If you’ve been thinking about passing your family business down to the next generation, you may be asking: How much should I sell it for? To answer this question, you’ll want to reflect carefully on these six major areas:
How should I structure the transaction?
This is a common place to start thinking about your ownership transition and can impact what price you choose. You may give for free (or gift) equity in the company to the next owners. This is helpful if the next generation doesn’t have the cash today to fully fund a purchase (which is often the case), and the current owners don’t need a big liquidity event. It also can be done in a way that minimizes tax liability for the parties involved, leaving more money in your family pockets.
You may want or need to sell your equity. You could sell at a higher-than-market price, which is helpful to maximize the cash going to the current owners but can be painful for the new owners. You can sell at a fair market value, which might be seen as treating all parties fairly in the transaction. Or you could sell at a below market price, which can still give the current owners some liquidity but also affords the next generation some greater upside and a total purchase price that is easier to pay for. Your choice of financing (e.g. seller financing, company financing or buyer bringing cash) might also play into what the final deal price is.
What is the impact on all the people involved?
Before you choose the best way to structure your transaction, you’ll want to think through how each person involved will be impacted by the ownership transition. If the owner has multiple children, do they all want to participate in the business? Do ownership and management need to be separated? Are there key nonfamily employees who should be part of this transaction? What are the needs of the outgoing shareholders financially and nonfinancially (i.e. would you really be happy playing golf every day from now on)? Thinking about what all the family members and key nonfamily members needs are ahead of time will help ensure that a technically perfect plan isn’t dead in the water due to lack of support from the critical players.
What do we value most?
Thinking about the impact on the people involved leads to a broader question: What do we value? Family businesses are unique and have their own set of values. These values need to be aligned with your transition process for it to be most successful.
Is hard work a family value? If so, maybe making the next generation pay for the company (as opposed to gifting it to them or offering a bargain purchase price) might feel right for your company. Are diversity and fairness strong values? If so, should well-qualified, nonfamily executives also be invited to participate in the transaction?
What is our long-term vision?
In addition to values, one of the most important drivers of your transition strategy is a clear long-term vision for the company and your family. What does a wonderful future five years from now look like for your company? Your family? What roles are family members happy to be playing? Determining up front what the ideal future looks like will be the single biggest driver of clarity for the rest of your transition process.
What skills do we need to make this transition a success?
A great plan won’t work if you can’t execute it. What skills will you need to deliver on your transition plans? You will almost certainly need solid legal and tax advice, both for your individual family members and for the corporation. Internally, does the new owner need to step up their leadership skills to assume the role of CEO? Will you need a facilitator to help hard conversations with family members be more productive? A successful transition takes time — often years — and you may have a need for different skills at different points in the process.
How much is the business worth?
We couldn’t answer the question of how much to sell (or gift) an interest in your business for without asking what’s it worth? This can be answered by hiring a business valuation professional do to an appraisal of your company. Qualified valuation professionals will have credible certification — ASA, or Accredited Senior Appraiser, as designated by the American Society of Appraisers is the gold standard — and should be doing business valuation work full time. Their analysis will give you a number, which then informs the factors listed above and helps you know which road to pick.
Considering these six factors should give you a good idea about which path to take for a successful transition to the next generation. A fair price for your kids isn’t determined alone in a vacuum but relative to all the other factors in play. When these six key factors are in alignment, a great deal can be structured and the right price for your transition will become clear.
Matt Rampe is senior manager – forensic, valuation and litigation for Beene Garter LLP.