1) Most business owners are not well prepared to consider succession issues,
2) There is frequently a great disparity in perceived value between owners and buyers.

The Need for Exit Planning

Research suggests that only about 20% of business owners have a formal exit plan in place, leading to various challenges when the time to sell arrives. Several factors contribute to this lack of preparation:

• Lack of Awareness: Some owners may not fully understand the importance of exit planning or may underestimate the complexity of the process.
• Time Constraints: Running a business demands a lot of time and attention, leaving owners with limited bandwidth to focus on exit planning. Finding the time to work on the business, rather than in the business, is a constant challenge.
• Emotional Attachment: Owners may have emotional ties to their businesses, making it difficult for them to consider and plan for exit.
• Optimism: Many founders are optimists by nature. It’s a trait that serves them well in overcoming the inevitable hurdles that come with growing a business. It’s also a trait that allows for things that are not of immediate importance to be swept aside.

However, optimal succession outcomes necessitate early planning and action, whether it’s a generational transfer, partnership, or sale. Without proper preparation, owners risk disappointment when seeking new owners or investors.

Why Early Preparation Matters

Several factors can impact the success of a business sale:

• Overvaluation: Owners often have unrealistic expectations regarding the value of their businesses. An owners’ view on this is often shaped by outlier reports of very successful sales, speculation around price achieved, or by reference to multiples of publicly listed companies. Valuation of private companies is a complex undertaking and one that requires a mix of financial awareness and an understanding of how buyers or investors go about appraising a business.
• Poor Financial Performance: Businesses with declining or unstable financial performance may struggle to attract buyers or achieve desired sale prices. Introducing bullish forecasts for coming years does not overcome the reality of past performance in the sceptical eyes of buyers.
• Founder dependence: Larger companies tend to manage the separation of shareholding from management better, but for many founder-led businesses a failure to put in place a leadership team that has demonstrated its capability can either stop a deal or introduce undesirable requirements upon the seller.
• Market Conditions: Economic downturns or industry-specific challenges can impact the ability to sell a business at desired multiples. Owners almost invariably view their businesses through a positive frame, but differing views of the future can prevent a deal from being done.

Ultimately, the value of a business is that point of equilibrium between the least that a seller is willing to accept and a risk-averse buyer is willing to offer. The key is to understand who the buyers are, why they will be interested and how they appraise a business.

Three Factors That Make For A Successful Exit

We have seen some very successful outcomes when it comes to selling a business. The three things they all had in common were:

1. A founder who focused on an exit strategy, either from the beginning or well ahead of any possible sale. They had a vision for the business that included their personal goals; their strategy was aligned with delivering that vision; and they actively tracked their progress by conducting periodic appraisals of the value of the business.
2. They created enterprises that had strong processes, people and systems. They recognised that securing a buyer or investor was an exercise in perceived risk reduction.
3. Seeking guidance from people with direct experience in investment and sale processes was a natural extension of building the internal capabilities they had in operating their businesses.

There are an increasing number of businesses that founders have spent 30,40+ years building and are now wondering about how to step away. For that commitment and effort to generate the desired financial outcome, those business owners need to focus hard on an Exit Plan and a Business Appraisal valuation to understand what will drive value in their company.

Ready to discuss your exit strategy?

Don’t leave your exit strategy to chance. Begin by developing a solid exit plan and conducting a thorough business appraisal. Our team is here to guide you through the process and help you achieve the best possible outcome for your business sale. Book a call with me today.

1. Succession Planning Challenges

Succession planning is a critical consideration for family businesses, as the transition of leadership from one generation to the next can significantly impact the company’s continuity and future prospects. However, navigating succession dynamics within a family setting can be fraught with complexities, including disagreements among family members, concerns about competence or commitment, and emotional attachments to the business.

One of the biggest challenges is that often the children within the family do not want to continue with the traditional family business and instead have aspirations for their own working paths.

In situations where there is no clear successor or where internal conflicts impede effective leadership transition, selling the company may represent a prudent course of action. By selling to an external buyer or investor, the family can ensure a smooth transition of ownership and management while preserving the business’s legacy and value.

