Family business owners will all inevitably come to a decision point: what will you do when it is time to leave the business? Determining an exit strategy from the business you have built and managed can be complicated to plan and accept emotionally, but having an “exit plan” is critical: it will secure the future of your business and maximize your own financial situation as you leave.

The Exit Planning Institute found in a 2023 survey of business owners that 41% had formal, written plans for how they intended to sell their company, leaving 59% with only informal plans or no plans at all. In addition, 30% of owners reported that they didn’t feel they were knowledgeable of all of their options. PWC’s own 2023 survey found an even lower share – only one third – of family-owned businesses had a formal exit plan. Owners without exit plans risk losing an opportunity to sell at all, drastically reducing their future financial potential.

There are several ways to go about your transition and they all depend on your own financial goals, the current state of your business, and your priorities for the business’s future. Summarized below are four of the most common exit-strategies that family businesses commonly follow below. 

• Strategic Sales involve selling your business to a new owner or another company that folds operations into their existing business.

• Family Succession Plans pass your business directly to a member of your family.

• Management Buyouts (MBOs) pass your business to a partner or trusted investor.

• Employee Stock Ownership Plans (ESOPs) sell the business to your employees who share ownership into the future.

Exit Strategies for Family Succession: Passing Your Business Down To The Next Generation

Family succession plans, also commonly known as “legacy exits”, are a great option for businesses that hope to keep the business within the family.

Keeping management within the family can ensure that institutional knowledge isn’t lost in a transition to an outside party. Many businesses have also incorporated the family-run nature of the business into the brand itself and don’t want to give that up. The transition can be smooth and beneficial for everyone involved if someone in the family is trained and ready to step up to the plate to take over the business.

If you want to pass your business to your family but also hope to receive fair value for your stake in the business, then you can take advantage of a “leveraged buyout”. This means careful planning is still important when transferring a business to a trusted family member, as poorly executed transitions can create issues leading to financial hardship for the business and employees. It should also be noted that the sale price in family succession plans are often lower than in other cases.

Family succession plans work very well for some, but business owners should be savvy and realize that there are other options. Management Buyouts (MBOs) are one way to secure and carry forward the institutional knowledge of your business if you feel passing directly to a family member isn’t an option.

Management Buyout (MBO): Selling To A Partner Or Investor

Selling your stake in a business to a “friendly buyer”, or buyers that are already partners or managers in the business, comes with many of the advantages of a family succession plan. There may also be a venture capital investor you know and trust who would be interested in buying you out.

MBOs ensure institutional knowledge is secured and reduces disruption that could occur, though they also result in lower-than-average sale prices when compared to other external options.

MBOs have many of the same benefits as family succession plans, though there is one more internal method: passing ownership to your employees through an Employee Stock Ownership Plan (ESOP).

Employee Stock Ownership Plan (ESOP): Let Your Employees Take Ownership Over Your Business

Employee Stock Ownership Plans (ESOP) keep the business within the circle of those directly involved with the day-to-day operations of your business: your employees. Who else knows in more detail the secret-sauce that makes your business successful than the employees who do the work every day? ESOPs break up ownership over the business and distribute shares directly to your employees. 

To achieve this, a trust is created which then buys out the owner (typically with borrowed funds) at fair market value. The trust then divides ownership of the company into shares that are then distributed to each of your employees. From then on employees all have an even greater stake in the success of the business as they can sell their share when they leave.

ESOPs are mutually beneficial for both the existing owner and the current employees. The owner receives fair market value at the time of sale and adds new incentives for employees to keep the business running successfully into the future.

At the same time, ESOPs need to have plans in place to ensure the trust has enough liquidity to buy back shares from retiring employees. This strategy can also be complex to execute due to regulations unique to ESOPs, such as in the Employee Retirement Income Security Act (ERISA). Non-compliance can carry heavy penalties. If you think an ESOP is right for you, make sure to seek assistance in crafting a plan that is compliant and avoids these pitfalls.

While turning ownership over to family, partners, or your employees likely secures a steady transition, other options that sell your stake to others outside of your business can be more lucrative.

Strategic Sale: Sell Your Business To An External Buyer

Sales to third parties are popular with business owners who want to maximize sale price and the cash received up front from the sale. These buyers are typically interested in adding value to their own existing operations – like a marketing company that buys a small graphic design firm to improve their offerings.

External buyers are not as familiar with the ins and outs of your business, and so to successfully close on a deal you will have to be prepared to provide information on your operations to build a potential buyer’s confidence. This may be intimidating but with the right approach it is a huge opportunity to optimize your business to boost its ultimate value.  

Owners selling to third parties need to be prepared for a longer process and need to pay for professional assistance (in the form of attorneys, CPAs, and so on) to ensure the sale is done cleanly, opportunities for optimization aren’t missed, and to identify prospective buyers. The process can also be an emotional one, especially for owners who started the business themselves.

By understanding and acknowledging these challenges, owners can tailor their exit strategy to overcome them effectively.

How to get help with creating an exit strategy for a family business

Having a clear and thoughtful exit-strategy is paramount to securing your legacy and avoiding unnecessary complications and losses. Knowing all of your options, selecting your strategy, making a plan, and transitioning away from what you have spent your life building is not something anyone should do alone.

At Bridge we work with small business owners to craft an exit-strategy that matches up with where family business owners find themselves and where they hope to go.