6 Steps for a family-owned business transition

Selling a business is a pivotal moment for any family-owned small business, and it can be emotionally tumultuous for the owner, employees, and community. This guide focuses on six actionable steps that business owners can take to prepare for a family business transition and align all stakeholders with the next steps of the company.
President discussing business transition with employees

Selling a business is a pivotal moment for any company, especially a family-owned small business. Making a business transition can feel like riding an emotional roller coaster. One minute, there’s excitement over the next chapter. The next minute, it feels like grieving a loss. For many families, letting go of the small business they’ve worked so hard to create is a difficult midlife transition.

For owners struggling with the transition, employee ownership can often be the right solution. It keeps the integrity of the business intact while passing the reins along to the people who’ve been the beating heart of the business—the employees.

Teamshares is helping generations of small business owners retire confidently by helping business owners through the emotional process of transitioning a small business while guiding employee-owners and the business itself to continue to thrive.

How are family-owned business transitions different from other business transitions?

Family-owned business transitions are more complex than other sales because they’re both a family decision and a business decision.

While small businesses can certainly be transitioned to the next generation of family members, the unfortunate reality is that these kinds of business transitions rarely succeed beyond a second generation.

Succession planning statistics show that about 40% of U.S. family-owned businesses transition into second-generation businesses, while approximately 13% are successfully passed down to a third generation, and only 3% survive to a fourth or beyond.

Selling to a third party is often necessary for a small business to survive but it also adds complexity to business decisions. A third party is essentially a stranger taking over a business that a family has poured their blood, sweat, and tears into.

For this reason, it’s important to embrace the perspectives of all the different family stakeholders while striking a balance between control and collaboration.

Families should reflect on what values are most important to them in terms of legacy, business, and relationships.

A study by PWC found that family businesses that have written-down their values are better prepared for succession and are more communicative and transparent than those that have not. And while 70% of businesses say the family has a clear set of values, only 44% take the time to write them down.

Families should also consider how they want to use their business profits for the greater good and how to adapt to new business and philanthropic opportunities.

Step 1: Take stock of your exit plan and legacy

Planning a family business transition starts with assessing what kind of succession plan, if any, is in place.

Family owners should decide if their exit strategy includes transitioning the business within the family, selling to an outside party, selling to a trusted employee, or liquidating the business altogether.

Ideally, a family business should begin planning an exit at least three to five years before they want to sell the business. This gives the family owner(s) time and flexibility to make careful and calculated decisions in preparation for a sale, a process that takes about a year on average.

This time frame also takes into account that selling a family business can be a very emotional process. Planning far enough in advance gives owners time to work through their emotions and make prudent business decisions.

Business transition planning process

When transitioning a family business to a third party, business owners should include the following in their exit strategy:

  • An actionable timeline: Most small business owners don’t start thinking about selling until they’re preparing for retirement. However, the best time to sell a business is when an owner least wants to: when it’s a profitable, well-oiled machine. This is when the business is at its most attractive to buyers. Crafting an actionable exit strategy around this time frame is important.
  • A dedicated team of advisors: Just as small businesses must have policies and procedures in place, it’s important to establish policies with advisors and executive management who share the family’s vision and values.
  • A thorough evaluation of the business: Draft a document that considers the overall health of the business and plans for any improvements that need to be made prior to a sale.
  • Collection of due diligence documentation: Gather tax information, financials, real estate, wills, family/business codes of conduct, and family pacts (if the business is staying within the family).
  • Processes, operations, and roles that are critical to business success: To ensure a smooth transition, begin to document the business’s unique institutional knowledge, core competencies, and strengths, as well as the specific processes of the current team.
  • A successor: Consider if the business will be passed onto a family member, an employee, or a third-party buyer like Teamshares.

Having a checklist and using a succession planning template are important steps for small business owners to take when planning their exit strategy.

Step 2: View the business and family as separate entities

While family-owned businesses naturally blur family and business matters, it’s crucial to view family and business as separate entities when creating an exit strategy.

One of the most important steps is clearly establishing the owner’s intentions and exploring the various options for the business when the owner retires or passes on.

In many family-owned businesses, there is an unspoken expectation that the next generation will take over the business and assume active leadership roles. However, it is important to have explicit conversations about this and avoid making assumptions.

Having the transition conversation early on and setting appropriate expectations with family members about what will happen to the business after the owner retires is important, as it helps small business owners keep the business and family separate.

Step 3: Take family stakeholders into consideration

In this step, business owners should clearly define who officially makes up “the family.” This can be as simple as identifying the key stakeholders and beneficiaries of trusts and assets.

At this stage, it’s also important to address non-financial matters, like generational ambitions to take over the business. These ambitions may differ significantly across family members, and the next generation may not even have an interest in taking over the business.

Alternatively, a family member may assume they will be taking over the business just because they are family. Without a discussion of generational ambitions, small business owners risk upsetting family members who assume a business will be passed down to them, which can create a lot of conflict if a third party ultimately purchases the business.

Having these discussions early and setting expectations for every stakeholder is a crucial step in establishing any family-owned business transition.

Step 4: Educate on employee ownership, if this path is your legacy

Shared ownership isn’t yet common in small businesses, so most people are not familiar with what employee ownership is or what it means for them. For this reason, transitioning a business to an employee ownership model requires a good deal of financial and leadership education to build an ownership culture and bring both owners and employees on board.

At Teamshares employee ownership education starts with teaching the basic mechanics of employee ownership. This often begins with reviewing the financial fundamentals of the business during open-book financial meetings, which cover details including revenue, gross profit, and operating profit.

Know a small business that may be a fit for Teamshares?

Building financial fluency is the first step in creating a culture of ownership. It takes ongoing education, using tools to interpret financials, and constant alignment with company goals to create continuous growth.

Step 5: Put a high-performing management team in place before a sale

To prepare for a small business transition, current owners should focus on putting a high-performing management team in place. This means getting high-level managers up to speed on the inner business workings, policies and procedures, and formal structures of the business.

During a third-party sale to Teamshares, we hire a small business president who attends our intensive Leadership Accelerator Program. Teamshares network presidents are generalist leaders who lead with empathy, have a mindset for growth, and strong financial acumen in order to transition the company to an employee-owned business and lead it into its next phase of growth. Having a high-performing management team in place that can seamlessly work with the new president leads to a much smoother transition.

Step 6: Create an agile exit plan

A family business succession plan should be viewed as an ever-changing document— it needs to be agile and easily adaptable. Even the best exit plans can be impacted by evolving family relationships, shifts in business and tax rules, and even unforeseeable global events like the COVID-19 pandemic. Being able to adapt and be responsive to these changes is key.

To prepare for unseen events, business owners should compile a list of key roles and responsibilities within the company, create an onboarding and training plan for critical employees, assess the operational risk of losing key employees, and create a proactive career succession plan for priority roles to mitigate that risk.

At Teamshares, we understand the emotional process that small business owners experience when they retire and move on to their next chapter. To help former business owners transition, Teamshares provides an exclusive community of other owners who have sold their businesses to Teamshares.

Our goal is to help create a network of 10,000 employee-owned small businesses. With each company, we refine how best to transition a business to employee-owned and operated and we pass this knowledge to our network companies.

With Teamshares, small business owners can retire confident in the knowledge that they’ve sold to a company with a great close rate and track record of doing right by people by keeping businesses local and ensuring their legacy becomes employee ownership.

If you’re a broker or retiring small business owner who is looking to sell and interested in exploring employee ownership, find out if Teamshares is right for you.

Join the list for updates

Learn how we’re making employee ownership the future of small business.

Related Articles