STRATEGIC

Is Your Company an Asset or an Heirloom?

Mark J. Komen, President

Kodyne, Inc.

Plymouth, MN

The current owners of family businesses eventually have to make a decision about the future ownership of the company.

Will the business stay in the family?
If it does, who is the heir apparent to lead it and do they have the skills, attitudes, and competencies to be successful?
What do I do about other family members involved in the business?
If there are no family members, do I sell to an outside buyer?
Is an ESOP a possibility?
Do I just shut it down?

There are no easy answers here. For some, the business is a legacy to pass on. To others, the business is part of the owner’s retirement plan. Regardless, the decisions always carry a compelling emotional component about letting go of something the owner may have spent years building. The business may even be in its second, third, or fourth generation of family ownership. But sooner or later, the owner must decide whether the business is an asset or an heirloom.

Economists will tell you that money is a social invention that gives us a way to put value on goods and services. Similarly, if you look at a business in the cold reality of an asset, it’s only worth what someone is willing to pay for it. As much as we may feel it is worth more in our eyes. Certainly there are many approaches to valuing the business as a function of EBITDA multiples or a ratio of book value or comparable sales to name a few. But in the end, after all the number crunching is over, the business is still an asset that is worth X dollars to somebody.

What’s the value of an heirloom? Most people would say, “Priceless” – can’t put a value on it. An heirloom is a gift from someone’s parents, grandparents, or loved ones that had special meaning for them and something they treasure as well. Perhaps, it is something worth holding on to and passing along to the next generation. Can a business be viewed as an heirloom? Absolutely! But what if no one in the family wants to own or run the business? What if there are no heirs?

The owner may be very attached to the business and emotionally (as well as financially) invested in it. But the truth is that there will still need to be an exit strategy – whether it’s via sale, asset transfer, liquidation, earn-out or something else. The owner’s eventual death is their default exit strategy if one has not been pre-determined. But then what happens to the business?

Ultimately whatever the exit strategy chosen, the owner will have to decide – asset or heirloom?