Furthermore, selling the company can provide liquidity for retiring family members, address equity distribution issues, and alleviate the burden of succession planning, allowing the family to focus on other endeavors or interests without compromising the business’s future viability.

2. Taking Advantage of Opportunities

Families have the opportunity to refocus their assets and investments from their traditional markets into other opportunities. By taking advantage advantage of a hot market to sell their companies, families can gain the resources to invest in new directions, industries and growing markets.

As strategic buyers often recognize the value of the family business’s brand, customer base, or intellectual property, leading to attractive acquisition offers that provide the family with substantial financial rewards while positioning the business for continued success under new ownership

For family businesses, strategic growth may entail expanding into new markets, diversifying product lines, or investing in innovative technologies. However, limited resources or expertise may constrain the family’s ability to pursue such growth strategies independently.

In such cases, selling the company can provide the resources for acquisitions or new developments that offer access to resources, markets, or expertise beyond the family’s current reach.

3. Market Conditions and Financial Considerations

External factors such as economic downturns, industry disruptions, or changes in market dynamics can significantly impact the financial performance and valuation of a family business. In some cases, these shifts may create challenges that make it difficult for the family to sustainably operate or grow the business in its current form.

When faced with adverse market conditions or financial pressures, selling the company can offer a timely and pragmatic solution to mitigate risks and maximize value. By capitalizing on favorable market conditions or responding proactively to industry trends, the family can optimize returns on their investment and secure a favorable exit strategy.

Moreover, selling the company can provide the family with the financial resources needed to pursue alternative investment opportunities, support personal aspirations, or address unforeseen expenses, ensuring financial security and flexibility for future generations.

Safeguarding the Family Legacy

In essence, while the decision to sell a family business is never easy, there are compelling reasons why it may be the right choice for the family’s long-term prosperity. Whether driven by strategic growth opportunities, succession planning challenges, or financial considerations, selling the company can unlock new possibilities, safeguard the family’s legacy, and position them for continued success in an ever-changing business landscape.

Let’s Discuss Your Succession Plan

If your family-owned business finds itself in a position of steady revenue and growth potential, now is the time to consider your succession plan. Schedule a call with me or any of our experienced M&A advisors. We’re here to help.

If you own a business and have children, you may have already begun weighing your options regarding your company’s future ownership. Will you sell it to a third party, or do you want it to remain a family business?

For the purpose of this article, we will assume that:

• you want to keep your business in the family;
• you have multiple children; and
• at least one of them is a good candidate to succeed you in running the business.

If that describes your situation, read on. We will examine a number of important questions and challenges that, effectively addressed, can either provide a roadmap for your successful transition of ownership to the next generation, or show you a different destination altogether.

Steps To Plan For Your Intrafamily Transition

“Successfully transferring business ownership to your children takes more than a little thought and planning,” notes an America Express Kabbage article, Transferring Business Ownership to Your Kids. “Done right, it can ensure income, security and a chance to make a difference for the next generation. Done wrong, it can lose both the business and good relationships between your kids.”

Here are some fundamental steps to plan for your intrafamily transition:

1. Estimate the amount of assets or income you and your spouse need to secure your financial independence after you no longer own the company.
2. Determine whether and how the company can generate enough revenue to support your needs and the needs of your successor(s).
3. Pick an exit date – even a tentative target – for planning purposes.
4. As soon as you see the need, consult with a professional advisor; the right attorney, accountant, or financial advisors can inject insight and objectivity into your planning process.
5. Determine a realistic business value. If you are going to sell the business to your kids, offering a discount is fine – as long as you have a reliable and (for tax purposes) defendable starting value.
6. When the time is right (sooner than later), include your kids in the discussion.
7. Determine the best way to transfer the business to your kids (see a helpful Merrill article, “Smart Ways to Transfer the Family Business,” for potential options)
8. Know which of your children should own your business and which should run your business.

