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What to know before exploring a sale in 2021

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.

Contributed by James Bocinsky

You Just Sold Your Business…What Should You Do with the Cash?

Selling a business aǎer years of hard work triggers a ﬂood of emotions for most business owners. The relief, joy, and excitement of seeing the proceeds hit their account is often mixed with anxiety as owners wonder what to do with their newfound cash. Those who deferred planning now face pressing questions, including:

Will the proceeds be enough to sustain my lifestyle?
How should I invest the proceeds?
The market is at an all-time high; is now a good time to invest?
Should I invest all at once or stage my entry over time?

While answering these questions may seem daunting, the key is to deﬁne what happiness looks like and how newly acquired wealth might help fulﬁll speciﬁc life goals.

Mapping the Long Term

To determine how best to deploy the net proceeds, start by quantifying core and surplus capital. Think of core capital as the amount an owner needs today to sustain her lifestyle with a high degree of conﬁdence for the rest of her life. Surplus capital, on the other hand, represents extra wealth that can be used opportunistically to accomplish secondary goals like funding discretionary expenses, or gifts to family or charity.

Consider the Cashers, a 60-year-old couple who recently sold their business for $20 million. The couple wants to maintain their $400k per year in lifestyle spending while assuming only a moderate amount of risk. Using our proprietary Wealth Forecasting System, we quantiﬁed their core capital at $14.9 million and their surplus capital at $5.1 million. Notably, these ﬁgures assumed that all their capital was fully invested.

While the Cashers seemed comfortable with a moderate asset allocation when it came time to put money to work, they hesitated. Will a month or two delay materially aﬀect longterm wealth building? Not likely. But languishing in cash over several years could. For instance, holding cash for ﬁve years while waiting to invest increased their core capital by 15.4%—from $14.9 to $17.2 million (Display).

But the Market Is So High!

The Cashers felt torn. They wanted to avoid overfunding their core but also worried about buying in “at the top.” Yet when it comes to investing, there is never a perfect entry point. The market doesn’t send personal invitations—and if it did, some might reject them anyway. Consider the market conditions on March 23, 2020. In retrospect, it was the perfect moment to invest, though the “invest now” sign was obscured by the pandemic’s gloom.

Plus, even if you consistently invested at market highs, you could still generate attractive returns. Since WWII, an investor who bought at each bear market bottom earned 11.5% on average versus 9.6% for an investor who bought at each market top. And while it may feel uncomfortable to plow ahead at the peak, it’s not unusual. Since the market has historically trended higher, it has ended up trading near its all-time high roughly 43% of the time.

Take the Plunge or Wade Slowly Over Time?

Framing the historical context comforted the Cashers, though they remained reluctant to fully commit—a common sentiment among business owners. Successful entrepreneurs are usually innate risk-takers when it comes to their own ventures because they feel they’re in control. In contrast, markets seem irrational at times. Many business owners fear watching wealth they’ve spent decades building dissipate just because they’ve invested at an inopportune time. To combat this, some prefer to slowly dip their toes in the water by investing a little bit at a time—an approach called dollar-cost averaging (DCA).

Given that markets tend to driǎ higher over the long haul, DCA generally yields less wealth than going all in. Our analysis shows that the investor who dollar-cost averaged over six months into a global stock portfolio underperformed by 1.3% in typical markets and 7.5% in strong markets compared to investing immediately. Yet DCA can serve as a hedge in deteriorating scenarios. In weak markets, the investor who dollar-cost averaged was 5.0% better oﬀ. The Cashers acknowledged this cost-beneﬁt trade-oﬀ, but still felt more comfortable pursuing a staged entry. Now they wondered how to proceed.

When implementing DCA, time proved the most critical factor. Beyond six months, the marginal beneﬁt that a dollar-cost averaging strategy could provide in weak markets is outweighed by the cost in strong months (Display). For this reason, the Casher’s ﬁnancial advisor recommended that the couple stage their entry over a three- to six-month period.

