Securing Your Business’s Legacy with Succession Planning

Exit Plan Option 1: Keep the Business in the Family

Mixing family with business increases the risk of familial dynamics interfering with important business decisions. However, with careful planning, clear communication, and appropriate boundaries, keeping a family-owned business in the family by passing it down to the next generation can be immensely rewarding. Keeping the business in the family allows the business’s profit to continue supporting your loved ones after you retire or shift your focus to another professional endeavor, and it can help maintain the continuity of the business’s legacy, culture, branding, and values.

Having your child or another family member take over the business may sound idyllic, but it comes with unique challenges, including dramatically limiting your pool of potential successors. Successfully transferring ownership and leadership responsibilities to a family member requires that at least one family member is interested in taking on that role and has the acumen to excel in it. Therefore, if your goal is to keep ownership of your business in the family, it is essential that you communicate that goal to the successors you have in mind early on so that you can gauge their interest in the position and leadership potential. If you cannot find a suitable candidate in your family, you will need to consider other options for selling the business.

If you find a good candidate, you can facilitate the transaction in several ways. You may consider giving the business to your successor as an advanced inheritance or selling it to them at a discount. If you go this route, be aware that gift tax rates may apply, so it is essential to be mindful of your state’s regulations. Alternatively, you can sell the business to your successor at full market value, as you would for any other business transaction. In either case, when you have selected a successor in your family, you should begin mentoring them so that they understand your professional values and vision for the business’s future as well as the types of tasks and responsibilities their new role will demand.

Exit Plan Option 2: Sell the Business to a Promising Employee

Your employees already have experience working in your business and are familiar with the day-to-day processes and company culture, so you may find a current employee to be an ideal successor. Selling the company to an employee means that the new owner will already have working relationships with the rest of the existing team and may be better equipped to facilitate a smooth transition than an outside buyer would be. However, employees and owners must have different skills to succeed in their respective roles, so it is essential to identify employees with strong leadership and decision-making skills who can apply the knowledge they gained from working in the business in a more executive role.

When selling to an employee or any other prospective buyer, getting an outside appraisal of the business’s market value is important to determine a fair sale price. Your employee likely will not have the cash on hand to buy the business outright, so you may need to be flexible with the payment structure. For example, you may sell the business in installments, have your buyer work with a third-party lender, or create an employee stock ownership plan.

Exit Plan Option 3: Sell to or Merge with Another Company

Selling the business to or merging with a competitor in your industry is a popular succession strategy because it does not require you to train your successor to the same degree as the previous two options and can expand the business’s access to resources, markets, and industry experts. However, these benefits often come at the cost of restructuring that may disrupt employees and customers’ experiences. Negotiating a sale or merger also involves careful planning and legal risk management, such as preparing a nondisclosure agreement for prospective buyers to protect you if they gather confidential information while evaluating whether they want to purchase the business. Both the seller and buyer must do their due diligence to ensure the deal is fair to and beneficial for all parties involved.

Exit Plan Option 4: Sell to Private Equity Investors

Selling the business to private equity investors can be an attractive option for business owners who want to cash out and exit the company entirely or remove themselves from the business’s daily operations while retaining a financial stake in the business’s future. You can choose to divest from ownership completely or transition to being a minority shareholder in the company. Private equity firms can bring new perspectives and resources to the business, potentially expanding its market share and driving innovation. However, before finalizing a private equity sale, business owners should carefully evaluate the potential buyers to verify that they’re a good fit, capable of continuing the business’s legacy in a way that aligns with your values and vision for the business’s future.