Confronting those last considerations – ownership, management and, inevitably, money – is where many intra-family transfers come off of the rails, and it is on that issue that we will focus on the remainder of this article.

Planning for a Company’s Transition

Consider the example of Austin, whose trucking company, in a typical year, generates net income of about $3 million. Austin and his wife have three adult children: Kevin, a video game developer; Jennifer, a college professor; and Mike, who went to work for his dad right out of college, has performed well for 15 years at every level and is Austin’s heir apparent.

Thoughts of slowing down and ultimately retiring caused Austin to begin planning for the company’s transition. With the best of intentions, he convened a family meeting and laid out his plan for transferring to his three kids the company that comprises the lion’s share of his substantial estate (and their inheritance).

Austin’s plan: The kids would form and own equal interests in an LLC, of which Mike would be the managing member. Austin would convey to the kids’ LLC his ownership in the trucking company, in exchange for a $7 million note that would be paid over 10 years in equal monthly payments. Annual profits would be divided equally among the three kids. Mike would run the company.

The kids’ response: At first, crickets. Then …

• Mike: How much am I going to be paid?
• Kevin: How do we know that $7 million is a fair price?
• Jennifer: What if the company can’t make the payments? Are you going to foreclose on us?
• Mike: I’ve worked hard for the company for 15 years. Doesn’t sweat equity entitle me to more than a third ownership?
• Kevin: Mike’s going to want the company to keep as much of the profits as possible. How are we going to get our share?
• Mike: Do I have to take orders from Kevin and Jennifer?
• Jennifer: This is our inheritance. When are we going to get our money? Can I find a buyer for my share of the company? What’s my share going to be worth?

… and so on.

Strategic Questions To Ask

A Forbes article, “Business Transition Planning: How To Leave Your Company To Your Children,” poses a number of questions intended to head off unintended consequences such as those encountered by Austin, including:

• To which kids and in what percentages do I want to transfer my interests?
• How much of the business do I want to transfer now?
• Do I transfer it to all of my kids, or just to the ones who are actively working in the business?
• If not all of the kids are to receive a share, are the non-participating children somehow “made whole” with some other gifts or arrangements?
• If the parent wants to benefit all children but not all are involved in the business, should some distinction between voting and non-voting shares be considered, or some different classes of shares?
• If ownership is going to be vested equally among the children, how will the involved child be compensated (through income and appreciation) to keep him or her motivated to run the business?

How do you handle multiple children’s money needs and expectations? The business may be profitable enough to support your family, but can it also support the families of all of your kids? How do you fairly distribute profits while taking care of the child who is running the company and actually generating those profits?

If the makeup of your estate allows such flexibility, the best plan may be to transfer the business only to the child who takes over leadership, and equitably leave non-business assets to the other children.

Whatever your approach, the complexities noted in this article should at least help you recognize the challenges for which you need to be prepared. It should also help you discern whether keeping the business in the family is truly a viable option, or selling it to a third party is the more realistic course.

If you have questions about the succession or selling your business, feel free to book a call with any of our senior Principals.

*This article originally appeared on IBG Foxfin site.

A family office can be described in many ways and it can take many forms, from a modest, one-person operation to a separate, multi-staff set-up with a mix of internal and third-party advisors at their disposal. KPMG defines it as an “‘ecosystem’ that a family builds around itself to get organized, manage their assets and enable them to enjoy their lifestyles”.*

The concept of a single-family office, family office, or private office generally denotes a hybrid entity of best practice that continues to reinvent itself, much like competitive marketplace firms. The main difference is fiduciary as family offices tend to be private and oriented towards preservation, even if that means a more concise record keeping of the spending of one’s fortune. One of the main components of a successful family office is the central value of administration and observation.

