Succession Planning for the Family Business When There Isn’t a Next Generation.

Date February 28, 2023
Article Authors

Meet the Hart siblings, John and Jane, owners of Ted’s Gadget Factory. Their family-owned and operated business has been passed down from generation to generation, and John and Jane have been honored to extend the family legacy.

Ted’s Gadget Factory was established in the 1930s by their grandfather, Theodore, a skilled craftsman and prolific inventor. He created new and innovative gadgets quite often, and as the demand for his gadgets grew, he opened a manufacturing facility and started cranking them out in multiples. The business boomed, and it has provided a comfortable living for three generations.

Today, Ted’s Gadget Factory is a well-established company with a reputation for quality products and responsive customer service. John and Jane have worked for nearly 40 years to keep the family legacy alive, and the business is thriving. But now, in their mid-60s, they are ready to explore their exit and transition options. Unlike their father and grandfather before them, the Hart siblings do not have children of their own and must explore new options for transitioning the family business.

So, what options do the Hart siblings have? There are numerous, but here are four they might consider:

Sell the business to an outside party.

One option for the Hart siblings is to sell to an outside party: another company, a private equity firm, a family office, or an individual looking to buy an established business for their own family. One advantage of this option is that it provides an opportunity to maximize the cash they will receive at closing. However, finding a buyer who shares the Hart’s values and commitment to quality could be challenging. They should explore the market for all potentially interested parties to ensure the best chance of locating the best-suited buyer.

The Harts would be well advised to hire an investment banker or business broker to conduct the sale process professionally. When marketing a business to outside parties, owners need to keep their focus on the business to prevent any hiccups. Their limited time is best spent running their company while professionals create the marketing materials, perform the market outreach, vet potential buyers, schedule management presentations, coordinate due diligence, and help negotiate a successful closing.

Sell the business to key employees.

The Hart siblings might also consider selling the business to a key employee or group of key employees. This exit option keeps the business with people they know and trust, and it also provides for a potentially more comfortable transition for the Harts. It can also help ensure that the legacy of Ted’s Gadget Factory continues for many years to come. However, it is important to consider the financial and legal implications of selling or transferring ownership to employees; and it is necessary to make sure these key employees can run the business effectively. John and Jane won’t want to have to return and rescue the business once they’ve embraced their post-business lives.

Liquidate the business.

Often seen as an option of last resort, the Hart siblings could liquidate the business and share the proceeds. This option provides a simple and straightforward exit for owners, but it also means that the legacy of Ted’s Gadget Factory will come to an end. John and Jane will want to consider the impact of liquidation on their employees, other stakeholders, and their communities. Often a business owner who sells remains in their community and wants to exit their business in a way that allows them to hold their head high around town.

Create an Employee Stock Ownership Plan (ESOP).

An ESOP, in simplest terms, is a retirement plan. But more than that, according to The ESOP Association. “ESOPs motivate employees, increase productivity, improve worker retention, keep jobs local, contribute to business longevity, and so much more.” Using an ESOP to sell the business to employees over time gives them a stake in the future success of the company. It can also provide significant tax benefits for both the company and the owners, making it an attractive option for owners looking to exit their businesses in a controlled, structured manner. John and Jane would want to speak with an ESOP expert to help them determine if this is a viable option for them.

The Hart siblings have many options for exiting their business. The right choice will result from a variety of considerations, including their personal goals, financial situation, and the future of the business. As a CPA, Financial Advisor, and Certified Exit Planning Advisor, I would recommend that the Hart siblings work with a team of professionals to consider their options and ensure their exits and transitions are structured in a manner that provides them with the best opportunity to meet their financial, lifestyle and other post-business life goals. They’ll want to remember this once-in-a-lifetime event as a great success.

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