In many ways, selling to a third party is far easier than selling to a family member – it is usually less emotional, and the focus is entirely on transferring the business.
To sell to a family member, it requires a plan for working with your family, transferring your knowledge and transferring the business. Of course, from our experience, the extra effort is worth it when you are rewarded with seeing your business continue on as a legacy for generations to come.
To accomplish your exit plan, you will need to plan early and communicate openly and often. Both parents and Next Gens must set expectations, and put the plan in writing. If you have an exit planning team, they can help keep you focused on achieving your goals and keep you on track in the process.
Business Training for Next Gens
Is your Next Gen capable of assuming your role in the future? If not, what areas need work?
If you haven’t already, we recommend creating a training plan for your Next Gen to methodically transfer your knowledge of the business. To create a training plan:
- Create an outline of the various hats that you wear as the leader of your organization.
- Identify the hats your Next Gen can take over immediately, and let go of those responsibilities.
- Identify those hats with which your Next Gen has no experience, and carve out time each week to transfer that knowledge.
We strongly recommend involving your Next Gen in meetings with your financial team and CPA so they get a firm understanding of budgeting, cash flow and other financial matters. Without this knowledge, it will be difficult for your Next Gen to make future business decisions including reinvestments, possible acquisitions and even properly plan for the investment of buying out your ownership.
We recommend maintaining control of your business until your Next Gen has the financial skills to run the business. We find the greatest success among families that treat the business as if it may be sold to a third party, even if every intent is to transfer it to the Next Gen. It keeps all parties focused on maximizing the value of the business, including growing sales and cash flow. This ensures that all your bases are covered – because every good plan has a back-up plan built in.
Here’s a few additional questions parents need to figure out:
- How do you plan to operate? As a family unit? Or with your Next Gen on their own?
- Do you have more than one child working in the business? If yes, how do you plan to structure the organization between them?
READ MORE: The Dangers of Transferring Your Business to Children Without Planning
Transition Guidance for Next Gens
And now for the Next Gens – you also have a number of questions to consider in order to gauge your readiness and to formulate a plan that meets your expectations as well as your parents:
- What is your vision for your family business?
- Do you feel prepared to lead your family business into the future? If not, have you identified what areas you feel need attention and growth?
- Together, are you and your parent staying on track with the process of transferring/absorbing your parent’s knowledge, including operations, office management, financial management and business planning?
Your parents will likely be leading the decisions on how to transfer the business to you, but there are financial steps Next Gens should prepare for as well, including:
- Have you created a personal financial plan? Are you saving for this investment?
- Is your personal financial discipline in line with the requirements for running your own business. That means maintaining a healthy credit score and resolving past personal debts.
In many cases, the cash flows from the business may not be enough to support the debt payments required to buy out your parents. It’s best to live a financially disciplined life and make savings a priority to maximize the amount of business you can afford to purchase from your parents.
Consider your personal spending, and identify areas you could easily sacrifice. Sacrifice is easy when the goal and the reward are well defined – turning your Starbucks habit into more shares of your parents’ business is an easy decision.
Both parents and Next Gens – check yourself throughout this transition. Make sure your goals, your aspirations and timeline expectations are realistic and in sync with the preparations that you’ve made. If the transition isn’t going fast enough for your liking, ask yourself how you can change that – are your actions in line with what you say you want?
READ MORE: Family Business Succession Planning: Steps to Starting Transition
As a business, you must first and foremost have a company with strong, consistent cash flow, significant equity and well-managed debt. While these are crucial in third party sales to draw a maximum purchase price, they’re also key value drivers in a family transition strategy.
With so many things to consider and so many facets of your business to transition, you will need this plan to be in written form. It’s then best to re-evaluate this plan at least semi-annually.
Every good plan must have a back-up plan. Expect that there might be some detours and even some bumps in the road. Don’t get discouraged and remember you don’t have to do this all on your own – an exit planning team can advise and re-route you along the way.
If a plan is developed well, with these many questions answered beforehand, then it’s more likely that the overall plan will be a success. Remember, what works for one may not work for another – but for all of you, we can confidently say that more proactive planning will definitely mean more options and greater success.
Is your Next Gen ready to take the reigns? Get them fully prepared by enrolling in Concannon Miller’s Next Gen Academy for Finance and Leadership for McDonald’s Next Gen Operators. It helps prepare upcoming Owner/Operators to achieve greater success in McDonald’s Next Gen program and successfully run their own restaurants.