Finding The Exit In a Family-Owned Business

Posted on April 2, 2020 by John Lychos

According to a recent survey[1], family-owned businesses in the United States account for over 64% of the nation’s gross domestic product. Yet, over 50% of those businesses fail to last beyond the first generation. Successful business owners who want to pass along their business to family members know there are certain “big-company” fundamentals that apply to their business.

For example, big companies spend a significant amount of time, money, and resources on strategic planning, but when surveyed, less than 54% of family-owned businesses had a written strategic plan. Big companies have a management succession plan. Only 30% of the family-owned businesses surveyed said they have spent any time on a succession plan. Big companies have outside (non-employee) directors helping advise them, yet only 33% of family business owners surveyed said they have outside directors on their boards. On another front, most companies spend a great deal of time searching for qualified people to staff their businesses. However, 64% of family business owners do not require family members entering the business to have the qualifications or related experience necessary to be successful.

So here are a few “secrets” of successful family-owned businesses preparing a path for an exit or transition in the future:

  • Develop a shared strategic vision of the business and communicate that vision.
    • Business is easier when everyone knows the score. Commit to a consistent and effective communication process among family members and employees.
    • De-mystify the sacred cows.
    • Use outside data (market data) to find out and verify what is going on.

Most businesses will change their strategies four or five times before it gets passed on to the next generation. Doing what is best for the business, employees, customers, and community may preserve it for the next generation.

  • Establish a board of directors and recruit outsiders to participate
    • Mentors need mentoring and leaders need mentoring. Insiders cannot be objective and are certainly not always independent in their thinking.
    • Outside board members who are successful business people or financial experts, can provide balance for the company’s direction.
    • Outside board members have a fiduciary responsibility to provide their advice for what is best for the company.

Of the businesses surveyed that already had a board of directors which included outsiders, 77% said they strongly agreed that the board made a positive contribution to the direction of their business.

  • Cultivate a climate that develops good leadership
    • Founders must find ways to give feedback to employees, foster growth via success and failures, and build a culture of opportunity.
    • Foster a philosophy of fair family and employee compensation. Family businesses should not confuse the flow of funds or mislead family members into believing they are worth more.
    • Adopt a transition planning process early.

Family business owners must know what “hat” they are wearing when they come in contact with other family members both at work and at home. Social engineering is an important part of a functioning business unit.

“Finding the Exit,” and ensuring a smooth transition between generations requires many sound business fundamentals. It is important to make sure the assets are protected to ensure the well-being of both generations. Often, a well-thought-out buy/sell agreement can help “in-the-business” and “out-of-the-business” family members make the transition. Buy/Sell agreements lay important ground work ranging from establishing the price to detailing how other family members might acquire ownership.

“Finding the Exit” can be difficult, but finding the best way to move toward the exit starts by contacting your trusted business advisor at B2B CFO®. We have the financial and business expertise to guide a business owner through the process and can work with the other professionals needed to make an exit a smooth transition.

[1] Source used: Laird Newton Tyee Family Business Survey 2007

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