5 Reasons to Keep the Business in the Family: Part 2
July 20, 2022 by Interchange Capital Partners
By Brian Baum, CEPA®, CFP®
There comes a time when every family-owned business must either pass to the next generation or be sold to someone outside the family. This is a complicated decision that can quickly turn emotional when you think about all you’ve worked to build suddenly belonging to someone else.
In our previous article, we discussed the advantages of selling your family business, but that is just one side of the equation. In this article, we’ll discuss five reasons to keep your business in the family and how to decide if it makes sense for you.
1. The Next Generation Is Highly Motivated to Carry the Torch
One of the best reasons to keep the business in the family is if the company is doing well and the next generation is highly motivated to take over. Maybe you have a son or daughter who has grown up in the company, is well-liked, and knows how to handle the day-to-day operations. Perhaps they have outside business experience that makes them a qualified leader as well. This is the best-case scenario, especially when combined with a business that has steady growth and strong financials. These characteristics can be a great sign that your business would thrive if it was kept in the family.
2. Non-Family Employees & Shareholders Feel Equally Valued
Another factor that makes keeping the business in the family a viable option is if non-family employees and shareholders feel equally valued in your company. This indicates that your retirement would not be detrimental to the overall operation of the business because you have built a cohesive culture that is based on more than one individual’s talents, skills, or personality traits. If this is the case for your company, chances are that non-family employees and shareholders will still feel motivated to work toward the success of the company even if you are no longer the one in charge.
3. The Business Has a Performance-Driven Culture
If your business has a performance-driven culture that focuses on tangible results as opposed to family relationships, then it’s a good candidate for being kept in the family. This is because businesses with performance-driven cultures are much less likely to fall victim to the nepotism trap.
Family members who work for the company are held to the same standards as other employees, meaning they are only promoted to management if they are truly qualified based on their past performance and skill sets. Performance-driven cultures lend credibility to the next generation since they have to earn their management position over time. This can help create buy-in and support from non-family employees before the transition in management takes place.
4. The Sale Price Would Be Inadequate at This Time
It’s not uncommon to have a successful business with a lackluster sale price. It may not fully reflect the true value of the company, or its value may not be large enough to finance other goals like retirement. In this case, it would make more sense to keep the business in the family until its sale price matches the underlying value.
There are several reasons why the sale price might be inadequate. Maybe you don’t have a strong succession plan in place, or maybe you are experiencing a down year due to supply-chain constraints or other factors outside your control. Perhaps you’ve had a recent bout of employee turnover or some other one-off event that causes your valuation to drop. No matter what the situation is, delaying the sale can be an effective way to give your business a chance to increase in value and generate a larger sale price.
5. Current Liquidity Is Adequate
If your family’s liquidity needs are adequately met with your current business setup, then keeping the business in the family is probably a good option. In some cases, significant amounts of an owner’s personal wealth might be tied up in the business, making it next to impossible to successfully retire without selling assets of the business or the entire business itself. If this is not the case for you, then you will have more options when it comes to how to structure your exit plan. You won’t be forced to sell to meet liquidity needs, but you also don’t have to keep the business if you would rather take the payout.
Working with a financial professional who is skilled in business valuation can help you determine both what your business is worth and how much liquidity you currently have. Be sure to thoroughly assess these numbers before making a decision to keep the business or sell.
Making the Right Choice
Structuring your exit from a family business can be a tricky decision to navigate. Should you keep it in the family or sell to a third party? At Interchange Capital Partners, we have helped many business owners navigate this question with confidence. Our unbiased business valuation process can help you find clarity in your situation so you can feel good about the decisions you make. To learn more about how we can help, email us at firstname.lastname@example.org or call our office at 412-307-4230 to schedule an introductory appointment.
Brian Baum is the managing director of Interchange Capital Partners, an independent registered investment advisory firm providing family office and transition strategy services to family businesses. With 10 years of experience, Brian spends his days working with our clients to determine ideal strategies to simplify and optimize their processes and the future of their business. He is known for his attention to detail and going the extra mile to become familiar with the dynamics surrounding each situation so he can offer customized and creative guidance.
Brian has a bachelor’s degree in psychology with a minor in business from Penn State and is a Certified Exit Planning Advisor (CEPA) and CERTIFIED FINANCIAL PLANNER™ professional. Brian is also the president of the Pittsburgh Exit Planning Chapter, which he helped found in 2019. The chapter’s mission is to give business owners a forum to become educated on how to build a valuable and transferable business through a proven process. Outside of work, Brian enjoys spending time with his wife, Natalie, and their daughters, Quinn and Blair. He is also an avid golfer and likes the occasional scotch and cigar. To learn more about Brian, connect with him on LinkedIn.
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