Begin with the End in Mind

The Case for Planned Business Transitions

Retirement is a top ten most stressful life event. It is right up there with death, imprisonment, and divorce. Still, fewer than 30% of business owners have an exit plan, and almost half (48%) incur an “unplanned” retirement (meaning a health crisis) forcing them out. Given these striking statistics, people should be more thoughtful and plan for business transitions. It is wonderful to hear about a successful generational family business transition. Since only 30% of family businesses survive per generation, all the more reason to cheer. This means fewer than 3% of family businesses survive through the third family transition. So, it seems prudent to focus on the majority of family businesses out there that will eventually need to deal with a non-family transition.

Objectives to Consider

Begin the journey with the end in mind. As an owner, consider who is most impacted by the business transition and find a way to gain their insight. Don’t leave out advisors because they will bring needed objective perspectives. Three broad objectives to consider in any family business transition model include:

1. Financial need: How much do I need to be financially secure? What are the particular needs of your family members? Do you have special needs that require a deeper level of planning?

2. Emotional need: Do I or family members need to stay involved with the business in some form? What drives me and my family? What connection does the family business foster with employees, community, and extended family? How will that be fulfilled going forward?

3. Community need: How dependent is the community on this business? What role does the business play in the community? If the business disappeared would it be missed?

Strategic Options:

When a generational transition is not planned, the family business has five options to consider. You will see they may not all be viable options and depend on specific facts and circumstances.


Liquidation. It hardly presents as a viable option, but in some cases, it may make sense. For most, a thoughtful review of the objectives rules out liquidation as it is typically reserved for insolvency situations.

Initial Public Offering (IPO). Again, probably not a likely scenario. Despite fulfilling several transition objectives, an IPO requires substantial resources to execute, astute market timing, and business scale.


Employee Stock Ownership Plan (ESOP) is a transition strategy focused on selling the business to employees. For the right family business situation, it can be an attractive option. A properly designed and structured ESOP can fulfill all of the transitional objectives.


Hire Or Promote A Non-Family President and form a fiduciary board to oversee the management team. This is not an immediate transition, but it may allow the owner more freedom from the daily business. It may under-optimize the financial needs of the family, but this may be secondary to the emotional and community objectives set out by the family.

Sell The Family Business To A 3rd Party. This may achieve the financial objective and fulfill the emotional and community objectives too. There are various 3rd parties to consider when following this option, and each brings a different set of issues and opportunities to consider.


Private equity (PE) firms are typically sophisticated and disciplined in approaching a transaction. After all, their business is buying and selling companies. Vet any PE firm with care. Understand their values, track record, and investment/management style. What is their average hold period? Know going in that most PE firms are not longer-term owners, which means the family could see the business change ownership every few years or worse,
be consolidated and shut down. This may not fulfill the family’s emotional or community objectives.

Another option is to sell the business to the management team (MBO). As opposed to the ESOP where there is a plan to share ownership more broadly with all employees, the MBO concentrates ownership into the hands of a few senior/key managers. This may make sense in certain transition scenarios. Planned properly and under the right circumstances, an MBO can fulfill the majority of transition objectives. Finding a source of funding for the management team may be more challenging especially if the management team lacks sufficient personal assets, or the business is light on “hard” assets.


A third option is an outright sale to another company using a business broker or investment banker depending on the size of the business using an auction process, which is common. The process can be lengthy, and resource-intensive especially if the business is complicated or performing inconsistently. An auction will bring both financial buyers (i.e., PE firms previously discussed), high-net-worth investors, and other companies operating in your space (i.e., typically your competitors or a company seeking access to your products and/or markets). Once sold the family loses control and may not fully realize their emotional and community transition objectives.

Summary Process

Under any of these strategic options, the family must plan. Assemble a team of advisors and family members and begin to define the financial, emotional, and community objectives most important to them. With this template, assess the market attractiveness for each relevant option. If a sale is contemplated then business preparations are needed. Items to consider include:

  1. Review of all relevant documents to make sure they are in order (corporate structure, contingent liabilities, tax matters, etc.).
  2. Assemble a draft quality of earnings (QoE) statement, and objectively review it from a buyer’s perspective.
  3. Review and organize important documents such as financial records, corporate documents, and equity ownership records. Confirm all intellectual property (IP), if any, is properly registered.
  4. Review all contracts for expiration dates and change-of-control (COC) provisions..
  5. Work with advisors to objectively review the bench strength of the management team and entire organization. Is the management team sufficient to attract outside investors?
  6. Obtain a business valuation and compare it against your personal financial retirement goals and consider the tax implications, and how best to legally minimize them.
  7. Prepare the family for the process and at the right time, prepare the employees and the community.
  8. Before retaining any third-party business broker/investment banker, interview them and conduct thorough due diligence as you will be entering into a binding contract to sell the business you have worked your entire life to create.

Approach the transition process like any other important life-changing event. Be thoughtful, and bring in trusted advisors for perspective. Depending on family and business readiness, the process can take months to years. Regardless, make it a managed process under your control. The decision not to act is still a decision, just not the wisest one. Avoid playing the “one more year” game (procrastination). An unexpected owner departure undermines a successful transition because it leaves everyone more traumatized, and is unlikely to fulfill your transition objectives.

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