The media and press paint a colorful picture of family offices (FO) as a billionaire’s private office, hardwired to generate obscene profits and take on unregulated risks for the sole benefit of increasing the fortune. They also suggest family offices are merely management hubs to combine the oversight of trust funds and private jet bookings, and that the management office is managed by prototypical ivy leaguers, Oxbridge males, or a set of grand écoles educated analysts in Geneva, playing with billions beneath rotating priceless art. While this has some truth to it, family offices are no longer just for royal households, plutocrats or billionaires. There are many more comfortably rich and moderately wealthy families in the world than there are billionaires.

A Family Business as a Natural Path to Start a Family Office

Throughout the book “Global Family Office Investing” I discuss family businesses and that is for a few reasons – a successful family business is the most organic way to start a family office. It is a natural progression to see a family business transform into a family office; over time the family business may no longer suit the family members and the business is sold resulting in a cash influx. Families are a core element to our security and mental stability. Apart from familial love, money does much of the same.

When you combine the two you should have the utmost in safety, security and fortification with a tinge of dysfunction. A family that talks money and manages money often stays in the money. To keep it in the family, as the old saying goes is much more to remind us of where life comes from: families that stay the course are studies in succession and transition; discipline and luck; evolution and dignity. Regardless, the simple fact remains, most of the billions are created not overnight and not in one generation but in a succession of generations. With luck, a well-planned family office can not only provide family members with income and stability but can help future generations achieve success in their chosen fields.

The Structure of a Family Office

Today, a global family office is available to anyone who decides to establish a family office entity. Over the past decade, technology has levelled the playing field to such that forming a family office is very easy. Most offices begin as a reporting unit, an advisory unit or an office in a family business, and most begin with the success of a family business or generational wealth created by a family member which is then unified around a cohesive plan.

A family office by nature is a long term investor and they should not suffer from a fear of missing out on investments and trends. One of the key differences between someone on the street and a family office is a long term plan that is well defined and well protected. If that plan calls for aggressive investment tactics, usually the aggressive tactics are piled into an appropriate vehicle, or perhaps the family sets up an alpha driven hedge fund. Family offices have certain mandates and so funds will be allocated to particular asset classes and ventures, versus a flow of blind investment.

If you have questions about your family business or looking for investment opportunities, please contact any of our M&A Principals for a non-obligatory call. You can book a call here.

*Source:
– Excerpt from Global Family Office Investing by Chad Hagan (Palgrave, 2021).
– The Emergence of the Family Office

For some business owners, these investors can be the right fit, delivering an opportunity to accelerate their growth and the possibility of a higher future return.  Sometimes, however, what a business owner desires is a financial backer whose interests are better aligned to a strategy for long term growth.

The Growth of the Family Office

Source: Pitchbook, 2018

The increasing importance of Family Offices is a consequence of long term growth in their originating enterprises and generational change.  Accumulation of wealth from established family-controlled businesses and the introduction of professional managers to those operational businesses free up family members to develop a family investment house.

The Family Office brings some significant points of difference as an investor. Unlike private equity and venture capital managers, they are not constrained by the need for a liquidity event to distribute returns to investors. This patient capital is well suited to businesses that cannot attract the attention of investors seeking “moon-shot” opportunities. Additionally, whilst they will have areas of focus they generally have greater freedom to invest in compelling opportunities across different sectors and asset classes. Additionally, as we have found in a recent engagement in the waste management area, businesses in sectors outside of the usual areas of interest for venture capitalists can be attractive to family offices looking for more private investments.

Where a Family Office investor can be attractive

While some company founders may be looking for an immediate exit there are many for whom the goal is to release some cash for their own personal needs while remaining engaged in growing the business.  For them, a patient capital partner with the resources to continue to back their growth may be the best option. This is not uncommon in the technology space where young founders have experienced success and want to remain driving the business but are looking to realise some of that value creation.

Another consideration that commonly plays a part in selecting an investor is the desire of the company owner to preserve the employees, management and culture of their enterprise. Again the less interventionist involvement of a Family Office can facilitate this.

Structuring a deal that works for both parties often poses challenges.  Family Offices have the flexibility to think more creatively about how to construct such an arrangement, outside the constraints of doing a 3-5 year flip.