Bucketing Your Cash to Achieve Your Goals

One common mistake that owners make is investing the proceeds as a single pot of money with a uniform focus and allocation. Instead, consider disaggregating your newfound wealth into diﬀerent buckets with distinct allocations that match time horizons to speciﬁc goals (Display).

Business owners who successfully exit often find that their windfall doesn’t come worry-free. Investing a large sum can feel nerve-racking. As you deploy your cash, explore the road map we’ve laid out. In addition to allocating across traditional stock and bond portfolios, consider alternative investments. Although “alts” are frequently illiquid in nature, in the right circumstances they may be an attractive diversiﬁer, and they often have a capital call structure that simulates dollar-cost averaging into the portfolio. While cash can be a conundrum, your Bernstein ﬁnancial advisor can help you navigate the key planning and investment decisions at each juncture along the way.

Authors: Andrew Bishop and Richard Weaver

Contributed by Troy Niehaus

A Safety Net for your 1031 Exchange

One of the great tax deferral options in the world of real estate sales is the 1031 Exchange.

The 1031 Exchange allows the real estate seller to defer their capital gains tax, by exchanging their property for another like property. As with all the many IRS tax deferral programs, certain requirements must be met.

However, real estate sellers looking to complete a time-sensitive 1031 Exchange, have sometimes found themselves in a challenging situation. They may be running out of time, unable to negotiate a reasonable financial transaction or other issues associated with real estate transactions.

If a seller is concerned that their 1031 Exchange could face problems, they could always choose to utilize another tax deferral option. One excellent example is IRS(C) 453(A) Installment Sale with a monetization feature.

With this tax deferral program, the seller receives their money at closing in a tax-free form, while deferring their capital gains tax for 30 years. The challenge is that the 1031 exchange and the 453(A) Installment Sale are two different tax-deferral options. Each having its own rules and regulations.

However, if you work with an experienced ‘Exchange Facilitator / Designated Intermediary’ you can build a safety net by using both deferrals in the same transaction. In addition to protecting against a failing 1031 exchange, there are other financial reasons where the seller can benefit from utilizing both a 1031 Exchange and a 453(A) Installment in the same transaction.

When would Combining IRC 1031 Exchange & IRC 453(A) Installment Sale?

When you fear that your 1031 Exchange might not work out as planned.
In cases where a replacement property covered only a portion of your sales proceeds.
In cases where you want a new property but also needed cash for other uses.

Examples of combining tax deferral options:

Seller receives $5,000,000. taxable dollars from their sale and begins the 1031 exchange.

Seller finds a desirable replacement property for $3,500,000 utilizes the 1031 exchange. The seller is then unable to find an appropriate property for the remaining $1,500,000. Using an experienced exchange facilitator, the seller then defers the remaining $1,500,000. Using a 453(A). The seller receives the remaining funds in a tax-free form and defers the tax for 30 years. The seller can now use the $1,500,000. to buy any property they desire with none of the 1031 exchange restrictions.
The seller is interested in using some of the $5,000,000. of the sold property to exchange for another property. However, the seller also needs $2,000,000. in cash, to pay for other debts and alternative investment opportunities. The seller starts with the 1031 exchange process. They find an appropriate replacement property for $3,000,000. and utilize the 1031 exchange. Using an experienced exchange facilitator, they then transfer the remaining $2,00,000. to a 453(A). The seller receives this money in a tax-free form, defers the tax for 30 years, and invests the money as needed.

What are the important keys in utilizing two options for one sales transaction?

You always start with the implementation of a 1031 Exchange.
You need to utilize an exchange facilitator who has experience with both 1031 & 453.
The minimum dollars necessary for the 453(A) implementation is $500,000.
Utilize a coordinator who is experienced implementing a 453(A) Tax Deferral.

Contributed by Jack Gruber

The 5 Most Common Successor Development Mistakes

Most business owners know that a well-groomed successor should have at a working knowledge of operations, sales and marketing, customer service, administration, and finance. But this knowledge, although necessary, is not sufficient if a successor is to effectively lead a company into the future. In addition to having a firm grasp of the mechanics of the business, a successor must become an effective leader, think strategically and have good judgment, have vision, and adopt an owner’s mindset.

