Generally, we try to accomplish the following in a family transaction:
- Allow the senior generation to exit the business in such a way that their retirement financial needs are reasonably met. No one wants to give up control of their business without clarity of their financial future.
- Allow the next generation owners the opportunity to take control of the business on reasonable terms so they have an opportunity to create value for themselves in the future.
- Achieve steps one and two in a manner that does not put the business in jeopardy. Since no new capital is brought to the table in a family transaction, the company’s future earnings and cash flow are key. If the transaction stresses the company too much, both generations suffer.
Since family transactions are not based on a valuation or structure from an external third party, the family has to reach an agreement in a fair and reasonable manner. Coming to an agreement requires everyone to give a little and accept that no one will get everything they want or view as fair. This is because fairness is a judgment call and a matter of the point of view of the parties involved. I have been in deep discussions with families working on a transition and it is not uncommon for there to be disagreements about what is fair. These disputes are caused by the fact that oftentimes everyone’s point of view is valid and correct.
These issues related to fairness normally show up in the economics where the senior generation may feel they are not being paid enough to give up control and the next generation feels that they are paying too much. Depending on the specific facts, both are often somewhat right.
Since these transactions are “cooperative,” everyone involved needs to reasonably cooperate with each other and keep the big picture goal in mind – the long-term health and future of the business. When everyone has their eyes on the big picture goals rather than their own interests, the transaction can go smoothly. If everyone is solely focused on what they want, things get messy.
At the outset of any transaction, we advise that the ground rules include the following:
- Everyone is congruent on the big picture goals for the transition. The approach must be fairness for everyone as opposed to fairness for an individual.
- Everyone must make sacrifices to meet the big picture goal, which means no one gets everything that they want.
Starting with these basic assumptions will give your family transition a much better likelihood of success.
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