This is the first in a series on family-owned business issues. 

Did you know that Iowa ranks fifth among states with the most family-owned businesses? 

Last year, a study published by Small Business Trends revealed that 36.8% of Iowa’s businesses were privately held by families, placing our state near the top for family-owned businesses in the U.S. These companies range from small to large, cover multiple industries, encompass both new and multi-generational enterprises and contribute significantly to Iowa’s economy. But if Iowa is in line with the U.S. Census Bureau’s estimate that 40% of U.S. family-owned businesses are owned by baby boomers, that means our state is on the cusp of a great transfer of ownership from one generation to the next – or to outside purchasers. 

Despite the fact this collective transfer of ownership is looming, many businesses are not prepared for a transition. According to a recent PwC survey on succession planning, while 78% of respondents said protecting the business as the most important family asset is the top long-term goal, only 34% have a robust, documented succession plan or exit strategy.  “Known by some as the ‘great wealth transfer,’ this is expected to be the largest transfer of generational wealth in American history, which emphasizes the importance of successful ownership transition,” says Michelle Hutson of BCC Advisers in an article for the Iowa Association of Business and Industry (ABI). 

Many family-owned business leaders know they should create a plan to transfer to heirs or consider selling, but tackling such a monumental task can be daunting – and time-consuming. I turned to Steve Jacobs, president of BCC Advisers, to better understand key questions or considerations for owners of family businesses as they consider whether to sell the business or keep the enterprise in the family. 

“In a business ownership transfer, it is most important that a business owner be able to best meet their business, financial, and personal goals, whatever they may be,” says Jacobs. “Planning is critical to help the owners achieve the optimal mix of transaction terms for their situation.” 

Jacobs observes that a decision to sell requires much more than economic analysis, as the emotional consequences of such an action can be greater than the financial impact. For a family business, in addition to business questions, there can be complicated 

relationships, readiness, and even proximity to the enterprise. Key questions might include: Is there a family member or members who want to take over the business, or who have the skills and qualifications to do so? What training or transition plan would be needed if the business was to stay in the family? What if some but not all family members are suited to be or want to be involved? How would a transfer of ownership work from a legal standpoint? What will be the impact on family members, on the communities where the business operates, its customers and employees? Are there logical outside buyers? Is the timing right? 

“Business assets should provide value and satisfaction to family members and other stakeholders,” says Jacobs. “If a family cannot own and manage its business in a way to make it productive, valuable and satisfying, the family should consider selling.”

Jacobs advises that businesses should engage in succession planning long before a transfer is on the horizon, saying that the sooner planning starts the higher the probability of accomplishing a desired outcome. Plans can be developed at any time, but the closer to retirement a business owner is, the higher the risk and potential negative consequences. Advance planning is also critical to help heirs or management prepare in the event of unforeseen circumstances such the death or disability of an owner. Even if an owner finds it difficult to think about the future, it is prudent to consider goals and possible options for a possible transfer.

  Once an owner has clarified his or her goals, the next step is to explore various strategies for selling the business. Multiple sales methods exist – among them, selling directly to family members, employees or management; selling to employees through an ESOP; or selling to an outside party. Every company may have a different approach depending on their needs and priorities. “There is no ‘one size fits all’ approach,” says Jacobs.  

Jacobs emphasizes that after owners set goals, they should then explore and understand the range of options, even when they may not seem obvious or desirable. He recalls a client who approached their company after serving as his company’s owner for 50 years. The client’s primary goal was to ensure a smooth ownership transition and strong future for the employees of the company. BCC provided the company with numerous options, one which was to sell to a major competitor, which ended up being the ultimate solution.

  “Although the thought of selling your business to a competitor can be uncomfortable for many reasons, your competitor may just be the company with whom you are most familiar,” says Jacobs. “If your values align, and the company meets your established objectives, a competitor could generate the highest value to you as an owner and provide the most benefit to your employees and community.”

Regardless of what sales method you choose, it is important to investigate all the options and weigh them against your goals. It is also critical to have proper legal, accounting and advisory services in place, which can take some time. Meeting with an investment banker several years in advance of a planned transfer can provide insights on what advisory services may be needed, the market environment, and how to best prepare to position the business for an optimal transfer.

---

Key questions or considerations for transfer of business ownership

Jacobs notes there are many succession planning factors for business owners to consider, each as personal as the individual owner. The best sale strategy to employ will depend upon your primary goal. The following are some key questions to consider when engaging in possible succession or business transfer planning:

• Do you want to preserve the legacy of a family business you or your family members founded?
• Do you wish to transfer ownership to the next generation of family?
• If family succession is not an option, do you want to sell to existing employees?
• Are your community and local residents dependent upon your business (Is it important that the buyer keep the business in the community?)?
• Would it be advantageous to consolidate with a competitor or strategic partner to take advantage of additional market areas, operational equipment, investment capital, or synergistic opportunities such as complementary products or services?
• Are financial considerations obligating you to obtain the highest value possible?
• Are you interested in running a confidential auction process to increase the likelihood a buyer will pay a premium?