Families that have built a successful business will, sooner or later, face an unavoidable question: what should happen to the business when the time comes for succession?
At first glance, the answer seems obvious: the business should stay in the family.
It is a legitimate aspiration. The business was built by the founder, often with the support of the family, and has created jobs, wealth, reputation and, in many cases, a family identity spanning generations.
But a business is not a museum. It is a productive asset, exposed to market forces, economic cycles, capital requirements, technological change and opportunities for growth.
The relevant question is therefore not: “How do we ensure that the business stays in the family?”, but rather:
“What is the best way to preserve and enhance the long-term economic value of the business and the family’s wealth?”
“What is the best way to preserve and enhance the long-term economic value of the business and the family’s wealth?”
The answer may involve:
The objective is not to choose one of these routes in advance. It is to determine which alternative maximises risk-adjusted value, while considering control, liquidity, wealth concentration, investment capacity, time horizon and shareholder objectives.
Control and continuity.
Aligning shareholders’ interests and needs.
Capital and expertise to accelerate growth while sharing risk and governance.
Synergies and value creation that can maximise liquidity and diversify family wealth.
This is the most intuitive solution: ownership passes to the next generation and the business remains entirely under family control. Where there are several heirs, this may mean distributing the share capital among the different members of the next generation, according to the succession structure established.
There is, in principle, nothing wrong with keeping 100% of the business in the family. Quite the opposite: where shareholders are aligned, management capability is in place and the family has the financial capacity to fund future growth, keeping the business in the family may be an excellent investment decision.
It is important, however, to distinguish between choosing not to sell the business and failing to make a decision. The former can be an excellent decision. The latter merely postpones the issue and often leaves the next generation having to make decisions under pressure, with fewer alternatives, less information and weaker negotiating power. It should therefore be analysed as an investment decision in its own right.
First, the risk profile. If a significant proportion of each heir’s wealth remains invested in the same business, wealth concentration remains high. That may be entirely rational if the expected return compensates for the risk, but it should not be overlooked.
Second, liquidity. Shareholders may have very different personal liquidity needs. One heir may want to reinvest everything in the business; another may want to acquire an asset; another may prefer to diversify their wealth. If these needs are addressed through excessive dividends or capital distributions that are misaligned with the needs of the business, the company may end up funding its shareholders rather than its best investment opportunities.
Third, management capability. The next generation may have different skills from the previous generation, and that is not necessarily a problem. Where gaps exist, professional management can be brought in, but this requires governance mechanisms capable of aligning management incentives with those of shareholders.
Keeping 100% of the business in the family may therefore be the best solution. But it should be the conclusion of an analysis. Not a starting assumption.
Risk profile
Wealth concentration.
Liquidity
Different needs among heirs.
Management capability
Skills and governance.
Doing nothing is not a viable long-term option: the current shareholders will not be there indefinitely. The question is therefore to decide today how they want ownership to be structured when the time comes for succession
When a business is divided among several heirs with different risk profiles, liquidity needs, time horizons and strategic views, a fragmented ownership structure can make decision-making more difficult. In such cases, the solution may lie within the family itself.
A family buyout allows one branch of the family to acquire another branch’s stake, using equity, acquisition debt or a combination of the two.
Another possibility is a Management Buyout (MBO), in which the management team, whether family members or not, acquires a significant stake or the entire share capital.
These structures can help separate two interests that do not always coincide: those who want to continue owning and running the business, and those who would rather realise their wealth.
This is a fundamental distinction.
“Those who want to continue owning and running the business do not necessarily have the same interests as those who would rather realise their wealth.”
A family buyout or MBO can allow each shareholder to make the choice that best suits their circumstances.
In many cases, succession does not require selling the business to a third party. It simply requires restructuring who owns the business.
Another option is to bring in a financial investor through the sale of either a minority or majority stake
This allows the family to realise part of its wealth without necessarily giving up, immediately, all exposure to future growth.
It can also increase the company’s financial capacity to pursue a more ambitious strategy: acquisitions, international expansion, industrial investment, commercial expansion or organisational professionalisation.
But capital comes at a cost.
Bringing in a financial partner means sharing value creation, risk and governance. Depending on the transaction structure, it may also involve greater use of debt, affecting the risk profile of both the business and the remaining equity.
The question, therefore, is not whether private equity is “good” or “bad”.
It is whether the value created through the combination of capital, execution capability and risk-sharing justifies the cost of the partnership.
to create value.
to realise that value.
Time horizon matters here too. Private equity funds typically have a finite investment period and seek to establish a path to realisation from the outset. Exit arrangements, governance, sale rights, tag-along rights and other mechanisms are normally agreed when the investment is made.
The question should not be: “Do we want private equity?”.
It should be:
“What is the value to the family of continuing to own 100% of the business, compared with the value of obtaining liquidity today, diversifying our wealth and sharing risk, capital and value creation with a partner?”
The family therefore begins to operate with a different mindset:
a compass in one hand and a clock in the other
There is a strategy to create value, but there is also a time horizon within which that value needs to be realised.
It is a question of comparing economic value, different dynamics, risk and liquidity across the alternatives.
It is therefore a more complex question than:
choosing between owning “100% of 10 or 10% of 100”!
Finally, there may be an opportunity to sell to a competitor, an industrial group or another strategic buyer.
This can be particularly attractive when there are significant synergies between buyer and seller.
