If you run a family business, you may assume that the passage of ownership will transfer to the next generation. But what if your children don’t want to take it on?
When it comes to family businesses, it may seem logical that ownership will one day transfer to the next generation. But the realities are not so clear cut.
For one, offspring may have very different ideas about their career plans and family expectations may even be viewed as a burden. One client’s son (we’ll call him Client X Jr) announced that he was intending to move to Manchester, and when questioned on how he planned to run the family’s Berkshire-based business, it soon became apparent that he had no desire to do so.
Perhaps succession isn’t part of the thinking at all, that’s certainly becoming more common. According to research by PWC, only 40% of all family businesses plan to pass the ownership and management of the company to the next generation anyway. The same study shows the number of family businesses looking to sell, or pass on the business to a management team has increased by 10% in the last two years.
The trend is clear, and for family business owners looking to sell, what are the options?
For those wishing to keep a hand in the business but take more of a back seat, a Management Buy Out (MBO) could be the way to go. This involves someone from within the business – usually already in a management position – buying a stake in the company and easing into the hotseat. Most of the time this is in co-operation with external financiers such as private equity providers.
This puts both the business and the manager at relatively low risk: someone with strong company knowledge is theoretically more likely to be able to keep things profitable, and the private finance means that the incoming managers only put in a modest amount of personal investment.
Another option is a Management Buy In (MBI), whereby an external figure purchases the company with the express purpose of being trained-up to replace the business owner. In both cases, the company will generally be sold for less of an upfront cost, but the business owner will accept further payments from profits of the business.
For a family looking to sell, it is absolutely imperative that the business is in good condition; a business that looks in peak health is going to raise the most money. Investing in freehold estate or large amounts of stock is probably a bad idea, it could well be seen as a burden by prospective buyers. Those decisions should be left open to future management.
Alternatively, it may be better to let things come to a natural end and wind the business up altogether. Whatever the intentions, the first and foremost consideration should be on the continued success of the business. Business owners should always consider what you can do to make the company an even better investment for others.
It’s worth remembering that business brokers will often make unsolicited calls to gauge whether you’re looking to sell, so it’s essential for any family-run business wanting to cash in that the company is in the best possible condition for buyers. This state of mind brings the added advantage of running a healthier business, which should in turn become more profitable and less stressful to run.
Any improvements will naturally make the business more sellable, so owners should think tactically when preparing for the future. The key points to remember are: 1. Openly discuss the company’s destiny with other family members; 2. Ensure that all processes are up-to-date and in line with current practices, especially if you’re looking to sell.
Speak to a Business Board advisor on 0845 337 3327 if you have any questions at all on the above, or indeed if you wish to discuss other related matters.