A Once In a Lifetime Opportunity
By Roy Graham, Managing Director
San Antonio/Austin Office, Corporate Finance Associates
Entrepreneurs prepare extensively over the years as they build their businesses, but many fail to plan for an exit. In our last issue of CAPITAL IDEAS for Private Business we discussed Successfully Executing the Optimal Business Exit Strategy. In this issue, we will look at an area that many business owners neglect and that may be the most important part of the business transaction: life-after-business. In fact, during the current troublesome economic and tax environment, never before has it been so important for entrepreneurs to engage world-class wealth planning professionals prior to a business sale as part of their final exit plan.
Timing is Everything — Transitioning to Your-Money-Inc.
Comprehensive personal wealth planning is rarely considered before the business transaction. The fact is, the sale of a business will most likely be the largest liquidity event a family will ever experience. Additionally, there can be no small mistakes in the wealth management plan because once a deal is finalized, it cannot be undone.
In reality, when entrepreneurs sell their company they are really just transitioning from their current business (say, Smith Widget Co.) to another business, which we will call Your-Money-Inc. This new company will have a completely new mission and will need to be guided through an entirely new set of challenges.
Creating a mission statement for Your-Money-Inc. should always begin well before your business is sold. This planning process starts with a seemingly simple question: “What goals do I want to accomplish starting immediately after I exit?” The mission of Your-Money-Inc. will most likely be designed to support you and your family's cash flow goals for the rest of your life (if not multiple generations). How can you be sure that your company's market value will support these goals post-close? In addition, how can you also be sure that refusing to sell your business at a lower recession-adjusted price is the best course of action?
The fact is, unless you have worked with a specialized wealth management team to create a customized mission for Your-Money-Inc., it's very difficult to be certain of anything at all. These realities demand that your business transaction has experienced wealth management professionals working on your behalf alongside your investment banker and other advisors.
The Risk of Inaction
The cost of inaction can be very high. As an example, failing to do adequate estate planning utilizing all the appropriate estate planning techniques available to you can cause unnecessary taxes at death. Yet doing this type of work proactively before a business is sold can many times significantly reduce or eliminate these types of taxes. Additionally, taking the necessary time and steps to adequately consider even something seemingly simple, like your state of residency and how it will have an impact on a transaction, is not something that can be done after the fact. There are no mulligans or do-overs when selling a company and the cost of inaction can be extremely high, resulting in needless taxes.
A New Breed of Wealth Advisors — CFOs for Your-Money-Inc.
There is a new breed of wealth managers that specifically focus on partnering with you before the sale of your business.
Contrary to the old general practitioner financial advisor model, these new wealth management teams focus specifically on working with business owners far in advance of the actual sale. These wealth managers work on your behalf and learn your goals, dreams, aspirations and objectives that you want to accomplish life-after-business. Given these desires, they then become the CFO of Your-Money-Inc. to ensure that these goals are met with the wealth that your business will create.
At CFA, we strongly encourage our clients to connect with these new-breed wealth management teams well in advance of any business transaction. These groups will truly partner with you through every stage of the deal. Many old-approach financial advisors will wait until an imminent deal is at hand before becoming proactively involved with the entrepreneur. By this time the mission statement of Your-Money-Inc. should both be identified and a proactive plan to meet these goals should already be in place. This can only be accomplished at the early stages of a business exit.
In addition to preparing the framework for Your-Money-Inc., these new-breed wealth management groups will become an integral part of your M&A team. Along with your investment banker and attorney, they will assist you with thoroughly analyzing the terms of any offer to confirm that the deal terms indeed support your life-after-business goals. Many of these wealth management groups also provide guidance in estate planning strategies which can minimize the tax impact and retained legal liabilities of a business sale. Again, these services can only be provided prior to a sale.
Finally, when considering a wealth management team, you will want to look for possible conflicts of interest in the relationship such as in-house asset management. As a fully independent investment banking firm, CFA believes clients are best served by third party wealth management firms and we work with the leading firms in America. Consider selecting a firm nationally recognized for quality of reputation, service and depth of experience. If you are interested, CFA can introduce you to a new-breed wealth management group who can partner with you to help meet your specific needs. With proactive planning and the right wealth management partners, you can ensure Your-Money-Inc. pays your family dividends for generations to come.
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