A lot of owners who are in the baby boomer generation are facing the dilemma right now of what to do with the family business, says HBM Holdings CEO Mike DeCola.
"I think there's going to be a flood of transitions over the next decade just because of the size of the baby boomer generation and how many of them became entrepreneurs and business owners," he says.
But before selling a family business, there's a question that should first be asked: Why?
Clayton Capital Partners Managing Director and CEO Kevin Short says generally business owners choose to sell because there's no one to take over, they want to cash out while prices are an all-time high, or they're worried about increasing income taxes.
First Bank Center for Family-Owned Businesses Executive Director Joe Ambrose says something sellers should consider when it comes to leveraging up the company to buy out partners ahead of an exit is that it's only an option if certain conditions are met.
"Companies that historically have run with a low amount of debt, and there's something to borrow against to buy out that previous generation, then it can work," Ambrose says. "But if they go into a sale already leveraged, there's not a lot of capacity from a banking standpoint to service that debt going forward."
Something he's seen when there's a planned sale is the current generation wanting only to distribute funds to their heirs and be done with it. When no one in the family is interested in, or there's no one available to step up, then a sale to a third-party makes sense. But if the first generation would like to stay in the business for a while, then they need to start planning 10-20 years ahead to get the next generation oriented, ready to come into the business and have a successful transition in the future.
Other considerations for someone thinking about selling a family business is how wide the ownership is going to be within the family, whether the managers can also be the owner, and how to get value to the other members of the next generation.
"If the family's goal is to retain ownership of the business throughout multiple generations, the best time to start planning for that is now and not on a life-changing event — someone's passed away or getting ready to pass away, or tax laws change," Ambrose says. "Think through what you want the family to accomplish, what the ownership should look like, who the manager should be. The best time to start planning is today."
DeCola, Short and Ambrose discuss options for family businesses, look at the macroeconomic factors that are influencing owners' decisions to sell or stay put, and explore case studies from those who have developed successful solutions. Hit play on the video above to catch the full panel discussion.
