Our Business Value Accelerator reports can be used to help identify ways to improve your company’s value, essential for ownership transitions and other significant events like estate planning, bankruptcy, litigation, divorce, or partner disputes.

A well-defined buy-sell agreement that outlines your business’s value and your intentions for ownership transfer is essential for effective succession planning, along with a solid funding mechanism to execute the agreement.

There are two primary reasons why a family business may not stay in the family. First, there may be no qualified successor. Even in these cases, you can still protect the value of your business through careful planning—another aspect of succession planning.

The second reason is a lack of planning, which can lead to the failure or the sale of the business. It’s surprising how many business owners neglect to safeguard their business’s value, even though they are careful with personal assets. This is often due to the emotional challenges involved in succession planning, which include facing retirement, contemplating death, and making difficult decisions about family dynamics.

For many owners, their business is their most valuable asset, both financially and emotionally. The thought of stepping away from it can be daunting. The process of choosing a successor, particularly when it involves selecting one child over another, can be fraught with personal challenges. As a result, planning for succession is not a one-time event but a gradual process that addresses these sensitive issues over time. Each family’s situation is unique, requiring a tailored approach to succession planning.

Sometimes, passing the business to family isn’t feasible. For instance:

• Your children may not be interested or capable.
• A child may have potential but isn’t yet ready.
• You might have multiple capable children but don’t want to cause discord by choosing one over the others. Alternatively, your potential successor might decline the role to avoid family conflict.

If you find yourself in this situation, there are several options to consider:

Sell the Business: Selling to a third party, employees or an Employee Stock Ownership Plan may a solution. Succession planning can help clarify this decision, allowing you to plan how and when to sell to maximize the value. You can then develop an estate plan around the sale proceeds, making the sale another form of succession planning.

Split the Business: If your business is large and diverse, dividing it into separate entities could allow you to assign each division to the child best suited to manage it, avoiding the need to choose one successor. And many times, spinning off parts of the business can increase the value of the whole.

Use an Interim CEO: If a child isn’t ready yet, appointing an interim leader could keep the business on track while they prepare. This person could also mentor your child. However, it’s important to:

• Establish a family management structure to oversee key decisions.
• Choose someone with strong leadership skills who can step aside when the time comes.
• Have complete trust in this individual, given the significant control they’ll have.
• Offer competitive compensation, possibly including performance bonuses, as the interim leader likely won’t have a personal stake in the business.

Retaining key non-family employees is crucial in any succession plan but especially when an interim leader is involved. Offering creative compensation and bonuses to these employees can help maintain stability.

Go Public: For larger businesses, a public share offering could be a viable option. This approach has three key benefits: increasing the potential market for your company’s shares, potentially boosting the value of your shares, and offering greater flexibility for estate and tax planning. However, taking a company public is a complex and costly process that requires careful consideration.