M&A and Exit Planning Considerations for Family-Owned Manufacturing Companies

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No matter how long you have had your business, sooner or later you’ll have to leave—whether it’s through retirement, death, or financial necessity. Planning now is the best thing you can do, rather than allowing fate to determine what happens to your company and your legacy. Let’s explore some options for family-owned manufacturing companies planning for the future of their business.

Succession Through the Next Generation

If you intend to pass the company onto the next generation, you need to identify who exactly that will be. Don’t assume that family members will be prepared to take the reins. Begin grooming someone years ahead of an exit, and be explicit wit them about your plans. Even when you do pas your business down, you’ll still likely need to sell it to the person taking control.

Selling Your Company

If you opt for a sale, you’ll need t clear buy-sell agreement, which identifies the events that trigger the agreement, how the sale will be structured, and which terms must be met before it can be completed. You need a lawyer with experience with M&A to draft this agreement—not just your in-house counsel.

Transfer Through Living Trust

Some family business owners elect to transfer through living trust. In this scenario, you transfer your company’s assets into a trust. A trustee then oversees this entity in the event of your death. This can help prevent protracted probate disputes and bad financial decisions by heirs.

Heirs

If you don’t need to sell your business to retire comfortably, you might consider gifting the company to family members. It’s important to note that there can be significant tax implications, so you’ll need an accountant and a lawyer advising you before you proceed.

Succession Outside of the Family

The line of succession can be unclear in family businesses, especially if the heir you had in mind is not interested in taking over. When this happens, it’s financially savvy to look outside your family, and into the wider market, to pursue a sale.

The M&A market for manufacturing firms remains strong, and will likely accelerate into 2021-2022 and beyond. Family businesses can be an attractive asset, since they tend to be risk averse and fiscally conservative. There’s more than one way to sell your company if you consider this option. Some potential avenues include:

  • Merger of two entities; in most cases, one entity winds down and the other becomes the brand.
  • Acquisition: This happens when another entity purchases your company.
  • Management buyout: This allows existing managers to acquire the company.
  • Recapitalization: This strategy can help stabilize a company by restructuring the mix of equity and debt.

An investment banking firm can help you explore your options, identify the risks and benefits of each, then make the right decision for your family and your company.

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Posted on

March 31, 2021