the satisfaction of knowing that you have stewarded your business well for their benefit. This strategy can enhance familial relationships as you work together in the business, creating lifetime bonds with the next generation(s). Your team can also experience the benefits of continuity if the values of the company continue into the next generation. We have all seen photographs of two, three or even four generations of family members serving in a business together, and it would be hard to find a more meaningful business outcome.
On the flipside, many family business transitions do not work. Less than one-third of family businesses survive to the second generation, and only 13% make it to the third generation. Relationships are perhaps the most challenging hurdle in a family business. Without healthy relationships among the individuals who are running the business, a successful transition is nearly impossible. There is also the risk that the business becomes the dominant focus of the family, with the result that the way the business goes, the family goes. This can put an unhealthy strain on a family, especially if the business is struggling.
On the financial side, if you wish to pass your business to your family, you need to diversify financially so that the business is only one of your assets. If you can build a robust personal portfolio independent from the business, you will be free to structure a transition plan without needing a strong financial outcome to make your exit viable. It also allows you to use planning tools that are unique to closely held businesses, such as legitimate valuation discounting and lower interest rates on installment loans. You can also use gifting to minimize the total price that the next generation must pay.
For the legacy strategy to work, you need to start planning early. You must be intentional about building guiderails into your business to provide clarity for your team and future family members so they know what the business growth path looks like. You also need to focus on building your personal balance sheet little-by-little to maximize your options at exit. Finally, you need to drive bottom line profitability in your business so that a transition to the next generation is financially feasible.
Maximizing Legacy is an admirable goal that can offer significant rewards, many of which are non-financial. Focusing on a comprehensive, long-term strategy to pass your business to family needs to start early and be revisited often. Your team, professional advisors and family members need consistent communication around your plan to maximize clarity and create a clear path for the future.
Garry North, CFP®
Managing Partner
