How to Retain Your Family Business as an Investment as an Alternative to Selling

Keeping family wealth in the family

Families are often torn about the long-term fate of their family businesses. On one hand, there is a burning desire to continue the legacy of the business and the impact it has on the community. Yet on the other hand, the owner may be unsure whether there are family members trailing behind them who are even ready and willing to take on that level of responsibility. As a result, the conclusion is often to simply put the company up for sale.

But what if there was another option – one that wouldn’t require family to run the business, but would still allow it to retain ownership. One that would let the family to keep the business as a long-term investment and avoid a sale.

As we have been working through various family transition cases with our clients, we have been exploring this scenario more and more. However, like any thoughtful succession plan, there are a number of variables and sifting through them certainly takes time.

Below are two key considerations to make this option work effectively.

Management Team

The first obstacle is to address the obvious question: If my family or I aren’t around to run the business, then who will?

This is where creating a strong management team becomes a key factor in implementing this strategy. First, step back and take a hard look at the “as-is” situation. Who do you currently have in place? Are they in the right roles? Are they doing the right things? Do you have all the right people? Next, evaluate what the right management team looks like. Lastly, develop action steps to get the team from where they are now, to where you need them to be. This may involve adding additional management over time, implementing training and development plans for new and existing management, or starting to make some upgrades in talent.

When looking for strong and talented people, one thing is for sure – you are going to need incentives. Highly qualified candidates know when they are providing value. Offering long-term incentives helps to align the goals of growth and sustainability of the business. This is where we see phantom stock or stock appreciation right plans come into play, whereby key managers have an opportunity to participate in the increased value that they are helping to create. These plans are often a great way to incentivize and reward these individuals without diluting the family’s ownership.

Proper Governance

The other challenge to face is setting up a structure that allows the family to keep an eye on its investment. The best way to do this is to create a formal Board. Many owners – particularly founders – may find this process to be a difficult one. Owners – especially G1 entrepreneurs – are used to spontaneity and doing things their way. Creating structure in the family business can be so counter-intuitive to why they went into business in the first place.

The good news is that you can ease into this structure, and the role of Chairperson may be a solid option for a senior owner. Developing the Board will take time, but ideally, you are looking to get to a place where the Board consists of both family stockholders and non-family members. The family stockholders – or their representatives – are there to ask questions and be aware of what is going on in the business. The non-family members are there to provide industry expertise and further financial insight. The Board should meet no less than quarterly, and it should be used a platform for management to report on the health of the business and the initiatives they are tackling.

Exploring this succession option and executing on this plan will take time. In fact, I would set an expectation that it will take at least a couple of years to implement properly. But I would argue that the investment in time is well worth it if it means you can avoid a sale and keep your business in the family for years to come.

Interested to learn more about how to tackle this challenge? Plan to attend our family business mini-conference on October 24th, where I’ll be talking in more depth about this topic. Also, as part of the event, we’ll be conducting panel discussions with senior generation and next generation leaders who will share their first-hand experiences and lessons learned. Register here.

Steven E. Staugaitis is a director at Kreischer Miller and a specialist for the Center for Private Company Excellence. Contact him at Email or 215.441.4600.

 

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