It may not seem obvious to you to have an exit strategy at the beginning of your family business. However, a pre-planned exit strategy is an important part of any business. It is not a matter of if, but when. Every business person who owns a personnel business or has inherited a family business needs to have strategies to exit.
There are many reasons one would consider exiting their current family business. It can be retirement or a wish to try something new. It can also be the sale of a business in a profitable way or simply winding it up and shutting it down forever.
No matter what your reasons are, you have to follow a pattern to exit your business. You should identify your vision for exiting it, then plan and execute the exit strategies. As exiting a business is not just a one-day operation, you have to begin the process earlier than the actual event. In this article, we will tell you about the four best strategies for a family business.
What is a Family Business Exit Strategy?
A plan you have in place in case you leave your family business is called a family business exit strategy. It outlines the form of transition that will take place and describe the outputs. The way you have a business plan while starting a business, you should also have business exit planning in place.
Exiting a business does not mean a failure or a disaster. Various small and large-scale business owners initiate a business intending to exit it after a few years. It does not imply that they are not passionate enough to run a business for a long time. It means they have the vision to grow themselves as a dynamic entrepreneur.
Many people inherit businesses, that either does not resonate with their passion or are just old school. They want to leave it honorably and pursue something they are passionate about. May whatever the reason in your case, you have to consider the following factors while placing an exit strategy:
- Will there be any profit when you exit your family business?
- Who will run the business after you?
- How much time is required for you to exit your family business?
- What is the backup option?
4 Best Strategies to Exit a Family-Owned Business
Sometimes, exiting a business that also involves your family members is not as simple as it may look. Certain factors have a direct impact on your exit strategy. You’ll have to consider the consent of all family members plus a backup option in case you want to sell the business as a whole.
At the end of the day, there is no wrong or right exit planning for the family business. The outcome depends on how well you will execute the plan you have in place. Following are four of the best exit strategies with their pros and cons.
1. Passing the Business to Family
If you have a business that is near to your heart but you have a reason to leave, this strategy will work well for you. Many entrepreneurs want their family business to stay in the family and there is absolutely nothing wrong with that. You should have a plan in place to smoothly transit the organization to a child, brother, or any other close relative.
However, don’t the idea of it cloud your true judgment. If you have someone in mind, make sure that they are the right person. Ask yourself whether they are ready to overtake it and replace you. Ensure that the family members will be able to handle the pressure and volatility of business ownership.
Passing a business to the family is a complex process. It involves the transfer of ownership, power, and assets. To execute it perfectly, place a transitional period for it. In that period, train the people you have in mind, and help them learn the trick of business. Involve them earlier in the business to allow them to gain an in-depth understanding. When you think they are ready enough, do the actual action.
You can take the help of good business advisors to ensure that your thinking is not clouded by your emotions. They will also help in training and preparing the potential candidate to overtake your business.
2. Merger or Acquisition Strategy
Merger and acquisition are the most used words in the world of businesses. A merger or acquisition strategy means that you either sell your business or merge it with a company having the same goals as you. It is one of the most flexible exit strategies for family businesses. It has the flexibility and freedom of you walking away completely or becoming one of the stakeholders in a larger setup.
The best thing about a merger and acquisition strategy is that you are free to negotiate the price and terms of sale. Whereas In the IPO model where you sell it to the public the worth of your company will be derived relative to the industry.
Merging with other companies is fruitful, however, it is difficult to find a company with common goals. Most companies avoid taking in the liabilities of other businesses. Similar is the case with the acquisition. The process of merging and acquisition is long and you should start your homework timely. According to a study by BizBuySell, around 20% of businesses successfully achieve a complete merger or acquisition.
The pros of this family-owned business exit strategy are that you will have a clean break from your business. You will also be to negotiate the terms, price, and other important details with buyers. However, to execute it perfectly, you will have to put some work into this strategy. Developing an exit strategy for your family business will require early planning.
3. Management Takeover Strategy
This is a type of strategy which you won’t require to have in place for a long time like the above two strategies. Very less number of businesses will plan in the earlier phase of the business to hand over their company to management. However, it is one of the most used strategies in case you don’t have much time to do the work.
As you know the management well, and they know you too, the transition can be very smooth. It will also give a boost to your business legacy reputation in the market. If you are planning to go for a new business, the current management will cooperate very well with you.
There are three common ways to sell your family-owned business to management:
- MBO or Management Buy-out: In this case, the company is sold to the existing management
- MBI or Management Buy-in: The company is overtaken by a new management
- BIMBO or Buy-in Management Buy-out: In this scenario, the company is acquired by the combination of both existing and new teams
Taking any of these courses is easy, fast, and efficient. In the case of MBI and BIMBO make sure to mitigate any conflict that may occur between new and existing management. For a smooth transition, you should hire an expert advisor or a coach to avoid any legal or financial hurdles.
4. Public IPO
Another exit strategy for business through the family is to go for IPO (initial public offering). If your business is not bringing the expected result and you require capital, this is the best strategy to go for. In IPOs, companies sell their shares of assets to the general public. They go through the process to raise capital and increase their growth. Entrepreneurs dream to sell their stocks to the public for a large profit. However, to execute this strategy, your company needs to be substantially big. This may not work well for small businesses.
Going for IPO may also devalue your company if the business conditions are not right. This is like a partial exit business plan where you will sell part of your business to the public. You may not be permitted to sell the whole company to the public. Also, floating your business on the stock market will affect other investors and shareholders of your business.
With all its technicalities, however, this is probably the most lucrative exit strategy for your family business. It is the only way of selling a company that brings substantial profit. With good advisors on your team and perfect conditions, you can raise huge capital.
Strategy for Exiting Family Business – Final Thoughts
The bottom line is, that there is no one-size-fits-all family business exit strategy. The right strategy that will work for you depends on various factors. These factors may vary with passing time. The best thing you should do to gain maximum profit out of exiting the business is to plan. Additionally, you should hire a good business consultant who can oversee the technicalities for you.
If you are proactive about your exit strategy, plan well ahead and execute properly, you are likely to have success. It won’t matter then how it was executed, what could have gone wrong and what it looked like. The success of your exit strategy will speak volumes itself.
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