As in most things, there is a cost for securing these advantages. Generally, Family Offices adopt a more conservative approach to valuation.  They are rarely interested in a competitive process, partly through a desire to protect their privacy and partly due to their fiscal prudence – they rarely utilise debt to leverage their return.

Challenges for Family Offices

Family Offices in their early stages tend to invest in areas close to their domain – they buy what they already understand.  As the Office matures, or the family’s operational connection with their business diminishes, the networks they have within their own industry may weaken.  In that case or upon the introduction of professional investment managers into the Family Office the scope of opportunities considered will tend to broaden.

For many Family Offices, the desire for privacy can constrain the flow of quality deals.  This is where professional advisors, having relationships with Family Offices and free to search out deal opportunities can assist in bringing a potential transaction to a successful conclusion.

Another challenge, cited by around 70% of Family Offices, is the issue of conducting an appropriate level of due diligence.  Individually, Offices may undertake relatively few investments, a fact which can constrain their internal capabilities and domain expertise.  A sell-side advisor, understanding the perspective and issues concerning an investor or buyer, can reduce the friction in the process and expedite an outcome.

Ensuring a business is ready for a transaction is key to getting it done … and that is a full-sized topic for another day.

If you’re interested to learn more about investment opportunities, please send me an email at peter.hall@eatonsq.com.

Here is an example to amplify this issue. In the past when we would sit down as a family for we would all pretty much eat the same food. However, these days it seems that everyone has their own preferences that need to be catered for. Suddenly the straight forward task of preparing dinner has become terribly complicated by the individual tastes and philosophies of all the individual family members.

You can imagine then how difficult it is for a family business with layers of operational, financial and staff challenges to seamlessly introduce next-generation family members? Of course, there is no answer that will suit all family situations.  At the very least, the founders must invest heavily in educating, training and mentoring the next generation. That investment takes years. There needs to be agreed rules and principles that the founders and the next generation acknowledge and commit to. Equally imperative is that the next generation has a voice and that the founders are willing to listen.

Many families elect to sell their businesses and let the next generation focus on their business or other interests independently. However, this strategy requires careful planning. At Eaton Square, we see family businesses dealing with this challenge in many ways. Some sell at market price on normal commercial terms while others find varying models to transfer the firms to family members. Either way, it’s imperative for the family to prepare for the outcome that they wish to achieve before succession is forced upon them.

Transactions can be affected by impending elections, economic issues offshore and at home and other transactions in play at the same time. If the window of opportunity to sell a business is open, don’t assume that it will stay open forever and if it closes it could be 5+ years before it reopens.

Here are six tips to help you prepare for a sale:

1. Sell before the top of the cycle. Leave some growth on the table for the buyer
2. Create a competition. Research shows that competition between buyers is the most important factor for driving a higher price
3. Create an open and transparent process. Given different family members can have very different objectives, a transparent process can help to give everyone comfort that they are being treated equally
4. Look internationally. With global markets being so fluid often the best buyer strategically and financially is based outside your home country
5. Have your house in order. Deal preparation includes having all forecasts, strategies, material contracts and business plans and post-transaction management plans documented and in writing
6. Understand the nuances of each buyer. Every buyer is different and if you can align with their needs you will get a better deal. An offshore conglomerate will behave completely different from a neighbour during the process and there is no saying which would be the preferred buyer to deal with.

The execution of a decision to sell a family business or to introduce family members into a business is a challenging almost daunting endeavour of its own unrelated to the daily stresses and challenges of a running the business. Whichever pathway a family takes it should work with a professional to give themselves the best opportunity to succeed.

If you own a family business and would like to seek strategic advise, please don’t hesitate to send me an email.

Gary Papay
Managing Partner and Principal

Gary Papay is a Principal at Eaton Square. A professional intermediary and business appraiser specializing in the sale and transfer of privately held mid-market, heating oil, propane, and petroleum companies since 1976. Gary is the partner in charge of IBG’s Pennsylvania and North Carolina offices.

gary.papay@eatonsq.com
Ph: +1 (570) 584-6488