Succession Planning: 3 Tips for Selling Your Family Business

After spending years cultivating and nurturing your family business, it’s important to consider succession planning when preparing to sell your business. A strategic succession plan will ensure the smooth transfer of your family business while maintaining all existing relationships — whether that’s with your employees, business partners or customers. Additionally, succession planning will:

• Protect your legacy
• Maintain a service for your customers and community
• Build value for your business
• Provide financial security for your family and stakeholders
• Plan for unexpected events
• Prepare for the future

Here are three tips for selling your family business.

1. Select an exit strategy

Finding a suitable successor or buyer is the top concern that business owners face during succession planning.

Transfer to a family member — a family succession provides the advantage of continuity and the confidence that your business is in the hands of someone committed to its success. In many cases, there is no suitable family successor — a family member may not have the expertise, skill set or the desire to operate your business successfully.

Sell to a partner, management team or employees — a management buyout is popular due to existing knowledge and familiarity with the business along with evidence of commitment and relevant experience. You also have the option of a management buy-in wherein an external management team joins the business.

Sell to a third party — a sale to a buyer or investment firm is an attractive option if there is a need to raise funds, or if there is an absence of a successor.

Many business owners have an unrealistic idea of how much their business is worth, often due to their emotional investment

2. Determine a market price

Once you’ve selected a successor, you’ll need to determine a fair market price for your family business. Differing expectations from owners, potential buyers, family members and partners can also cause variation and even conflict.

Earnings are key to valuation — The most common method to determine a fair market price for your business is determining your business’s ability to generate earnings. This is done through calculating a multiple of EBITDA (earnings before interest, taxes, depreciation and amortization). After calculating the EBITDA-based value amount, a valuator confirms it by applying other valuation methods.

It may be helpful to consult a professional valuation expert to help you set a selling price and determine whether an offer is reasonable. A tax expert can also advise you on tax liabilities in any potential sale of your family business.

3. Finance your succession

Financing your succession planning strategy may be your largest obstacle to a successful transition. Successors do better if they have a limited burden of debt, maximum repayment flexibility and diversified financing sources. All of this allows continuity of your business for your customers and preserves your legacy. Furthermore, financing must be advantageous to both sides of the sale or transfer, and it is important to seek flexible financing. Here are some of the sources of financing available for you to consider:

• Buyer Equity
• Vendor Financing
• Secured Debt
• Mezzanine Financing
• Outside Equity

Understanding the 3 broad tips for succession planning is the first step — the rest, we can help with. Skidmore Group has an established record of growing business value and caring for people — with over 70 years of experience. If you are considering exiting your business and want to ensure your people are taken care of, we would love to hear from you. Contact us today.