When The Apple Falls Far From The Tree

What if your kids don’t want to take over your business? That’s a bummer. Succession planning is often much easier if the transition is to adult children who are already in the business and want to run it, own it and serve in some leadership role for some period of time.

If they don’t want to run or own it, you have a tough decision to make.

75.Skateboarders.FranklinSquare.NW.WDC.17April2013The next easiest option would be to sell to one or more key employees who want to own the company. You could do this through an ESOP (employee stock ownership plan), which makes every employee an owner, but there is a lot to consider with an ESOP, and it still requires a strong leader who can run the business profitably and sustainably. More often I see sales to competent leadership-level employees who are interested in buying the business.

The problem with selling to family members or key employees is the financing. The vice president of a $15 million company isn’t sitting on a wad of cash ready to invest in your business. And getting a bank loan of that magnitude is tough.

In most cases, you will have to finance the sale. Doing this will build an opportunity for your successor — the new owner(s) — to run the business while you are still engaged. And you’ll likely want to be engaged, since you’ll still own a good piece of it for years.

The plus side of this arrangement is that the installment payments fund your retirement and give you the flexibility and freedom you want in your life. The negative side is that you are an owner for a long time, and your liquidity event is really a series of payments over time. If the business succeeds profitably, you get paid. If the business suffers, your payments may go toward the survival of the business, and you may find yourself coming back in to re-right the ship or find a new buyer.

This makes it very important that you pick the right people to buy it in the first place. If they can’t run the company successfully and sustainably, there isn’t going to be a payout for you.

If you have no family member or key employee willing and able to buy and run the business, it may be time to seek out a third-party buyer. The wrinkle in this scenario is that it can be really hard to secure an outside buyer who’s willing to pay what you think the business is worth.

Selling to a strategic buyer is a cleaner transition. There is a liquidity event , then you move on with your life and they move on with your business. Oftentimes, this also can be more lucrative for you, too. But it’s hard and can be time consuming to find the right buyer.

While these options may seem daunting – and they likely are — the worst solution is for an uninterested adult child to feel obligated to take over the family business. It’s not good for your company, your wallet, your family or your legacy.

Start now — Find the right fit buyer for your business, and ensure the long term success of your company, your retirement funds, your family and your legacy.