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Matt Gilbert
February 20, 2025
You've invested countless hours, energy, and passion into building your business from the ground up. It's been a journey filled with challenges and triumphs, and your dedication has brought your company to where it is today. However, as you look to the future, have you started to consider what will happen when it's time for you to step away?
Succession planning is a vital, yet often overlooked and under-planned, aspect of entrepreneurship. It's not just about ensuring the continuity of your business; it's about preserving your legacy and securing the future for your employees, customers, and stakeholders.
In this edition of GaP Insights, we'll study the importance of succession planning for owners of privately held businesses. We'll examine why succession planning is important, the various types of succession paths available; from family succession to management buyouts, and the success rates associated with each. Additionally, we'll delve into why selling to a private equity firm or a PE-backed strategic buyer might be your best option for a rewarding and profitable exit.
For many business owners, the prospect of retirement looms large on the horizon. After years of hard work and dedication, the desire to enjoy the fruits of their labor becomes increasingly appealing. Succession planning done well allows owners to transition out of their roles while ensuring the continued success of the business they've built.
Entrepreneurs often have a significant portion of their net worth tied up in their businesses. This concentration of wealth can be risky, especially in uncertain economic times. Succession planning provides an opportunity to diversify assets and secure financial stability for the future.
Many business owners are deeply invested in the legacy of their companies. They want to ensure that their vision and values continue to guide the organization even after they're no longer at the helm. A well-thought-out succession plan can help preserve this legacy for generations to come.
Life is unpredictable, and unforeseen circumstances such as illness or family emergencies can force business owners to step away from their roles unexpectedly. Having a succession plan in place provides a safety net, ensuring the business can continue to operate smoothly in the face of unexpected events.
Sometimes, business owners recognize that their companies have outgrown their capabilities. Succession planning often opens doors to new leadership with fresh perspectives and additional resources, potentially setting the business on a trajectory to new heights.
Passing the business down to family members was a common practice for most owners in bygone eras. Today, sadly less than 19% of businesses transition within the family. Equally disturbing, the success rate for family successions is surprisingly low. Only about 30% of family-owned businesses survive in the second generation, with a mere 12% making it to the third generation. The challenges of family dynamics and lack of necessary skills in the next generation make this option risky for most business owners.
Selling the business to existing management or employees can be an attractive option. This type of succession has a higher success rate than family succession, with about 70% of management buyouts considered successful. The advantage here is that the new owners are already familiar with the business and its operations. The disadvantage is that they are accustomed to being the lead and often struggle when the void of a strong leader is upon them.
ESOPs can be an effective way to transition ownership to employees while providing tax benefits to the selling owner. While ESOPs have a relatively high success rate, with about 80% of ESOP companies still in operation after 20 years, they can be complex to set up and maintain. ESOPs are State specific when it comes to how they are regulated, and many States have a framework that makes it hard for the retiring owner to achieve their objectives using this tool.
Selling to an outside buyer, such as a competitor or industry player, is another option. The success rate for these types of transactions varies widely depending on the specific circumstances, but they generally have a higher success rate than the other options.
This option has gained popularity in recent years, and for good reasons. The success rate for private equity acquisitions is impressive, with studies showing that around 70% of these deals meet or exceed expectations. This high success rate, combined with the potential for significant returns, makes selling to a private equity firm or PE-backed strategic buyer an attractive option for most business owners.
When it comes to succession planning, selling to a private equity firm or PE-backed strategic buyer often emerges as the option with the best return on investment and the highest odds of success. Here's why:
Private equity firms and PE-backed strategic buyers have the resources and expertise to accurately value the future earnings and trajectory of your business. They're often willing to pay a premium for companies with strong growth potential and synergistic qualities, ensuring you receive fair compensation for your years of hard work.
These buyers bring more than just money to the table. They offer access to extensive networks, industry expertise, and operational know how that can take your business to the next level. This can be particularly beneficial if you're looking to retain a stake in the company and benefit from its future growth as a minority partner to the buyer.
Private equity firms and strategic buyers often have experienced management teams that can step in and run the business effectively. This can be a significant advantage if you're concerned about the company's future leadership.
These buyers typically offer flexibility in deal structuring, allowing you to tailor the transaction to meet your specific needs. Whether you want a clean exit or prefer to retain some ownership and involvement, there's likely a deal structure that can accommodate your wishes.
As mentioned earlier, private equity acquisitions have a higher success rate compared toother succession options. This increased likelihood of success can provide peace of mind as you transition out of your business.
While selling to a private equity firm or a PE-backed strategic buyer can offer significant advantages, these are world-class, well-healed buyers and navigating this process and subsequent negotiations requires specialized expertise. This is where aligning with an experienced M&A team becomes crucial.
Final thoughts: while there are various succession options available to business owners, selling to a private equity firm or a PE-backed strategic buyer often presents the best combination of financial return and likelihood of success. By understanding the different paths available and planning ahead, you can ensure a smooth transition that aligns with your personal and professional goals.
However, to capitalize on this opportunity and obtain the best possible outcome for yourself and your business, it's crucial to partner with an experienced M&A Advisory team. They can guide you through the process, helping you avoid traps and pitfalls while facilitating informed decisions that ultimately lead to a successful exit that honors your hard work and properly secure your legacy.
If any of this resonates with you, we encourage you to complete our M&A Discovery Questionnaire and talk with us to see if your business makes the cut as one who can still command a great exit in this M&A environment. We will be in touch quickly to discuss the results. Click here to take the assessment.
Gilbert & Pardue Transaction Advisors (GaP) is a Houston-based business advisory firm serving lower middle and middle market business owners from coast to coast through representation for Mergers & Acquisitions Matt Gilbert and Bret Pardue established GaP to provide owners of privately-held businesses – those businesses generally enjoying annual revenue of $10-$100 million – with the quality of M&A representation and value-enhancement services previously only available to upper middle and large businesses. GaP brings highly experienced executives, sophisticated financial and marketing products, proven-effective processes, and fully-integrated expertise to every engagement. No other M&A firm serving the lower middle and middle market provides the quality of representation and transactional expertise that we do.
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