If several
market meltdowns have taught us anything it is to make sure you are diversified
over several investments and asset classes. Would your financial advisor
recommend that you put 80% or more of your assets into a single investment? Of
course not, but a large percentage of business owners actually have that level
of concentration. On top of that, privately held businesses are illiquid assets
often requiring one to two years to sell.
So for
your baby boomer business owner, it is time to recognize the importance of
planning for your business exit or business sale. It is time to move your thinking
about your business from the method to provide income to your family and start
thinking about it in terms of wealth maximization. Above is a graphical comparison between a
business owner and another high net worth individual.
Business
owners are typically not proactive when it comes to exit planning or succession
planning in their business because it forces them to embrace their own
mortality. If an owner has a sudden debilitating health issue or unexpectedly
dies, instead of getting full value for the company, his estate can sell it out
of bankruptcy two years later for ten cents on the dollar. This is a punishing
financial result for the lack of appropriate planning.
There
are many complex issues involved in a business transition or a business sale.
Poor decisions at this critical time can result in swings of hundreds of
thousands or even millions of dollars. If you can take away one thing from
this, it would be to actively get out in front of the process with your professional
advisors. This decision and how it is executed will be the single most
impactful event in your family’s financial future. You should consider
assembling a multidisciplinary team that can include:
The
Financial Advisor
– Coordinate all the pieces for a holistic wealth maximization plan
Attorney – Create the
necessary documents, wills, trusts, family LLC's, corporate structure, etc
Estate
Planner
– work with financial advisor and attorney to create the properly documented
estate roadmap
CPA/Tax
Advisor
– review corporate structure, analyze after tax proceeds comparison of various
transaction structures, create tax deferral and tax avoidance strategies
Investment
Banker/Merger and Acquisition Advisor – Analyze the business, create value
maximization strategies, position the company for sale, and create a soft auction
of multiple buyers to maximize selling price and terms.
As business owners approach retirement, they often
seek help with investment decisions that employ sound diversification and
liquidity strategies. Your business is generally the largest, most illiquid, and
most risky investment in your total wealth portfolio. Your successful business
exit should be executed with the same diligence, knowledge, experience and
skill that you have regularly applied to the organizing, running and building your
business.
Dave Kauppi is a Merger and Acquisition Advisor and President of MidMarket Capital, providing business broker and investment banking services to owners in the sale of lower middle market companies. For more information about exit planning and selling a business, click to subscribe to our free newsletter The Exit Strategist