July 20, 2022 by Interchange Capital Partners
By Brian Baum, CEPA®, CFP®
Family businesses face a pivotal moment when considering succession - keep the legacy within the family or transition to outside ownership. While our previous article explored the advantages of selling, understanding when to maintain family ownership shapes the future of both your business and family capital.
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.
Motivated Next-Generation Leadership
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.
Strong Non-Family Employee Relations
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.
Performance-Driven Company 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.
Timing and Business Valuation
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.
Sufficient Family Liquidity
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 business consultant 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.
Next Steps in Your Family Business Succession Journey
Structuring your family business exit requires careful navigation between keeping it in the family or selling it to a third party. At Interchange Capital Partners, our business consulting services guide families through complex exit decisions by looking at the individual, family, business, and ownership dynamics. Through our Clarity Foundation™, we provide clear pathways to navigate these decisions in alignment with your goals.
To discuss how our business consulting expertise can help define your path forward, connect with us at team@interchangecp.com or 412-307-4230.
About Brian
Brian Baum is the CEO & President of Interchange Capital Partners, where he leads the development of innovative strategies tailored to the unique needs of private and multi-generational companies. Early in his career, Brian conducted over 1,000 interviews with CEOs, Presidents, and Chairmen of privately held companies, uncovering a critical insight: the larger the company, the more likely the owners were to struggle with complex family, business, and ownership dynamics. Even more striking was the realization that many of these business leaders were unaware of these complexities and the sophisticated level of advice needed to effectively navigate them.
Armed with this understanding, Brian has been instrumental in reshaping Interchange’s focus, aligning its services with the lifecycle of generational transitions. His approach provides owners with expert guidance through the critical phases before, during, and after an ownership change, addressing both the immediate needs and the long-term vision of the business and family. Under Brian’s leadership, Interchange has become a leading resource for business owners seeking to solve intricate challenges and create lasting value.
Brian's vision extends beyond traditional financial advice; he positions Interchange as a family business advisory firm, recognizing the interconnectedness of family and business in creating enduring success. His leadership is not only about working to optimize financial outcomes but also about enhancing the overall well-being of the families he serves. Interchange’s work involves coordinating all aspects of a family's financial, business, and ownership strategies, akin to managing an outsourced family office, ensuring that no aspect is overlooked.
Brian’s educational background includes a Bachelor of Arts from Penn State University, where he majored in Psychology and minored in Business. He is also a Certified Exit Planning Advisor (CEPA) and a CERTIFIED FINANCIAL PLANNER™ (CFP®).
Outside of work, Brian enjoys spending quality time with his wife, Natalie, and their two daughters, Quinn and Blair. He is an avid golfer and enjoys the occasional scotch and cigar. To learn more about Brian, connect with him on LinkedIn.
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