I was recently interviewed by Mike Saunders on his Influential Entrepreneurs podcast.
Key takeaways from our discussion on family business exit and succession planning:
- The average family business lifespan has dropped from 62 years to 24
- You need to have 3 different succession conversations: wealth, business ownership, leadership
- Exit planning and succession are more nuanced in family businesses due to family relationships and emotions
- Only 25% of your business valuation comes from tangible items like financials – the remaining 75% comes from intangible assets such as your culture
- Business owners often have as much as 85% of their wealth tied up in their business
- You can substantially increase the value of your business by making investments in leadership before you sell
- Exit timing depends on your personal and financial readiness to exit, as well as the business’s attractiveness to potential buyers
- The family business advisors at Ferguson Alliance can help you prepare to exit and maximize the value you receive from your business.
You can listen to the full interview here: Influential Entrepreneurs interview with Rob Ferguson or scroll down to read the edited transcript.
Give us a little bit of your background and what led you into this industry in the first place?
I spent the first 30 years of my career working in various management, and executive leadership roles, eventually as a CEO with two different mid-cap companies.
Eventually, I found myself working with a family business that was 100 years old and had gotten into some trouble. I helped them get out of that trouble and began working with other successful family businesses.
Through this experience, I developed a passion for family businesses and the role they play in the economy, innovation, and philanthropy.
In recent years, I have focused on helping family businesses with business governance and succession planning, using my expertise and knowledge of best practices to assist business owners in preparing their businesses and themselves for an exit. I have been doing this for the past 13 years.
Should you have a family first business or a business first family?
One important question to consider when running a family business is whether the business should prioritize the needs of the family or the needs of the business itself.
This is not a value-based question, but rather a question of what serves the best interests of the business in the long term.
Some family businesses, such as local dry cleaners or restaurants, may prioritize providing jobs and income for the family and may be more focused on maintaining a certain lifestyle.
However, these types of business philosophies may have limitations on scale and growth.
When working with families in a business context, it’s important to consider their long-term plans and goals, and to help them break the trend of declining business lifespan, which has dropped from an average of 62 years to 24 years in recent years.
Working with “business first” families, or those that prioritize the best interest of the business over the needs of the family, can help reverse this trend and ensure the long-term success and sustainability of the business.
When it comes to planning for an exit, what’s different for a family business vs a traditional organization?
When discussing exit planning or succession planning for a family business, there are three primary conversations to consider:
- succession of wealth
- succession of business ownership
- succession of leadership
These conversations are closely interconnected, but they should be treated separately in order to make informed decisions that are not only equal, but equitable for all parties involved.
When dealing with a family business, it’s important to take into account emotions, lifelong history, and other complexities that may arise.
By separating these three conversations and developing individual plans for each, then integrating them together, it creates a holistic succession plan that takes into account the business goals and needs of the family as a whole.
This process may involve several iterations and revisions before arriving at a final plan that is ready to be implemented.
Every family business has its own unique set of circumstances and nuances that must be taken into account when planning for an exit or succession.
It’s important to first understand the long-term goals and desires of the founders or owners of the business, and then work through any specific issues that may arise.
This may include considerations around transferring shares to certain family members or only to blood relatives, or handling succession when the next generation is not interested in the business. It’s essential to approach these matters with a customized approach and not rely on a one-size-fits-all approach or checklist.
Can bringing in an external adviser, such as a consultant, help improve the value and profitability of a business in the lead-up to an exit or succession plan, even if the business owner initially had no intention of selling?
Many individuals who own businesses have a significant portion of their net worth tied up in their business, with some estimates suggesting that this can be as high as 85%.
Despite this, these individuals may not realize the value of seeking out professional advice from family business consultants or may not know how to go about finding such advisors.
This can be especially true for individuals who may already be working with financial planners to manage a smaller portion of their net worth, but who may not realize the importance of seeking out specialized advice for the business itself, that is the largest portion of the net worth of the individual or family.
One of the primary roles of a family business advisor is to help business owners understand and become aware of the true value of their business.
This involves regularly monitoring the value of the business and identifying any areas where improvements can be made to increase its value. Another important aspect of a business advisor’s role is to manage the expectations of business owners and provide a reality check on the value of the business.
While it can be difficult to deliver difficult news or feedback to family business owners, it’s important for advisors to be honest and transparent in order to help business owners make informed decisions and achieve their goals.
This involves educating them on how business valuations work, which typically involve multiplying a company’s profits by a multiple that reflects the market demand for businesses in that industry.
It’s important to note that while the company is responsible for setting its profits, the market sets the multiple.
In the case of family businesses, it’s particularly important to understand that only 25% of the multiple is based on the tangible assets of the company, such as its financials.
The remaining 75% is influenced by intangible factors, such as customer relationships, company culture, brand, infrastructure, and operating systems.
By educating business owners on the importance of these intangible factors and helping them to focus on improving them over time, it’s possible to increase the value of the business and maximize its potential for a successful exit or succession plan.
What is an example of a step that can be taken to maximize the value of the business?
In many businesses, the owner is the central figure and all decisions flow through them.
We refer to this as the “hub and spoke trap.”
This can be a drawback when it comes to selling the business, as the value of the business may be discounted if the owner leaves after the sale. In order to maximize the value of their business, it may be necessary for owners to invest in building a leadership team and delegating responsibilities to others.
For example, investing $200,000 in a CEO or Chief Operating Officer and building a leadership team may seem like a significant cost for a business owner, but it can actually lead to a significant increase in the value of the business.
In fact, 75% of a business’s value is often influenced by intangible factors such as company culture, brand, and infrastructure. By investing in these areas, a business owner can potentially see a return of up to $2 million in incremental value.
While it is important to carefully evaluate the potential return on investment, investing in the intangible assets of a business can be a smart move to increase its overall value.
How can business owners determine the best time to sell their business?
It’s important for business owners to consider not just the financial readiness of their business, but also their personal readiness and the overall attractiveness of the business to potential buyers.
It’s also valuable to have regular check-ins to determine whether it’s time to sell or time to reinvest in the business. By following this process and getting the right advice, business owners can be well-prepared for the sale of their business and maximize the value they receive from it.
If you’d like to speak with an expert about succession or exit planning, book a complimentary call with one of our family business advisors here: book a call.
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