When an owner of a privately held company is ready to exit the enterprise, he or she has a variety of options. From selling the company, to setting up a trust or passing the torch to the next generation, there can be a lot to consider.
As a third-generation family-owned business, GROEBNER has had a couple swings at succession planning in its 46 years, but it might be surprising to learn that only about a third of family-owned businesses have constructed and documented a succession plan.
Here are some of the options that owners should consider when developing their exit strategy:
Option 1: Sell to a Competitor
It might be attractive to sell the business to a competitor, particularly if the market is in a good position and the company has performed well allowing the owner to get top dollar for the business. There may also be many efficiencies to be gained by aligning business operations making the deal attractive for stakeholders.
However, before selling to a competitor, it’s important to connect with key family members, employees and business partners to ensure an orderly transition post-acquisition. Clear communication is important before planning to sell outside of the family.
The owner might want to make sure that the company culture of the competition is a good fit for their business and employees. When selling to a competitor everything should be vetted—beyond the financial aspect—before closing the sale.
Option 2: Sell to an Employee
Employees of family-owned businesses can feel like extended family. If no blood relatives want to take over the business, it’s possible that a trusted and seasoned employee might have interest. Again, this is where clear communication and vetting are vital. The owner should think about what the company looks like under the leadership of this employee. Does the employee have the breadth of knowledge needed to effectively continue the business beyond their department? Are they invested in the success of the business as well as the wellbeing of the employees?
Another point to consider is if the employee would need to leverage herself or himself to finance the deal, making them responsible to creditors and, consequently, less free and secure to make long-term decisions. So, it’s essential to look at the big picture before signing the deal.
Option 3: Spread the Equity
An employee stock ownership plan (ESOP) is a trust that gives employees ownership interest in the company through shares of stock. If not passing on to a family member, this could be the next best option, as it sets up all employees as owners of the company. An ESOP can give employees more shares for longevity, and encourages hard work by allowing employees to receive financial rewards when the company performs well.
There are numerous other benefits to an ESOP, but owners need to be exceedingly detailed when setting this up as their succession plan. The terms of the ESOP can determine how many assets employees are able to access, and how payout is processed if an employee leaves, is terminated or retires. Each industry is different, so finding a trusted advisor to help set this up will make for the most positive transition to an ESOP.
Option 4: Keep it in the Family
With several tempting exit strategies to consider, owners might find it best to keep their business in the family. PricewaterhouseCoopers (PWC) found that globally, only 24 percent of family businesses are focused on next-generation involvement. In the U.S., that number is much higher, with 67 percent of family-owned businesses already having next-generation involvement with those family members being set up to become majority shareholders.
It’s clear that families in the U.S. are aiming for generational ownership. For there to be a flourishing succession, getting the next generation involved at every level of the business is vital. This will help successors understand the ins and outs of the business, make solid decisions and set them up to be the next caretaker of the family’s livelihood and reputation.
With a successor that is trained and ready to lead the company through the next generation, employees can rest assured that their jobs are secure, the company culture and ethical standards will continue, and that the foundation of experienced leadership will remain intact.
Keeping the business within the family is especially compelling if the owner can pass down the mantle to a female family member. It was found that there are more opportunities for women in family businesses, with 60 percent of family-owned businesses having women in top management and 24 percent having a female president or CEO. This is good to not only keep the business in the family, but it will also support diversity, equity, and inclusion (DE&I) initiatives. These types of efforts are being hotly pursued by a majority of corporate America, and a family-owned business being able to point to their successor as fulfilling a DE&I goal will only bolster the family’s brand and reputation. It will also help attract and retain top talent, as it indicates an inclusive environment.
Pass it On
There are many options that an owner might entertain when determining what to do with their business upon their retirement. The best option for the business and for the employees may be to keep it in the family; however, every business – and every family – is unique, and many nuances need to be applied to each situation when weighing options. To ensure a smooth transition, owners should make a succession plan that details how the ownership of the company will be passed on to new ownership.
Keeping it in the family can be a fantastic decision, and GROEBNER is proud to be an example as a third-generation family-owned business.
As third generation president of her family business, GROEBNER
, Carissa carries the mantle her grandfather built 46 years ago. She has been a transformative figure in the energy sector, modernizing many critical systems and policies within the organization as it thrives and scales into a national brand. Carissa is passionate about creating a positive work environment where employees are excited to come to work, developing a business where customers and vendors feel like family, and making a difference in the everchanging natural gas industry.
No Replies to "Keeping it in the Family: How to Plan a Successful Succession"