The buyer may be able to increase revenues, reduce costs, make better use of installed capacity, consolidate operations, enter new markets or leverage assets that are worth more within its platform than on a standalone basis.
The value may lie in the synergies.
It is precisely this ability to generate synergies that may allow the buyer to pay more than a financial investor could justify based solely on the company’s free cash flows.
For the family, a strategic sale can allow them to:
The family gives up control of the business. But it gains control over something else: how the wealth received in exchange is allocated. And that freedom has value.
There is also a less conventional alternative that may be relevant in certain situations: Search Funds.
A search fund typically involves an entrepreneur seeking to acquire an existing business and take over its management, backed by investor capital and acquisition financing.
Following the acquisition, the entrepreneur assumes direct responsibility for the business, seeking to ensure continuity while creating value.
For a family shareholder, this can be an interesting solution when there is no successor within the family, but there is a desire to preserve the continuity of the business through new leadership.
It is, however, an alternative with a different logic from those described above: it is neither about keeping the business in the family nor about integrating it into a strategic or financial platform. It is about transferring ownership and leadership to a new entrepreneur, backed by investors.
Its suitability will naturally depend on the size and characteristics of the business, the buyer’s profile and the financing structure of the transaction.
There is no universal answer. And this is precisely where the role of an M&A and Corporate Finance advisor comes in: helping to build and compare alternatives.
None of these alternatives determines the decision on its own. It is necessary to understand the family’s objectives: control, liquidity, diversification, growth, time horizon and legacy.
Productive asset
Portfolio of assets
For decades, the business may have been almost synonymous with family wealth. But it is important to distinguish the two early on. In a succession context, that distinction becomes even more relevant, as the family reassesses the role of the business within its overall wealth.
A business is a productive asset with operating risk, capital requirements, growth opportunities and exposure to a particular industry.
Family wealth is a portfolio of assets. It includes the business, but also real estate, financial assets, other investments, personal assets and liquidity.
Confusing the two can lead to suboptimal decisions.
A family can own an excellent business and, at the same time, have an excessively concentrated wealth portfolio. And it can reduce that concentration without rejecting the legacy built by the previous generation.
Diversification does not necessarily mean destroying wealth. It can be a way of preserving it.
The analysis should therefore consider both the interests of the business as an independent economic asset and the interests of the family as shareholder. The alignment between the two should be reassessed periodically.
For the family, the question also arises at another level: when a stake or the entire business is sold, this does not necessarily mean exchanging “a productive asset” for “idle cash”.
It may mean transforming a single, concentrated and illiquid asset into a portfolio of liquid and diversified assets, with different risk and return profiles.
The right decision naturally depends on the expected return of those alternatives.
But that is precisely the point: the decision to sell should be compared with the alternative of holding, rather than with an abstract scenario in which either holding or selling is automatically better.
A recurring issue in family succession is leaving the subject for “later”.
While the business is growing, shareholders are aligned and there is no immediate need for liquidity, succession can seem like a distant issue. Until several things happen at the same time:
At that point, the available options may be far more limited. And so may negotiating power.
Planning ahead does not mean preparing for a sale. It means preparing alternatives: maintaining the existing structure, restructuring the ownership, assessing an MBO, preparing for the entry of a financial partner, considering a search fund or approaching strategic buyers.
And the conclusion may perfectly well be not to change the ownership structure.
“The objective is to reach the decision point with the ability to choose, rather than with the need to choose.”
When an acquisition approach comes in, it is natural to start with the price. And an offer can contain valuable information: it provides a concrete indication of how much a third party is willing to pay for the business, contributing to price discovery.
But an individual offer does not necessarily represent either the market value or the economic value of the business.
Before comparing the price being offered with the price considered acceptable, it is necessary to compare the alternative of selling with the alternative of holding. This means considering, among other factors:
The question is therefore not simply:
“How much are they offering us?”
It is:
“What is each alternative worth to us?”
The real risk may be failing to decide.
Planning does not mean preparing for a sale. It means preparing the ability to choose.
The business should remain in the family when that is the best economic and strategic decision for the shareholders and for the business itself.
It should be restructured when the ownership structure is no longer aligned with the company’s strategy or with changing market and competitive conditions.
It may benefit from external capital when growth opportunities exceed the family’s financial capacity or willingness to invest.
It may be sold to a strategic buyer when the value that buyer can attribute to the business, due to synergies, is greater than the value the family expects to obtain by continuing to own it.
And it may find a new owner through a search fund when an entrepreneurial transition makes sense for both the business and its shareholders.
The fundamental point is that succession is not synonymous with transferring shares to the heirs. It is a decision about who should own the capital, who should control the business, who should bear the risk, who should fund growth and where the family’s wealth should be allocated.
The decision should start with a simple question:
“If we had all our wealth in cash today, would we choose to invest that cash in this business, under the current conditions, with this level of risk and concentration”
If the answer is yes, keeping the business may be perfectly rational. If the answer is no, it may be time to consider alternatives.
It is this shift in perspective that makes succession truly strategic.
The objective should not be to keep the business in the family at any cost.
Nor should it be to sell at the highest possible price.
It should be to maximise the family’s value and freedom of choice, while preserving the company’s ability to continue creating value.
Because selling does not necessarily mean failing at succession. And keeping does not necessarily mean succeeding at succession.
A good succession is one that allows the business to continue creating value while enabling the family to optimise the balance between risk, return, liquidity and wealth concentration.
Decisions concerning ownership, capital and succession should be assessed before they become urgent.
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