Family business exit options

Leadership and ownership succession

The MGI Australian Family & Private Business Survey 2010 (The MGI Survey) provided a number of valuable insights into family business continuity, leadership and succession issues, and the suggested ways to address them. Over two thirds of survey respondents indicated that leadership and ownership succession, more particularly 'letting go of control', were among the most critical issues/challenges confronting family businesses. (See Table below)

Source: The MGI Family & Private Business Survey 2010 (Visit: www.mgiaust-survey.com)

Statistical overview

In most family businesses, ultimate ownership control is consolidated in a husband and wife couple 46%, compared with 24% in two or more siblings (brothers and/or sisters); 17% in one individual; and 2% in cousins from different sibling branches. Fifty-eight per cent of businesses are first generation, 31% second generation, and 11% third and subsequent generation family businesses. Fifty-nine per cent have two generations involved in operations and 6% have three or more generations. Thirty-six per cent have only one generation of family members involved in business operations.

Over a third of family business owner-managers are in the 50-59 years of age bracket, and just under a quarter are in the 60-69 age bracket, with 8% being 70 years of age or older. Just under half of them see themselves working in the business beyond 65 years of age; with two thirds suggesting that their businesses are NOT exit or succession ready. Only a fifth, however, identify passing the business on to the next generation as a main motivation or objective for starting a business or remaining in it.

The family members most actively involved in the business are: spouses, 35%; sons, 35%; brothers, 11%; daughters, 7%; sisters, 2%; and other family members, 6%. To the extent that current CEOs are likely to be succeeded by a family member, those family members are most likely to be a son, 27%; or spouse, 14%. However, two thirds of family business owners indicate that younger generation family members are NOT as interested in actively managing the family business as the older generation. A third of family business owners indicate that, as a result, leadership succession will NOT be feasible, and that the current CEO is likely to be succeeded by a non-family member.
Over two thirds of family business owner-mangers believe that they have an adequately funded retirement program. Nevertheless, a substantial proportion of business owner managers are relying either on the sale of their business or continuing family business ownership for the cash to fund their retirement.

Assisting families in business to deal with succession planning issues and challenges

The MGI Survey identifies a number of proactive governance and management practices designed to assist families in business deal with business continuity and succession challenges, including the following:

• Commitment to the long-term viability and continuity of the business
• Establishing a clear process for successors to develop as individuals, in their roles, and in the business
• Ensuring attentive mentoring of successors as prospective business leaders and owners
• Emphasizing the importance of integrity and commitment to the business as primary successor attributes
• Establishing processes for welcoming, educating, and inducting in-laws into the family
• Documenting 'buy-sell' agreements that provide clearly defined and fair ownership exit options
• Taking the challenging task of succession planning seriously and putting considerable effort into it
• Designating a mandatory retirement age for all senior executives, especially owner-managers
• Selecting a family (cf. business) leader to perform the role of holding the family together emotionally
• Setting a definite date for the transfer of leadership responsibility and control to the next generation

Main benefits of continuity and succession planning

There are many benefits which accrue from proactively planning for continuity and succession. These include:

• Increasing the economic value of the business and providing owners with well thought out exit options and strategies
• Safeguarding the long-term health of the business and revitalising strategy
• Identifying, selecting, preparing and installing successor(s) and mapping out other family members' roles in the business
• Protecting and rewarding loyal employees and perpetuating employment opportunities
• Preparing founder(s) and their spouses for retirement by building up substantial interests outside the business to look forward to and providing for post retirement financial security
• Making the most of family-business assets, preserving wealth, and providing one's children with opportunities
• Perpetuating and passing on to subsequent generations some of the rewards of entrepreneurship and the special privileges of ownership

These, and other more business specific reasons for continuity and succession planning, enable family business owners to feel in control because they have a clearer idea of where they are going and how they propose to get there.

Sale of the business

Selling the family business as the preferred exit strategy

Almost 45% of family business respondents indicated that they are actively planning the sale of their business either now or later. Moreover, 61.3% would seriously consider selling their business if approached; with 25.2% reporting that they had been approached during the previous 12 months. The main reasons family business owners contemplate selling their business are retirement, lack of family successor, and original intention was to sell.

These findings confirm that while all family business owners may want their businesses to succeed, not all of them want their businesses to continue under family ownership and control. For many family business owners, the main objective for starting or remaining in business is improving family lifestyle by the creation of family wealth and its realisation via the eventual sale of the business. To that extent, it would be inappropriate simply to equate family business success with succession. Based on a consideration of what is in the best interests of the family and the business at the time critical decisions have to be made, both keeping and selling the business could be viable success options for families in business.

When selling the business is, or becomes, the ultimate objective and preferred exit strategy for family business owner-managers, as it usually is for privately held non-family businesses, the game changes and so do the rules; practices, the principal objective of which is continuity of family ownership and control, or succession, are no longer seen as either critical or relevant. The main focus then becomes identifying the business value drivers and managing the business to maximize its realizable value via a sale to third parties. The challenge becomes one of creating a viable selling strategy and targeting high probability buyers.

Developing family business protocols, constitutions, and succession plans.

To assist families in business with the issues and challenges that confront them as they contemplate business exit options and strategies, MGI has developed a number of business exit planning checklists for both succession and sale of the business to guide the exploration and decision-making processes. In particular, MGI Australasia's National Chairman Sue Prestney, whose special focus is proactive family business advising, has developed her own specialist approach to the daunting task of family business succession planning which she has outlined in detail in her recently published book Family Business Succession Guide; a practical manual that covers the entire planning process.¹ In one of the introductory chapters in her book, Sue comments that 'succession planning is a process which, if handled badly or not handled at all, can result in conflict in the family and great damage to the business'.

According to Sue, 'succession planning is a jigsaw with various advisors tending to concentrate on their own piece of the puzzle. However, given that there are many pieces in the puzzle, a workable plan will not emerge until all the pieces are put together and a full picture emerges'. This is the reason that Sue recommends a holistic approach to family business succession planning; a process that facilitates the development of succession and estate plans within the broader context of a family business Constitution that addresses relevant aspects of the interaction between the family and the business. The objective is to establish rules and principles that deal with family business issues before and after succession, as well as the underlying interpersonal and emotional issues that invariably accompany the process. Appendix 11 in the book provides detailed Planning Checklists to help families in business get started on their business continuity and succession-planning journey.

For family business owners, sale and succession can be major life changes fraught with both financial and emotional risks. The underlying personal/emotional issues that confront business founder owners (goals, needs, desires, and fears) as a result of current lifecycle and lifestyle are as crucial to the formulation of family business exit strategies as are the more technical issues of business and financial planning, valuation, and taxation. Only after those emotional issues are identified and addressed can the most appropriate strategy for the continuity of any family business, or its eventual sale, be developed and implemented effectively.

¹ Copies of Sue Prestney's book can be obtained from the publishers Thomson Reuters by ringing 1300 304 195 or by visiting www.thomsonreuters.com.au/, alternatively you can contact Sue Prestney at MGI