Business Succession: Should you pass it down or sell it?

July 9th, 2015 Cory Ahrendsen
MidWestOne Business Succession tips

It’s never too early to start thinking about a succession plan for your business. You’ve put a great deal of time and hard work in your business and if you want it to continue to thrive after you leave, it’s important to think about that will happen .While business succession can take many different shapes, it often boils down to two key questions – do you want to sell the business or do you want to pass it down to other members of your family?

Let’s look at both sides of this very complex coin.

Passing the business down to family members

To help you decide if this is the right option for you, take some time to think about these questions:

  • Do you want your family to take over the business?
  • Who would be taking it over? One, a few or all of your children?
  • Is there one of your children who shows the kind of leadership skills you prefer?
  • Is there an equitable way to pass down your business?
  • Who will take control of the business after you pass exit?
  • How will capital gains be managed if you sell your business to your children?
  • Will you need income from the sale of your business?

These are just a few considerations that need to be weighed before you make your decision.

Because the transition of your business to a family member can be a risky one, it’s helpful to know some statistics. According to Joseph Astrachan of Family Business Review, more than 30 percent of family businesses survive in their second generation and only 10 percent into the third generation.

You’ll need to think about the challenges you’ve faced within your family. Any non-business problems and the way your family would respond to big challenges and little challenges that add up, too. Does your family understand the dynamic you’ve established within your company and will they get along with the team you’ve come to know so well? How much do your family members know about how the business is run, or your plans for its future?

If you choose to hand the business to a family member, you will need to take care of a few more things like deciding which family member will run the business after you, making a detailed plan for the transition and “what happens if…” situations, and becoming a mentor to the successor.

Selling the business

If you think that selling your business may be the right decision for you, there are more considerations you have to make. You may need the help of trusted experts, including an accountant, attorney and possibly an estate broker. Much of your time will be needed to make sure the sale of your business is a smooth one.

Here are some things to consider.

  • Give yourself plenty of time to sell – Spend time giving your business the preparation it needs. Consider who will take care of record-keeping, how the business is structured and how you will break the news to your employees and customers.
  • Get a valuation on your business – Finding out how much your business is worth will help you put a fair and attractive price on the sale. You will receive a detailed look at how and why the assessor determined the value.
  • Consider using a broker – A broker will free up a lot of your time so you can focus on other things, like running the business. The broker will also allow you to prepare for the sale quietly and sell your business for a higher price (because the broker will want to maximize commissions).
  • Take care of paper work – Your accountant will want to see tax returns, receipts, invoices and other financial documents over the last three years. This is also a good time to take inventory of your equipment and supplies. You can determine what will stay and what should go. Once the documentation is complete, you can share this with potential buyers.
  • Welcome your potential buyers – When you are ready to begin your sale, you will have to find a buyer. You may advertise or announce the sale through various channels. You may want to find a few serious potential buyers in case your initial deal falls through. Depending on your situation, the sale process may take six months up to two years.

If you choose to sell to an outside buyer, you will be able to cut your ties to the business a little easier.

The choice that’s right for you

Whatever you decide, you have to make sure it’s a choice you can live with.  Each choice has its upside and downside. Which are you more willing to accept? It is an emotional and time-consuming journey. Don’t forget to reach out to people who have already been through similar experiences. The most important thing to remember after your sale is to simply enjoy what you have accomplished. The legacy you leave behind will continue is some fashion for years to come.

About the author

Cory Ahrendsen is Second Vice-President, Commercial/Ag Banking Officer for MidWestOne Bank.

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