Family Business Exit Planning: The Next Generation or M&A?
In Part 1 of our series on Building a Future For Your Family Business, we highlighted the importance of succession planning for family business owners looking to maintain a legacy within their family. And while some owners will pass along their companies to children or other family members, others may explore other options. In Part 2 below, we explore various exit options for owners of family businesses, including both family- and non-family options.
To download the complete whitepaper, click here.
Succession: The Next Generation
Arguably the most critical element of the succession plan will be who will take over the company when the current owner leaves. For approximately 33 percent of family businesses — according to the Small Business Administration — that includes the next generation of family members. For those owners, determining how to leave their business to a family member or members can be a challenging personal and professional decision, and there are a variety of ways the torch can be passed.
- Outright Sale: As an owner, you have the option to sell the company outright to a child or other family member.
- Buy/Sell Agreement: An owner and interested family members can draft a buy/sell agreement, which governs ownership of the business if the owner passes away or otherwise exits. Buy/sell agreements most often contain information on what event(s) would trigger such an agreement, who has the right to purchase ownership shares and how the value of said shares will be determined.
- Transfer through Living Trust: Another option for owners is the use of a living trust, which allows owners to transfer their ownership interests into the trust and designate a trustee to oversee in the event the owner is no longer living. Living trusts not only act as a mechanism for transferring ownership, they also help avoid lengthy probate disputes and prevent business assets from being used to satisfy personal debts.
- Gift: Owners also have the option of ‘gifting’ their business to family members, however, tax implications play an important role in this process and should be closely considered.
Succession: When the Business Leaves the Family
Oftentimes, the line of succession isn’t always clear for a family business. If a child, sibling or other family member isn’t available or chooses not to assume ownership of the business, the owner/operator may look outside the family and explore merger or acquisition (M&A) opportunities.
The marketplace for M&A remains strong, with sustained deal activity continuing for middle-market companies involved with both corporate and private equity transactions. Family businesses are often an attractive asset to buyers, given their inclination to operate more fiscally conservative and take on less debt than their privately-owned counterparts.
And with certain industries experiencing rapid change — including many popular industries for families, such as manufacturing, distribution and service — there could be great opportunity outside the intergenerational family. So, the question for family business owners then becomes: am I open to a merger, acquisition or other exit via an external buyer?
If so, there are a number of exit strategies to explore, including (but not limited to):
- Merger: In its simplest form, this describes the joining of two entities; in most cases, one of the parties retains the brand while the other ceases to exist.
- Acquisition: The acquiring party (often an industry-focused corporation or private equity firm) invests and acquires ownership rights and a majority stake in the business.
- Management Buyout (MBO): The company’s existing managers acquire ownership of all or part of the business they manage.
- Recapitalization: Used as a strategy to stabilize a company’s capital structure, recapitalization involves restructuring a business’ debt and equity mixture (typically exchanging one for the other).
An investment banker or trust advisor can walk you through the various options and help you to determine which may make the most sense for your business.
Should you decide to go the M&A route, it’s important to understand that the approach to the transaction process is unique for family businesses as there is typically more of an attachment to the business – the owner has built the business themselves or a previous generation of their family has built it. This can often lead to a longer, more methodical transaction process that takes into account what the owner truly wants for the future of the business when it is no longer controlled by a family member.
Material discussed in this communication is meant to provide general information and should not be acted on without obtaining professional advice tailored to you or your company’s individual and specific needs. Any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used by any person or entity, for the purpose of (i) avoiding penalties that may be imposed on any taxpayer or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. This information is for general guidance only and is not a substitute for professional advice.
The information contained herein should not be construed as personalized investment advice. Investment in securities involves the risk of loss, and past performance is no guarantee of future results. There is no guarantee that the views and opinions expressed in this document will come to pass. Historical performance results for investment indexes and/or categories generally do not reflect the deduction of transaction and/or custodial charges or the deduction of an investment-management fee, the incurrence of which would have the effect of decreasing historical performance results. There can be no assurances that your portfolio will match or outperform any particular benchmark.
Information presented was obtained from sources deemed qualified and reliable; however, MFA makes no representations as to accuracy, completeness, suitability, or validity of any information within this communication and will not be liable for any errors, omissions, or delays in this information or any losses, injuries, or damages arising from its display or use. Any forward-looking statements are believed to be reasonable; however, MFA gives no assurance that such expectations will prove to be correct.