The transfer of ownership interests in private companies is a very complex task. One of the most difficult positions is that of the exiting shareholder – the senior generation family member, or G1. Most advisors on these transactions tend to focus on the financial elements of the deal. However, we have found that the financial element is only one small part of the equation that G1 is struggling with. We have identified four additional areas that G1 needs to address in order to feel comfortable with their decision:
- Personal Financial Issues. Does G1 have clarity about their lifestyle needs and cash flow in retirement? What role does the potential transaction play in that plan? It is important for G1 to work closely with their financial planner to project their needs over their life expectancy.
- Family Issues. The last thing a G1 leader wants to do is leave their company to their children while the family is a chaotic state. The family work and governance structure should be agreed upon by the entire family well in advance of an exit so the structure is solidly in place when G1 is ready to exit.
- Emotional Issues. One of the biggest hurdles to a G1 exit is the emotional issues involved in letting go and adapting to a changing role at the company as well as broader lifestyle changes. These emotional issues take time to work through and there are no one-size-fits-all answers. Many G1 leaders delay a transfer because they think they need to retire and be fully disconnected from the company, which is not the case. The operative word here is different role, as opposed to no role, unless G1 desires a complete exit.
- Business Issues. It is completely natural for G1 to be concerned about whether those coming behind them are capable, competent, and motivated. Often, this concern partly stems from the fact that G1 has continued financial risk, in that they are holding a note for the purchase of their shares or they have a deferred compensation arrangement that is dependent upon the future success of the company. This is a real, valid concern. Succession planning is the way to address this, and the sooner the better. The risk goes up the later you start to groom your successors.
The bottom line in all of this is that private company transfers are highly complex and take time. The best practice is to get ahead of the exit – and its issues – by preparing for it years in advance.
What keeps you up at night as you think about your own transfer? Have you seen examples of other companies that have handled this process particularly well? Share in the comments.
