By: Carol Roth
While any given entrepreneur may have the skills, experience and passion required to make his business successful, there is no guarantee that his heirs will have what it takes, let alone the desire, to successfully pursue the “family business”.
Many owners of family businesses believe that they are doing their heirs a favor by passing down the business. Usually this is because of emotional ties to the business. Actually, many families have a large part of their wealth tied up in the business, creating an “eggs all in one basket” scenario. Often the best strategy in a succession is a full or partial sale of the business, so that the heirs can take the proceeds and diversify those in a variety of investments to satisfy income growth and income preservation strategies.
The best way to maximize the value in a sale where the CEO/entrepreneur is looking to retire is to start planning early enough (a minimum of five years before the desired retirement date). This is because many buyers will want the entrepreneur’s expertise in a transition and an entrepreneur that is going AWOL the day the sale contract is signed will equate to a much lower valuation for the business. Plus, many financial buyers (who currently account for a large portion of M&A activity, especially for middle market businesses) will only participate in a sale process if the entrepreneur is going to stay on board for some period of time.
Bottom line…an entrepreneur has to start planning early in order to maximize the value to both him and his heirs.
Carol Roth is an investment banker, business strategist, and dealmaker. She is a frequent radio, television and print media contributor. She can be reached at 847.215.4880 or firstname.lastname@example.org.