How important is growth in business value to the success or failure of generational business transition?
The simple answer to your question is that it’s very important, and it’s particularly important in multigenerational planning. The reason for that is that families grow geometrically, not perfectly geometrically, but somewhat geometrically in numbers of family members.
As an aside, it’s also important in multigenerational planning to think hard about the difference between sibling relationships, first cousin relationships, and then second and third cousin relationships, because as those generations develop, the closeness of relationship tends almost always to become less close.
So that means that if you’re going to keep a multigenerational family together, what, as a practical matter, families may be forced to do is an ongoing pruning exercise where some people decide they don’t want to be a part of business ownership any longer and get bought out. To accommodate that you need business growth and growth in free cash flow to be able to support such partial purchases or purchases of individual ownership interests.
But also a business family needs to ensure their family business is able to generate growing free cash flow to enable both some capital liquidity and dividend liquidity for business owners in order for them to get a return on what is often an illiquid or largely illiquid investment.
So if the business does not grow in free cash flow and value over time, at least as quickly as the growth in family members who participate in business ownership, the chances of keeping everybody in the family happy and avoiding shareholder disputes becomes greater over time. So growth in business value and free cash flow is an absolute fundamental to generational business transition.
Written by Ian Campbell
Ian R. Campbell, FCPA, FCA, FCBV is the president of Business Transition Counsel Inc. and the author of 50 Hurdles: Business Transition Simplified.
Ian is one of the most distinguished and recognized business valuators in North America. He has been instrumental in developing the practice of business valuation consulting in Canada through participating in the founding of the Canadian Institute of Chartered Business Valuators, lecturing and writing.
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