Family business transfer involves multiple steps

By James A. FItts, Marshall Rowe

Successfully completing a business transfer is often more difficult than building the business itself, whether the company is sold outside the family or ownership is transferred to a new generation of family members. The business leader can either control the transition or be controlled by the situation.

A successful transition of a family-owned business requires a multi-step process. Planning must begin years in advance. The steps detailed here will give the business managers and the family owners time to understand their true goals and to implement the systems that will best serve them.

Getting started

Because family relationships are a primary concern of business owners, it is helpful for the family to outline its beliefs and goals at the outset.

Holding family meetings promotes communication and trust. This process should include input from all family members. It’s advisable for the family to develop a statement of its mission, vision and values and to establish a code of conduct. Next, the family should define the existing ownership and governance structure and determine how these will change in the future. Then the owners can create an exit strategy, and the managers can develop a strategic plan that outlines how the transition will be accomplished.

• Retaining appropriate advisers. If the family decides to pursue a sale of the business, a corporate attorney and a CPA with experience in mergers and acquisitions will be necessary. This will help protect the family’s interests and provide a wider range of structuring ideas. Intergenerational transfers require an experienced trust and estate attorney to recommend deal structures that meet the family’s objectives within the existing gift and estate tax framework.

• Preparing a personal financial plan for departing owners. A business transition changes the character of the family enterprise. Once monetized, the business is essentially a financial management company whose inventory includes stocks, bonds, commodities and other investments that are often unfamiliar to an entrepreneur. Professionals generally must be engaged to help manage the assets.

• Preparing the business for change. Someone should be designated to oversee business management during this phase. This person need not be the CEO; the COO or another senior-level manager with broad operational experience and authority to handle day-to-day operations is often a good choice. A plan should be established that outlines how the responsibilities of the current CEO will shift during and after the transition. The plan should be communicated consistently to all constituencies, including employees, customers, key vendors and banks.

Intergenerational transfer

If the family chooses an intergenerational transfer, business considerations must be balanced against the family’s needs. There are a number of actions that can alleviate such challenges:

• Addressing ownership succession. Determining the new ownership structure involves dividing economic value among family members while placing management and control in the hands of those best able to build business value for the family. In practice, the ownership structure that is already in place will influence how much flexibility there is to make changes. However, the way in which the family enterprise value is shared will have a major impact on family relationships for generations to come, so it must be considered carefully.

• Successor selection. Steps must be taken to ensure that the ownership group supports the future management team. Non-family managers must also be on board with the new order and have confidence in the management succession plan.

Selling the business

There are a number of steps business leaders can take to ensure the company’s smooth transition to a new owner. The first is maximizing the company’s value. Some family businesses are well prepared to be sold; their accounting systems are in good order, family expenses are not run through the business and there are no unusual accounting practices. If you have identified weaknesses or threats in these areas, you must address them so your company can receive its highest value in the marketplace.

The second step involves identifying prospects. Many business owners are already aware of prospective suitors, and their inclination may be to work with their existing advisers to contact these prospects and negotiate a sale. Many successful transactions are concluded this way if the advisers are experienced in performing this role. If access to a broader range of potential buyers is desired, an investment banker might be added to the team. Investment bankers provide market perspective on the shape and value of similar transactions and may be able to develop alternative sale options that help meet the seller’s long-term objectives. If a sale to a competitor is thought to be the best solution, an investment banker can develop competing proposals before contacting the competition, protecting the seller’s market and perhaps pushing the competition into a higher bid.

The third step is negotiating the sale. The structure of the transaction will significantly affect its value to the owner. The nominal price of a deal is reduced by its tax impact, both in the present and in the future (e.g., a stock vs. asset transfer or installment sale). If an earn-out is involved, the price is not set and a lower price without that contingency may be more desirable. Any liability retained by the seller clouds the eventual value of the deal. There may be additional benefit or cost to the seller if the structure requires the business leader to stay involved for a while. The family may have identified other non-financial objectives that will determine if the deal is right, such as the structure’s impact on employees and the community.

Preserving and protecting wealth

In an intergenerational transfer, wealth preservation will have been addressed in the transfer structure; the capital pool that sustains the retiring owner’s lifestyle must be protected. When a sale has occurred, the family’s principal goal is the preservation and growth of the sale proceeds. In both cases, wealth preservation must be managed continually.

Owners often take risks in managing their business, though few of them appreciate the severity of those risks. This changes once business equity is exchanged for financial assets. An investment strategy should incorporate this new risk limitation and should deliver a sustainable cash flow while protecting the capital with few surprises.

Planning life after retirement

Despite its importance, insufficient attention is often devoted to planning a post-retirement lifestyle. Life after retirement can last as long as 30 years. That’s why it’s vital for individuals to have a well-balanced life plan that includes each of the following:

• Securing lifetime income. This allows the retiree freedom to pursue other goals.

• Purposeful living. The former business owner should seek out new directions that provide satisfying outlets for his or her energy. Post-retirement roles could include mentor or adviser to someone just entering the field, angel investor, volunteer for a charitable organization, member of another family business’s board or business consultant.

• Strengthening family relationships. Many retirees find satisfaction by developing deeper and broader communication links with family members.

• Health and long-term care planning. Maintaining healthy habits and activity levels improves and extends a retiree’s quality of life. Meanwhile, a long-term care plan should go beyond having the assets to pay for long-term care or buying long-term care insurance. It should include the funding source and the facility where the care will be provided. Be sure to develop a living will so your family knows your preferences for medical intervention in end-of-life situations.

Ensuring a successful transition

Ultimately, the success of any family business transition is determined by the extent to which it reflects the family’s values and provides a rewarding life for the owner and his or her loved ones after the transition is completed. The steps detailed here will aid family business owners in formulating a strategy for addressing the challenges that can arise.

James A. Fitts (left) is director of wealth counseling and Marshall Rowe is president and chief investment officer at Harvest Capital in Concord, N.H. (







Copyright 2012 by Family Business Magazine. This article may not be posted online or reproduced in any form, including photocopy, without permssion from the publisher. For reprint information, contact

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July/August 2012


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