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What’s your company’s succession plan?

For many family businesses, it amounts to “keeping it in the family.” The reality, however, is that businesses that transfer successfully from one generation to the next are the exception rather than the rule.

Why is the failure rate so high? The primary reason is the lack of planning for the succession of the business. Therefore, it’s important that you carefully think through what will happen after you’ve exited your company—and not simply assume that you’ll pass your business and your legacy along to your children.

To help you get started, let’s take a look at some of the fundamentals of business succession planning, paying particular attention to one option you might not have considered: selling to a private-equity firm.

Your Business Succession Plan

Business owners typically have two primary objectives in their succession plan: They want to ensure that the business will continue to prosper after their exit and they want to diversify their net worth by realizing a substantial portion of the value that has been created in the business.

There are three major elements of a successful business succession plan:
• Strategic plan – a roadmap for where the business is going and how it’s going to get there.
• Management succession plan – identification and development of the right talent in place to take over the leadership of business.
• Ownership transition plan – the framework for orderly transfer of ownership of the business to a chosen successor.

The strategic plan is your foundation for the future, helping you effectively allocate resources to the highest-priority items and providing a base from which progress can be measured and changes made as necessary.

With the strategic plan as a guide, a management succession plan identifies and prepares key individuals to take the helm, ensuring continuity of skills, knowledge and leadership in the organization.

As you go through this process, it’s important to keep in mind that business needs change, and the management of tomorrow may need different skills. You should choose management successors based on leadership/management abilities, not birthright.

The final element of a succession plan, ownership transition, must take into account both the needs of the current owners as well as the future needs of the business. The ownership transition plan that properly balances these needs will be the best solution.

With that in mind, the ownership transition plan also should address several questions:
• Do you want to be involved in the company after the sale? To what extent?
• Would you like to maintain a partial ownership stake?
• Are there employees the owner wishes to reward prior to the transition?
• How important is it to preserve the “family legacy” of the business?

Ownership Transition Options

Generally speaking, you have three ownership transition options: Transfer to one or more family members, sell to a strategic buyer or sell to a private equity firm.

Passing your business down in the family has its advantages, of course. You keep the business and the family together, you provide a source of income for the next generation and you can remain actively involved if you wish.

However, remember that ownership transfers within the family often don’t succeed. Why? Many family business owners have trouble letting go and making way for the next generation. Conversely, children are sometimes reluctant to take the reins of the business. Most often, the owners haven’t planned properly for this transition by addressing the many challenges of strategic planning and management succession, which we touched on earlier.

If you decide the time is right to sell the company, the next step is finding the right buyer. Selling to a strategic buyer is the option most likely to generate the highest proceeds for the owners. Combining with such a buyer often yields synergies that provide competitive advantage to the business going forward.

On the other hand, the result would likely be that your business would be merged into the buyer and lose its identity. Also, your employees’ jobs would be at risk if their responsibilities are redundant in the new organization. The potential dismantling of the family legacy and dismissal of loyal employees often doesn’t sit well with an owner.

Fortunately, there is another sale option for a family business: selling to a private equity (PE) firm.

The Benefits of Selling to a PE Firm

Selling to a PE firm, which often involves including key employees in the transaction, offers a variety of benefits that other options don’t, including:
• Your company can remain independent.
• You have greater flexibility in the transaction, including the ability to reward your management team with a partial ownership stake.
• The new ownership often brings new strategic and operational expertise.
• The company remains focused on long-term growth.
• You preserve the family legacy.

Perhaps the most important result is that a PE firm applies a greater emphasis on strategic focus and discipline. Management is oftentimes consumed by the daily “firefighting” that is involved in running a business. The PE firm can help management take a step back and ask, “What are we doing right? What are we doing wrong?”

In addition to financial stability, a PE firm can also provide insights that maximize the value of the business and provides a smooth transition into the future. The transactional flexibility of working with a PE firm means you can maintain some ownership stake and participate in these endeavors. One drawback of selling to a PE firm, however, is that PE is designed to provide a return to investors down the road, so the company may be sold again in four to seven years.

Family business owners who are interested in selling to a PE firm should look for several characteristics:
• A reputation for honesty and integrity
• A proven history of closing transactions
• Ability to move quickly to complete due diligence
• Reliable financing sources
• And, of course, a proven track record of building successful companies

Selling to a PE firm that demonstrates these attributes—as long as the move proves to be a good fit with your strategic plan and your management team—may be just the succession plan your family business needs to thrive into the future.

Bill Krugler is a managing director at Mason Wells Buyout Funds in Milwaukee, a private equity firm known for its proven, disciplined, forthright approach to acquiring and growing mid-sized, family-owned companies with an emphasis on packaging & packaged goods, engineered products & services, and outsourced business services industries in the Midwest.

By Bill Krugler

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