Should a family business always remain within the family? Not always. Learn more about options for transitioning a business.
After decades of building a successful business, owners often find themselves facing their toughest challenge: deciding what to do with the business when they’re ready to retire.
Many business owners pass the reins to family but sometimes that’s not possible — for example, there might not be a family member with the right experience or perhaps the kids aren’t yet old enough for the responsibility.
According to Tracey Gillespie, national director of Business Owner Advisory at Wells Fargo Wealth & Investment Management, business owners have a variety of options when it comes time to think about business succession planning, including turning to qualified investment bankers or business brokers to identify a range of potential buyers. Here, she shares her perspective on family businesses and what might come next.
Why look outside the family?
According to a recent Wells Fargo Wealth & Investment Management survey,1 52% of business owners do not want their children to run and inherit their business. Gillespie says that there could be a variety of reasons for this — and it can be more than generational differences.
“Many parents, especially baby boomers, want their kids to become college educated and choose a career path that interests them — and often, the family business doesn’t,” she says. “We’re also seeing a shift in societal norms; there’s not the same feeling of duty among younger generations to carry on their parents’ business legacy. Younger generations want to fulfill their own goals and build their own legacies.”
If you want to leave a financial legacy for your children, looking beyond the business might also help you reduce the family’s risk, Gillespie says. Keeping most of the family’s wealth tied up in one company may not make sense if your business succession goals include long-term financial security. You may prefer to reduce risk by selling the business to a third party and investing the proceeds in a diversified portfolio that potentially benefits the family and future generations. This way, she says, your business’s value may continue to provide for the family while posing minimal risk.
Finding new owners
Gillespie says today’s business owners have a range of options when it comes to selling the company:
- Individuals: You may find buyers who would like to take over and run the company themselves, or sell to investors looking to develop a buy-and-build strategy.
- Private equity firms: Gillespie says there has been an explosion in the number of private equity firms in the marketplace, as well as business brokers and investment bankers who can help find buyers for businesses of almost any size.
- Employee buyouts: If you’re looking to reward loyal employees, you might consider an ESOP (employee stock ownership plan) in your business succession planning. Giving your employees some or total ownership of the business can shift the rewards of ownership, which can be motivating to them and can also offer you flexibility as you transition out of the business.
Craft a plan that balances business and family
Succession plans are as unique as the families involved in the business — a transition that works for one owner may not work for the next. The key to business succession planning is finding an exit strategy that aligns with the enterprise’s vision while respecting family dynamics, Gillespie says. Just because the business isn’t staying in the family doesn’t mean the family isn’t involved in the decision. The goal is to help ensure business continuity and prosperity in a way that makes sense for everyone involved.
1. On behalf of Wells Fargo, Versta Research conducted a national survey of 1,008 Wealth Creators, defined as U.S. adults aged 50 or over who have at least $1 million in investable assets, excluding those who inherited most of their assets. The sample included 136 from Generation X (ages 50 to 57), 771 Baby Boomers (ages 58 to 76), and 101 from the Silent Generation (ages 77 and older). Data were weighted by age to match current population estimates of U.S. households with $1M+ in investable assets, derived from the Federal Reserve Board’s Survey of Consumer Finances. The survey was conducted January 3 – 18, 2023. Assuming no sample bias, the maximum margin of error for full-sample estimates is ±3%.