Back to News

Succession Planning Process: 3 Tips for Selling Your Family Business

After spending years cultivating and nurturing your family business, it’s important to consider succession planning when preparing to sell your business. A strategic succession plan will ensure the smooth transfer of your family business while maintaining all existing relationships - whether that’s with your employees, business partners or customers. Additionally, succession planning will:

  • Protect your legacy

  • Maintain a service for your customers and community

  • Build value for your business

  • Provide financial security for your family and stakeholders

  • Plan for unexpected events

  • Prepare for the future

Here are three tips for selling your family business.

1. Select an exit strategy

Finding a suitable successor or buyer is the top concern that business owners face during succession planning.

It boils down to having a succession plan that’s tailored to fit both your personal and business objectives. Some questions to ask yourself when choosing a successor are: How can I best make sure my people are looked after when I’m gone? How can I ensure my business’s continuity and success? How can I preserve my family business’s legacy? Other factors that will help you in your strategy include evidence of commitment, skills, experience, leadership qualities and personality.

There are several options available to you as a business owner when planning your exit. Ultimately, your decision should be primarily guided by business objectives first and people second; as the people are not cared for if the business isn’t.

Transfer to a family member — a family succession provides the advantage of continuity and the confidence that your business is in the hands of someone committed to its success. In many cases, there is no suitable family successor -- a family member may not have the expertise, skill set or the desire to operate your business successfully. You also would not receive the same financial return that you would otherwise receive with an investment or third party sale of your business.

Sell to a partner, management team or employees — a management buyout is popular due to existing knowledge and familiarity with the business along with evidence of commitment and relevant experience. You also have the option of a management buy-in wherein an external management team joins the business.

Sell to a third party — a sale to a buyer or investment firm is an attractive option if there is a need to raise funds, or if there is an absence of a successor. It is crucial to consider skills, experience, leadership skills and commitment to your business and people when selling to a third party.

Many business owners have an unrealistic idea of how much their business is worth, often due to their emotional investment

2. Determine a market price

Once you’ve selected a successor, you’ll need to determine a fair market price for your family business. Many business owners have an unrealistic idea of how much their business is worth, often due to their emotional investment which can result in unwarranted inflation. Differing expectations from owners, potential buyers, family members and partners can also cause variation and even conflict.

Earnings are key to valuation — The most common method to determine a fair market price for your business is determining your business’s ability to generate earnings. This is done through calculating a multiple of EBITDA (earnings before interest, taxes, depreciation and amortization). After calculating the EBITDA-based value amount, a valuator confirms it by applying other valuation methods.

First, by calculating the total value of your business’ tangible and intangible assets and second, by an analysis of the sale figures of comparable businesses. It’s important to note that the price you get for your business may differ from the appraised market value and can be affected by numerous unexpected factors (value of assets, owned real estate, etc.)

Finally, it may be helpful to consult a professional valuation expert to help you set a selling price and determine whether an offer is reasonable. A tax expert can also advise you on tax liabilities in any potential sale of your family business.

3. Finance your succession 

Financing your succession planning strategy may be your largest obstacle to a successful transition. Successors do better if they have a limited burden of debt, maximum repayment flexibility and diversified financing sources. All of this allows continuity of your business for your customers and preserves your legacy. Furthermore, financing must be advantageous to both sides of the sale or transfer, and it is important to seek flexible financing. Here are some of the sources of financing available for you to consider:

Buyer Equity — buyers may invest their own capital in a business to reduce the amount of outside capital and demonstrate commitment to the business.

Vendor Financing — some financial participation by the business owner may sometimes required for the transaction. This generally involves the owner agreeing to be paid some percentage of the sale price over time with interest.

Secured Debt —can include term loans, lines of credit, and commercial mortgages. These are secured by the business’s assets (ie. real estate, equipment, etc.).

Mezzanine Financing — financing based on historic and expected future cash flows of the business. Interest rates are higher than those with secured loans, however it offers flexible terms, and requires no specific collateral.

Outside Equity - another way to raise funds for succession is by selling an ownership stake in the company to outside investors. Equity capital can come from a private equity fund, individual investors, or a financial institution’s venture capital/private equity arm.

Understanding the 3 broad tips for succession planning is the first step - the rest, we can help with. Skidmore Group has an established record of growing business value and caring for people - with over 70 years of experience. We expand regional businesses into national players by applying capital and expertise, ultimately to achieve market dominance. If you are considering exiting your business and want to ensure your people are taken care of, we would love to hear from you. Contact us today.