Succession planning for family businesses: three options
- Published: October 17, 2019
- Author: Jessica Hill
There are three main options when it comes to succession planning for a family business: transitioning the business to family members, trade sale or management buyout. Here, we explore the pros and cons of these options.
Sale to family members
The biggest advantage of this approach is the business remains in the family. The parents can also remain involved and provide mentorship and guidance to the new owners.
For this to be a viable option, however, family members have to be in a position and want to take-over the business and also have the skills to do so. Particularly where there is more than one child in the family, there is less likelihood of all the children being equally interested in and capable of taking over the business. There may be one that’s interested or qualified to do it, and the others may not be, which can create succession challenges. It may also create inheritance issues. So if this is the chosen path, it’s important to consider estate planning.
Another consideration is whether the children have the capital to buy out their parents. It may not be as easy to have a commercial arrangement in place with family succession, so how the acquisition will be funded has to be thought through. Vendor finance is one strategy to fund the acquisition, where the purchase is paid down over time.
With family succession, it’s important the plan is fully discussed with all the family to make sure everyone understands what’s being done and why, especially if one child is going into the business and the others are not. Managing relationships is key.
Pros and cons of a trade sale
A trade sale involves offering the business to a wider pool of buyers. This is often the most straightforward approach and may involve a business broker. The sale is usually negotiated under commercial terms. In terms of financing, typically the transaction is immediate, albeit with a transition period of up to two years.
However, there needs to be a market for the business for this to be a feasible option. This means it will be important to strategically plan the sale. If the business is mainly run by one person, this may affect how attractive it is to a potential buyer. It may be sensible to bring in a manager and planning may take years, as with most business sales.
Management buyout opportunities
Employees buy the business in a typical management buyout, with one of the main advantages being the buyers already know and have the skills to operate the business.
But for this to be an option, the employees must be interested in owning the business and have the capital or the ability to repay funds used to acquire it, which can be more difficult for larger businesses. If vendor finance is used, it may mean the sellers have to wait a considerable time to extract their funds from the enterprise.
However, sellers don’t have to spend as much time getting the business sale ready as with a trade sale because the buyers are already familiar with the business. Consequently, extensive due diligence is usually not required.
With every sale, what’s essential is to plan ahead and work through the business’s unique circumstances to determine the right approach.
The information contained herein is of a general nature only and is not intended to be relied upon nor is it a substitute for appropriate professional advice. Whilst all care has been taken in the preparation of the material, it is not guaranteed to be accurate. Individual circumstances are different and as such require specific examination. Asparq cannot accept liability for any loss or damage of any kind arising out of the use of or reliance upon all or any part of this material. Additional information may be made available upon request.