Private Equity - How to Leverage Private Equity in an Internal Sale to the Next Generation

Derek Notman |

Owning and running a business is no easy feat and the entrepreneurial spirit is continually challenged.  One would concur that the transitioning of ownership in a family business and navigating the pitfalls is a stressful time and certainly one that needs foresight and planning.  As a business owner, this nest egg (your business) has been nurtured and being concerned about a successful transition of ownership is a process that can be accomplished with the right people on your side.


Being a Certified Financial Planner with more than a decade’s experience, I work with you, your family, and your other trusted advisors to realize the important goals of a successful transition of ownership to the future generation.  Although deemed a complex process requiring significant capital, I will help you understand how to utilize private equity to accomplish an internal sale of your business.


Understanding Private Equity

Private equity is a term widely used but the simplest definition of private equity is just that… equity.  That is, it is shares representing ownership of or an interest in an entity that is not publicly listed or traded.  Private equity is more attracted to an established business and a source of investment capital is derived from high net worth individuals and firms that purchase shares of private companies or acquire control of public companies with plans to make them private.  Most of the private equity industry is comprised of large institutional investors such as pension funds and large private equity firms funded by a group of investors.  Private equity is also associated with the leveraged buyout, in which the fund borrows additional money to enhance its buying power, thus using the assets of the acquisition target as collateral. 


While it may seem obvious, the fundamental motivation for any investor is a positive return on investment.  So be prepared for some ruthless negotiating!



Family Business Succession Planning

As the owner of a family business, it may seem obvious to have a strategic succession plan in place, but let’s face it, running a business is a 24/7/365 operation.  You don’t just knock off at 5, kick back and hope everyone else around you will ensure the success of the company.  Being at the helm takes seriously hard work, dedication and determination – leaving you little time to really think about the future and about the next steps.


It has been my experience that although most family businesses have a verbal succession plan, it is just that, verbal.  Nothing it written down and there are no contingencies should things pan out differently than hoped and expected.


Having an experienced team of professionals, like accountants, attorneys, and a certified financial planner, familiar with business succession is key to formulating the right plan and in protecting the organization’s future.  This team will assist in ensuring your company has qualified candidates to replace people in key positions who leave, for whatever reasons such as illness, retirement, death or even taking another job.


A succession plan boils down to six steps:


Type of plan:

Consult with your team and determine why you want a succession plan.  There could be many reasons such as unexpected departures of key personnel due to illness or competitive offers or retirement.  By having clear and concise reasons for a succession plan, it enables you to meet your organisation’s needs.


The succession-planning team:

Select people who bring the right balance to your organisation and are process orientated, good communicators and knowledgeable when it comes to job competencies.  Ensure you have people who are team players and act in good faith.


What are the main factors of your plan:

Anticipating factors that influence the success of your plan is key.  Be aware of emerging trends in the marketplace that require updated skills in key positions.  Develop internal talent by embracing diverse generational and cultural workforce changes.


Succession plan vs Your organization’s strategic plan

A strategic plan identifies what your company is about, where it’s going and how it will get there.  Make sure your succession plan aligns with your strategic plan.  If you don’t do this, you are going to run into problems from the get-go.  It is easier to set plans like these up correctly from the start as opposed to trying to resolve issues years down the line.


Key positions for successor candidates

Once you have identified key positions in your plan, develop competencies required for candidates.  You will find that candidates come from two major sources – internally, within your organization and the second, by way of employment agencies, the internet, universities etc.


Shape action plans

Having a succession plan by itself is not enough!  You require concrete action plans with measurable goals, timelines and people who are accountable for taking various actions for key processes.  Ensure that your succession-planning team monitor the implementation of the plan to ensure its success.



 When does a family succession makes sense?

Family businesses have changed, as has the era of passing on the family business.  In years gone by, succession was something that just happened without a formal plan in place.  It was a given that children would automatically take over the family business and keep the trend following.  As is the norm, everything changes and there is an uncertainty challenging many families in business.  We need to contend with aspects such as globalization, the internet and digitization.  Consumer preferences are continually changing, and many businesses are required to adapt their business models to remain competitive.


In an era that fervently supports self-determination and individualization, there is growing uncertainty as to whether the children of business owners even have an interest in the business.  Selling the business may ensure a successful succession plan as opposed to assuming the children will take over by default.


Is there an advantage in pursuing business succession within the family?  This is not cut and dried and the answer lies in the innate competitive advantages that family businesses can possess and the benefits that may be achieved in the compounding of wealth across generations.


As with most things in life, there are challenges associated with making decisions and the top three challenges that families identified as holding them back from commencing succession are:


  • The financial capacity of the business to support the appointees and the new generation
  • The new generation not being ready to step up including lack of interest and inadequate skills
  • Determining what is a fair distribution of assets among family members, especially those not taking over the business


For the families and businesses who successfully transition, the rewards can be great and enduring.


Continuing a family business and maintaining your legacy is a difficult challenge to manage.  However, at Intrepid Wealth Partners we are convinced that you can increase your chances of success by partnering with us as part of your team of professionals.  I encourage you to get in touch via phone or email for a complimentary, no obligation conversation.


Thank you for reading this post, If you have any questions regarding my services, please feel free to contact me here.


Thank you for reading!




Derek Notman