Exit strategies for family businesses

I recently had a presentation and one of our guests in the audience had an interesting question during the event question segment. His question was, “My children are not interested in taking over my business. They are not interested at all in the family business. What should I do? I’ve built this big empire, and now I feel as if I should sell it and give away the money to my children.”

The question brought up an issue I have discussed before; family businesses are usually created to provide financial relief or independence to a family. Not all family businesses make it past the founder of the business. Moreso, if the founder is a James Bond leader who keeps his cards to himself. Globally only 30 percent of family businesses make it past the founder generation. And statistically, 95 percent of family businesses fail to make it to the 3rd generation. This high rate of failure among family businesses is attributed to a multitude of reasons.

Some of these reasons are the same ones that could make any other business fail, such as poor management, insufficient cash to fund growth, inadequate control of costs, industry, and other macro conditions. However, family businesses also show some weaknesses that are especially relevant to their nature. Some of these weaknesses are:

Complexity. Family businesses are often more complex in terms of governance than their counterparts due to the addition of a new variable: the family. Adding family emotions and issues to the business increases the complexity of the problems that these businesses have to deal with.

Informality. Because most families run their businesses themselves (at least during the first and second generations), there is usually very little interest in setting clearly articulated business practices and procedures. As the family and its business grow larger, this situation can lead to many inefficiencies and internal conflicts that could threaten the continuity of the business.

Lack of Discipline. Many family businesses do not pay sufficient attention to key strategic areas such as CEO and other key management positions’ succession planning, family member employment in the company, and attracting and retaining skilled outside managers. Delaying or ignoring such important strategic decisions could lead to business failure in any family business.

Now, going back to the question. The question was rooted in the assumption that the family business should be passed on to a managing next-generation family member. This is not always the case. And it is not always necessary. In some cases of family businesses, the business can be run and flourish under non-family management. It can grow to great heights as an entity that still achieves its purpose – providing financial means or security for the family – while being managed by non-family employees.

However, for those families who are determined to exit the business, there are several exit strategies available. And these exit strategies have got financial benefits for the family if managed successfully. Exit strategies include acquisition, merger, IPO, cash cow, selling to a friend, or shutting down operations.

Let’s explore the exit options in-depth and understand the differences and options for our family business owner:

1. Merger & Acquisition (M&A). This option has two alternatives. Outright Merger & Acquisition with the family relinquishing the business, similar to a sale. Or a Merger & Acquisition where the family still has significant shareholding but is not involved in the day-to-day running of the business. Either way, Merger & Acquisition normally means merging with a similar company or being bought by a larger company. This is a win-win situation when bordering companies have complementary skills, and can save resources by combining. For bigger companies, it’s a more efficient and quicker way to grow their revenue than creating new products organically. For a business owner looking to exit, identifying a business that is interested in buying out their own, may ensure that there is continuity of service to their customers. And the buyout may allow them to stay on in a role in the company until retirement. Alternatively, if other family members were working in the business, they still may be able to retain their jobs. Mergers have many advantages as they do disadvantages. In some cases, the company buying out the family business may just be to close it down. Defeating all the benefits listed above.

2. Initial Public Offering (IPO). This method is usually used to increase the value of the business and institutionalize it. Institutionalizing a family business can move significant shares from the family to non-family shareholders. This option may be suited to a family business that is significant in size. However, for someone not looking for an outright exit strategy, it is necessary to note that shareholders are demanding, and liability concerns are high. Most of the advantages of mergers and acquisitions also apply to IPOs.
3. Sell to a friendly individual. This is not a merger & acquisition since it is not combining two entities into one. Yet it’s a great way to “cash out” so you can exit the business and give the money to whomever you feel deserves it, or whomever you want. If you are passionate about the business, the ideal buyer is someone who has skills and interests in the business and can scale it. You will feel as if your work has continuity, even if it isn’t being passed on to your own children.
4. Make it a cash cow. If your business is in a stable, secure marketplace that has a steady revenue stream, it may be in your best interest to have meaningful conversations with your children or other likely family members. You could find someone in the family you trust to run it for your family, while you or your children use the income from shareholder dividends to live the life they choose. This way, your children retain ownership and enjoy the annuity. But it must be noted that cash cows do need constant feeding to stay healthy. Your children may not have an operational interest in the business, but if they have any business experience, their input as shareholders may be essential to maintain stability and growth in the business.
5. Liquidation and close. Even lifetime entrepreneurs can decide that enough is enough. And after much consultation, you may decide that this is the only course best for you and your family business. The often-overlooked exit strategy is to shut down, close the business doors, and liquidate. Most business owners feel as if they have failed and worked until their dying day. And an ill-prepared family takes over a business they are not ready for. This leads to the business falling apart, and the family is often left with debt.

Some of these options are very viable if our business founder is willing to detach their ego from the operations of the business and instead focus on the reason why the business was established.

One of the biggest reasons most family businesses are run to the ground is that the owner/founder and the family tend to keep holding on to the business without any intention or plan as to its continuity strategy.

Tsitsi Mutendi is a co-founder of African Family Firms, an organization that aims to facilitate the continuity of African family businesses across generations. She is also the lead consultant at Nhaka Legacy Planning and the host of the Enterprising Families Podcast.