By John Patnaude – Bernstein Private Wealth Management
The decision by a business owner to sell his or her company can be both emotionally challenging and financially complex. It has, however, become a growing consideration among local Puget Sound owners during the Covid-19 pandemic, as some companies struggle to continue their operations, or alternatively, become a more attractive acquisition target for potential buyers amid pandemic-related tailwinds.
The continued impact of Covid on the deal landscape, combined with the possibility of significant increases in the capital gains tax later this year, make sale preparation and planning for businesses and their owners, paramount.
For business owners potentially looking into a sale this year, there are a few key factors to consider:
Understand valuation. An owner should begin the process by connecting with an investment banker with expertise in their industry who can offer guidance on the likely value of the business and how deals are typically being structured. For example, should they expect to see all cash deals, having a portion paid out as an earn-out over the coming years, or perhaps having a portion rolled over into a newly created entity?
An investment banker can also prepare the business to be an attractive acquisition candidate both internally, ensuring the right management team is in place and the financials are in order, and also externally by evaluating the competitive landscape, branding of the company, as well as any concentration risk with their customer base.
Build an advisory team. Beyond the investment banker, business owners need to build a team with deep mergers and acquisitions expertise including a seasoned corporate lawyer, CPA and wealth adviser. Business owners tend to have relationships with these professionals already, but it’s key to ensure these individuals have experience with sizable, complex transactions.
Consider personal financial goals. Often the focus of the business owner is around maximizing the sales price of their business and completing the transaction. But sellers need to give equal attention to the impact the structure and sale will have on their personal financial goals, along with the effect on the next generation and philanthropic pursuits.
This is where the value of a qualified wealth adviser comes in. An adviser can explore a range of possibilities by simulating the sale of the business under several scenarios, after taxes, to determine:
- The minimum amount needed from this sale to replace and secure lifetime spending
- The amount of surplus capital beyond lifestyle spending available for generational and philanthropic goals
- How accomplishing these needs might change based on different deal structures presented by potential buyers
- How an earn-out or equity stake in a newly formed business might affect current goals
- How a potential capital gains tax increase and reduction of the federal estate tax exemption, as proposed by the Biden administration, could impact financial goals
- Tax-savings strategies, such as Qualified Small Business Stock (QSBS)
Create a pre-sale financial plan. Once the owner has defined their personal and family goals and objectives around the sale, it is important to understand the different investment options for their newfound liquidity. Interest rates are historically low and equity market valuations near all-time highs. Evaluating the broader range of investment choices beyond stocks and bonds to meet income needs, minimize volatility and accomplish growth objectives is critical.
It will also be necessary to explore different legal entities to create, in advance of the sale, to efficiently maximize wealth for the family and reduce taxes. These entities include generation skipping trusts, donor advised funds or private family foundations. Coupling these entities and certain planning techniques with the sale of the business can magnify the potential for the transaction well beyond the headline sales price.
Receiving an attractive multiple for the business is only one aspect to achieving a business owner’s financial goals, and a sole focus on the price may be to the owner’s detriment over time. Implementing wealth planning techniques before and after a sale will allow owners greater flexibility over how to deploy their wealth and ensure it lasts for generations to come.
John Patnaude is managing director at Bernstein Private Wealth Management in Seattle.