Blood is Thicker than Water: Exiting Family Business

According to PwC’s latest Global Family Business Survey, only 16% of the 2,378 businesses interviewed had a documented succession plan in place.  It is particularly important for those involved in a family business to consider an exit strategy at the earliest possible stage, especially as the Business Families Foundation reports that only 13% of family businesses make it to the third generation.

So how can the owners of family businesses guarantee success over multiple generations?

In this blog, we take a look at some of the ways longevity can be ensured through exit strategy.

What is an exit strategy?

Each company has its own ‘fingerprint’ that defines the best moment for an M&A to occur, but for family-owned businesses this fingerprint can be even more complex.  Whether or not shareholding is divided equally, differing agendas can see one or more family members pursuing a full exit, whereas others may want only a partial exit or even no exit at all.

An optimal departure ensures that all owners can exit (either partially or fully) under the most advantageous circumstances and allows other key stakeholders to benefit as well.  This creates a win/win result for all concerned.

Knowing when, how, and to whom to sell a business can seem like a series of estimations, which, when compounded, can prove to be costly for businesses. For example, exiting too soon may result in a lost opportunity cost, while selling to the wrong buyer with unfavourable terms can result in high-risk and high-uncertainty.  If you don’t know when to sell, how to sell and who to sell to, find a partner that you trust who does and who also understands the complex relationships within your business and the goals of each family member – after all, trust is power.

Brokering a family bond

When selling a business it is important that every family member trusts each stakeholder involved in the selling process and disclose not only the successes of the business, but its potential risk-points and weaknesses. Family shareholders may have differing opinions when it comes to disclosing information about the company, but it is trust that will ultimately secure the best multiple for your business.

Sound structure

When considering an offer on a family business it is important the shareholders’ individual end-goals are met. This often requires a complex deal structure, which allows the owners to see that the legacy of the business is secured, in addition to the best immediate multiple and the best deal in the long-term.

It should also be noted that an offer does not always result in a deal. The legal process can be lengthy and emotional for the family members, and the terms and conditions – as well as the initial sum offered – can often change during the selling process.

Ensuring fair value

With so many variables at play, the matter of valuation can be highly subjective.  However, the very presence of these variable, combined with how buyers may perceive them, means, ultimately, that a business is worth what a buyer is willing to pay. There is an understandable tendency for those who have built a business from scratch, or who have inherited a family business, to take a valuation extremely personally – particularly if that value is lower than expected. Transparency (and always establishing an element of competition in the buying process) can ensure that the right buyer is found, the right multiple is achieved for the seller (and the future multiple anticipated for the buyer), and that the structure of the deal will suit all family members.

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