Why Family Businesses Owners should always have Exit Strategies

Ask any family business owner why they went into business for themselves and the usual answer is to provide an income for them and their families. Most of these entrepreneurs are too busy with the daily grind – marketing and selling the business’s products and/or services, managing staff, doing admin and so on – to think about what happens when one day they want out.

But, that take-it-as-it-comes approach to exiting the family business could be short-sighted. Rather, considering your exit strategy from the get-go is a smarter tactic… Reports The Business Journals – an online resource for business in America – 80 percent of small business owners only start thinking about their exit strategy when retirement looms large on the horizon.

But this is akin to leaving your business on a whim – which means the outcome could be unexpected (and not necessarily in a good sense).

Family business owners should consider exit strategies

Here’s why it’s wise to have an exit strategy in place:

• Planning properly helps secure your future, which helps you enjoy your golden years, free from financial anxiety
• An exit strategy can actually facilitate better management of your business – helping you steer it in a defined direction, thereby aiding its growth (and increasing its value)
• Not worrying about what will happen to your business (and the people involved in it, whether family members or outside employees) when you’re gone will give you peace of mind.

Handing over the reins to a younger family member is just one of the ways in which you can exit your business. Other options include:

• Selling the business to an outside buyer
• Going public and floating the business on the stock exchange
• Facilitating a management buyout – where your management team or employees purchase the business from you
• Winding up the business by liquidating it.

Think about an exit strategy long before retirement

Creating a legacy for subsequent generations is one of the proudest achievements of any family business owner. However, families being families, passing on the torch needs to be correctly managed to enable a smooth transition. When formulating a family succession plan, be sure to take the following into account:

• The role you’ll play in the company after retirement? Will you still maintain some degree of control or act as a consultant or advisor?
• Which family member will you appoint as your successor? Is the decision based on ability, talent, knowledge, education, skills and experience or on another factor, such as birth order, gender or personal preference?
• How will you help the next generation gain the appropriate experience? Getting them involved in the business from an early age gives younger family members time to learn the ropes and form relationships conducive to helping the business thrive.
• How will shares in the family business be apportioned between your named successor and other family members – will this provide a source of conflict between them?
• How do you plan to mitigate any potential conflict? Making use of a neutral family business consultant can help ease the transfer from one generation to the next.

Manage your tax responsibilites

Choosing an exit strategy also involves considering tax; what would be the most efficient approach for your particular circumstances. Talk to your tax advisor about:

• Your own liquidity needs – how much you need/want to get out of your business when you depart and whether you would prefer a lump sum or ongoing monthly payments
• Any inheritance tax or estate duty which may become payable if you pass on the business to a family member
• Whether disposing of your company makes you liable for Capital Gains tax
• Whether gifting company shares or creating a trust will have any tax benefits for you and/or you successors
• Whether selling the company or going public is preferable from a tax perspective than transferring ownership to a nominated successor.

by Christophe Bernard (KPMGFamilyBusiness.com)