Understanding market trends and business value can help family businesses make better decisions as they move further along with succession planning. If one thing is constant in family businesses, it is that things will not always go as planned. P&N frequently sees the following family business planning challenges among our clients:

• Financial needs for retirement may delay or prevent an exit;
• Next generation leader(s) may not be ready or have lost interest;
• Growth is required to support an increasing number of next generation business owners;
• With a greater number of next generation owners, individual needs and expectations can become increasingly fragmented;
• It may be necessary to manage a variety of capital needs at or near the same time, such as deferred capital expenditures, shareholder buy-outs, growth capital needs, and acquisition opportunities.

Family businesses that understand capital markets can learn how to improve or alter their succession plans as things will inevitably change.

Family businesses navigating these challenges frequently ask, “Should I keep or sell the business?” For a variety of reasons, finding an answer to this question is often delayed or avoided, which can result in the forced sale or transfer of the business – either at the wrong time, lower value, or both. Family businesses that understand capital markets can learn how to improve or alter their succession plans as things will inevitably change.

Through P&N’s client interactions and access to various private capital market resources, we have made the following observations:

• In general, valuation multiples were higher in 2017-2018 than they were five years ago.
• While there are numerous factors influencing each deal, transactions in ‘hot markets’ are driving multiples higher.
• We have observed an increase in interest from private equity in the industrial market, particularly in South Louisiana.
• Seller financing is being used (in whole or in part) to structure deals for smaller companies with less access to capital but positive cash flow expectations over the planned transition period.

So, how can family businesses use this market data to make better planning decisions?

Debt Capital for Growth

Leverage the value of the business to borrow money for growth capital and/or shareholder buy-outs.

Private Equity for Growth

Consider private equity as an option for the current generation to sell part of their ownership today, fund growth capital, and ultimately exit at a higher valuation.

Seller Financing

Use seller financing to provide flexible deal structures that consider business cash flows, transaction financing, buyer/seller cash flows, and tax implications – all of which are impacted by business value.

Strategic Buyer

Market timing could dictate that a strategic buyer may be willing to pay a premium for selling today.

Acquisitions

Understanding market trends may provide opportunities to make strategic acquisitions to increase value and/or accommodate the growth needed to satisfy a larger pool of next generation owners.

Internal Transfers

Understanding valuation and tax trends can be helpful in developing plans for generational transfers and shareholder transactions.

Understanding these options may help your family business pass its success on to the next generation. You can't avoid every disruption along the way, but you can gain a better understanding of market data, the value of your business, and how you can adjust your succession plans when needed.

This article is part of a series of focusing on family business challenges in the construction and industrial markets. P&N is a full-service accounting and advisory firm with experienced professionals who can help family businesses succeed.

Contact us to start a discussion today.

Read Part 1: Family Businesses: What is Going On?

Read Part 2: Family Businesses: Making the Transition