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Family Businesses: Choosing the right exit strategy

Business Solutions

By Jane Schroeder

Jane Schroeder is a Senior Vice President at Lenox Advisors who has been with the firm since 2011. She specializes in family and business insurance planning.

There are many different exit strategies for a family business, including transferring it to the younger generation, selling it to the company’s management or to an employee stock ownership plan, or selling it to a third party. This article explores these options and stresses the importance of timing a sale right.

If you own a family business, it’s likely one of the biggest assets you own. So, your plans for it will have an outsized impact on your retirement and estate plans.

There are many different exit strategies for a family business, including transferring it to the younger generation, selling it to your company’s management team or to an employee stock ownership plan, or selling it to a third party. The right outcome depends on several factors, including your financial resources, your retirement goals and your family’s interest in taking over the business.

Eying the future

Before you formulate a strategy, consider obtaining a professional valuation of your business to get an idea of what it’s worth. Only then can you determine how its value fits into your personal and financial retirement goals.

You’ll need to estimate what you’ll need to support your desired lifestyle in retirement, what other sources of income are available, and whether you’ll need to continue working for a certain period after exiting the business. This inquiry will help you determine whether a transfer to family members is financially viable or if it’s necessary to explore other options, such as a sale.

Another factor to consider is whether your children or other family members, or your management team, are willing and able to take over the business. If not, a sale to a third party may be the only option that maximizes the value you and your family derive from the business. This is particularly important if you’ll continue to rely on the business for income after the sale. For example, some owners retain a minority interest or receive payments tied to their company’s financial performance. Finally, consider the business’s future prospects. If competitive or technological developments may increase its risks, for example, a complete or partial sale may be an effective strategy for diversifying your holdings and mitigating risk.

Timing is everything

If you’ve decided to sell your business, when’s the right time to do so? The answer depends in part on your personal goals and in part on external factors. For example:

  • Do you plan to work until traditional retirement age or later, or do you anticipate an earlier exit?
  • What’s the likelihood that health issues will force you to pull the trigger earlier?
  • How do you expect current conditions in your industry to change between now and your anticipated retirement date?
  • Are there opportunities to enhance the value of your business before you sell?

The greater the value of your business, the greater the chances your exit strategy will be successful. You may want to stay on past your original retirement date to increase the company’s value, even if that takes a couple extra years. For instance, you might evaluate your management team and hire new talent or provide additional training to address leadership weaknesses. Also assess your technology and product or service mix for opportunities to improve your competitive edge. “Professionalizing” the business by strengthening governance practices or appointing independent board members can further increase its value.

Start planning now

Planning your exit from a family business is a complex undertaking. But one concept is simple: The earlier you start planning, the greater your chances of success. Start by assessing your current financial situation, setting your personal and financial retirement goals, and determining how the business fits within those goals. Only then can you begin to identify the optimal strategies for executing your plans and laying a foundation for a successful transition.

© 2023

Securities and investment advisory services offered through qualified registered representatives of MML Investors Services, LLC,90 Park Ave. 17th Floor, New York, NY 10016, 212.536.6000. The information provided is not written or intended as tax or legal advice and may not be relied on for purposes of avoiding any Federal tax penalties. Lenox Advisor, Inc., its employees, or representatives are not authorized to give legal or tax advice. Individuals are encouraged to seek advice from their own tax or legal counsel. Individuals involved in the estate planning process should work with an estate planning team, including their own personal tax or legal counsel.