A business transition can happen at any time. Proper planning will help ensure a successful outcome.
What’s the best time to start thinking about selling your business? The answer is “yesterday.”
Many owners envision the sale or monetization of their business will coincide with their retirement. However, a transition often occurs much sooner. Some of the reasons are unfortunate, like the “Five Ds”: death, departure, divorce, disability, or disagreement between partners. But owners may also receive unsolicited offers to buy their business or decide to monetize a portion of their ownership. Planning for one or both of these strategies while you are in charge and have the time to plan is critical to successful outcomes. Yet only about one-third of owners have any sort of transition plan, according to Daniela Demaria, SVP of private bank strategy and solutions at Fifth Third Bank.
The most successful transitions occur when planning starts before the owner has any intention of leaving the business. Early strategic planning — conversations that involve a business owner’s commercial banker and wealth management advisors — help identify opportunities to increase eventual value of a business while minimizing tax impacts. And it can define and achieve their financial goals after the sale.
“Owners like to be in control,” says Lisa Smoots, national director of wealth planning at Fifth Third Bank. “If you want control, then you need a plan — or someone else will be in control.”
Preparing Your Future Buyers
“Susan,” the founder of a successful manufacturing firm, wanted to sell her business to her son and another family member. But she also wanted cash out of the sale that her son couldn’t provide to kick-start her retirement. Susan’s local team of wealth management advisors and commercial bankers at Fifth Third Bank collaborated to provide her son with a loan to buy two-thirds of the business, including a large cash payment to Susan. Susan then also financed part of the sale, allowing her son to repay her over time with business profits.
Susan kept one-third of the business, in part to reduce its sale price in keeping with her long-term financial plan. She also made a large charitable contribution the same year as the sale, reducing the tax impact of the sale. Now Susan is building a second home and stepping back from management, all while keeping a role in the business.
Many business owners feel torn between selling to an external buyer like a private-equity firm or an internal buyer like a family member or trusted manager. The internal buyer may be a sentimental favorite, but the owner must make extra preparations (like Susan) to ensure the internal buyer not only has the financing but also the expertise to take over, says Troy Farmer, a regional director of wealth planning with Fifth Third.
“Your management succession plan is critical,” he says. “When there’s an internal buyer, the owner is usually financing part of the purchase. That owner will only continue to get paid if the business is run successfully. So the owner needs to plan — in advance — for grooming the management successor.”
Early planning is also essential when it comes to reducing the tax impact of an eventual sale. By transferring business shares to a trust when a company is relatively young, owners and their successors can potentially realize beneficial tax savings when the business is eventually sold at a higher value, Farmer notes. But if a business owner waits until the sale is near before establishing a trust, the effort might not pass muster with tax authorities.
What’s Your Business Worth?
Ideally, investment bankers, commercial bankers and wealth management advisors all collaborate with business owners to optimize the timing and structure of a sale or monetization of a business. Investment bankers can help with the first step, which is obtaining an accurate valuation for your business. Owners commonly apply “rules of thumb” when gauging the value of their business, typically an earnings multiple based on their industry. But these estimates ignore industry trends and the unique features of a business.
Investment bankers can also help owners improve the salability of their business. Optimizing a business for sale is another process that can take years to execute and may require the help of a commercial banker. Finally, credentialed wealth management advisor helps ensure the sale reaches the owners’ fi nancial goals for themselves and their families.
The wealth management advisor can also act as the owner’s “financial quarterback,” bringing bankers, lawyers, accountants and others together to discuss the implications of a sale, says Kristine Garrett, head of private bank at Fifth Third Bank. “The earlier you can get everyone involved in that discussion, the better the results tend to turn out.”