“Our (dad, uncle, mother, aunt) has been running the family business for 25+ years and done nothing to plan for an exit!” Does this sound familiar?
A client shared an article with me on Richard Robinson, longtime CEO of Scholastic, who died suddenly this past June at the age of 84 while walking through Martha’s Vineyard. He had two adult children and an ex-wife, all of whom he recently became close to again, in addition to four siblings. They were all shocked to learn that he left controlling stake in the $1.2 billion company along with all personal possessions to the Chief Strategy Officer, with whom he was reportedly involved in a long-term romantic relationship. Mr. Robinson’s ex-wife was actively involved in the business for over 30 years and was stunned at the outcome of the will.
Now, most of our clients are not dealing with $1.2 billion companies, but they are often dealing with legacy, family relationships, financial security, as well as career aspirations and plans that have not been planned for, communicated, and or discussed.
Consider this client scenario where an uncle had been running the family business for over 30 years. For 20+ of those years, his niece and nephew worked in the company, helping to build the value and playing key roles in the operations. One day he decided he wanted out of the business and engaged a broker to coordinate the sale.
About 5 years earlier, there was a valuation done on the firm with the intent of transferring some ownership to the niece and nephew. This was never completed. In addition, when the uncle took the business to market, there was no discussion with the niece and nephew about his intentions, or their interest in buying the business. They were told to go through the purchase process of submitting a letter of intent, which would be reviewed along with the other prospective buyers. At the same time, their uncle said the legacy of the ongoing operations and the employees were important to him in a transition. Now mind you, the niece and nephew were actively involved in running the day-to-day operations of the business throughout this process.
What was the outcome? The uncle ended up taking a higher bid. The business operations ceased a few months later, as the buyer had no need for the operations, only the hard assets. The niece, nephew and most of the employees lost their jobs. The family relationships were forever tarnished.
Family business is complicated. It’s business and it’s personal, and separation of the two is impossible. However, they can be managed. But management requires communication and planning.
One of the starting points in planning for a transition is understanding the business value and goals of the owner(s) in a transition. In this particular situation, the value was deemed higher by the competitor than an internal buyer for a number of reasons: 1) the competitor was looking at purchasing the assets, 2) the competitor was taking a player out of the market, and 3) they would achieve economies of scale by rolling the assets into their existing operations. The niece and nephew, on the other hand, provided a lower bid because: 1) they wanted credit for their 20+ years of growing the business, 2) they didn’t understand business valuation, 3) they were not in a financial position to offer more, and 4) they relied on the relationship with the uncle and his stated goals of legacy and taking care of the employees.
Could this outcome have been different? There’s never a guarantee, but there is no chance if the planning and preparation are not done.
What can you, as a family business owner, and or potential successor to a family business do to avoid these pitfalls?
Start the exit and transition planning process early. Life is unexpected and you never know what can happen when you’re out for a walk in a vineyard.
Engage a Certified Exit Planning Advisor to walk alongside you through the process, including:
Identifying Business Value
Identifying the business goals such as value, legacy, employee security, readiness for transition, etc., as well as personal goals around value, exit timing, and next chapter planning
Identifying the gap between the business value, business readiness for transition, and personal goals in order to develop a plan to close the gap
Working the plan
Adjusting the plan as things change
Starting the planning process earlier allows business owners, and in this case, the family business owner, to prepare themselves personally, as well as the business and key leaders, to have the discussions, plan for the defined outcome, and retain and maintain family relationships.
None of us like unexpected surprises. Avoiding the planning doesn’t make the exit and transition easier. In fact, it can create a family divide that will last forever. Or, even worse, the sudden and unexpected death of an owner with no plan for the business can create long-lasting damage to the family and the business they worked so hard to build.
What kind of legacy do you want to leave? How important are family relationships to you after exiting your family business? What are you waiting for to start planning? You owe it to yourself, your family, and your employees. It’s never too early to start!
Jayne McQuillan, CPA, MBA, Certified Exit Planning Advisor (CEPA) is the owner of Journey Consulting, LLC
Our firm is focused on providing business owners and their businesses with strategic planning, exit planning, financial expertise, and organizational improvement. We use a holistic approach within all of our services by aligning leadership with business strategy and outcomes.
Schedule your free consultation call today!
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