Mistake #1: Not Developing Effective Leadership Skills
The effectiveness of a person’s leadership is determined by how they are viewed by the people they lead. A leader who is not respected or trusted can’t be very effective. In contrast, a leader who people trust and respect will always get better results.

People decide how much they trust and respect a leader based on how that leader acts and how they interact with others. When a leader demonstrates that they do what they say they’re going to do (acts with integrity) and demonstrates that they are the kind of person they claim to be (acts in integrity), people learn they can trust him or her.

When a leader interacts with people in a manner that shows they respect and value them, the leader will earn the respect of those around him or her. Leaders accomplish this by treating people like people (rather than like things) and by treating adults like adults (rather than like children).

Mistake #2: Lack of Strategic Thinking
The ability to think strategically is essential for a leader guiding an organization. Without an understanding of what a strategy is and how to develop one, leaders will often focus on goals and tactics. In the absence of a true strategy, these goals and tactics are often misguided and usually result in new challenges.

A goal is not a strategy. It’s just a metric to measure progress in the execution of a strategy. Plus, it has no emotional or inspirational component. Tactics are not strategies either. Tactics are the means by which a strategic initiative can be achieved. Tactics – like goals – also have no emotion or energy behind them. They are simply the mechanics of how things will get done.

A good strategy (in contrast to platitudes, goals or tactics) addresses a problem or takes advantage of an opportunity and provides direction for the company. Additionally, a good strategy inspires people to achieve it. By developing a true strategy, excellent results can be achieved, and the desired financial goals realized.

But an effective strategy also needs buy-in from the team. Without buy-in, a leader simply gets compliance, and compliance is not the same as commitment.

Mistake #3: Lack of Vision
For a leader to guide a company, it is essential to develop a vision for the future of the organization. A vision imagines a future which is better, different, and/or larger than the current state. Without vision, a leader will simply continue to execute the existing business model, often getting left behind as the economy shifts, customer/client preferences change, and competitors adapt.

The ability to develop vision can’t be learned from a book. It arises from within and it requires a leader to have passion and purpose for what they do. A passionless leader can only develop goals – which are uninspiring by their nature. If a leader wants to engage his or her organization, he or she must create a future that inspires people.

Mistake #4: Not Developing Good Judgment
A successor needs to develop sound judgment and become business savvy in order to make good decisions. Good judgment comes from our ability to recognize when our emotions and biases cloud our decision-making. When we allow emotions to cloud our judgment, we make decisions that are misguided. Having sound judgment – unbiased by emotions – allows an owner to make good business decisions.

Business savvy is developed by thinking broadly about all aspects of the business, by being aware of what’s going on within the company, within the economy, with customers, and with the competition. (It also helps to develop an understanding of human nature.)

Mistake #5: Not Developing an Owner’s Mindset
Up until a successor takes over as an owner, they have typically only ever been an employee. There are several differences between the way an employee thinks and the way an owner thinks, and if this shift doesn’t take place, problems will arise.

Employees tend to think narrowly. They usually focus on the task at hand and/or on their specific domain of responsibility (operations, finance, engineering, etc.). In contrast, an owner needs to consider the bigger picture and how his or her decisions impact each aspect of the business.

Employees tend to think short-term. Their focus tends to be on current matters, current revenues, current expenses, and current profits. On the other hand, an owner needs to consider both the short-term and the long-term success of the business.

Employees tend to focus on doing good work while at work but generally don’t take their work home with them. On the other hand, owners learn that the business becomes their lives, and they think about it all the time.

And finally, employees know that if they make poor decisions, the business doesn’t do well, they become dissatisfied, or they lose their job, they can always find a new job elsewhere. Owners understand that failure is not an option. Generally, there is no “Plan B.” They understand that the business is their only future, and this understanding colors their decisions and actions.

One Final Issue…
There’s one more issue that needs to be considered:
It’s nearly impossible for an owner to effectively develop their own successor!

Here’s why:

Interpersonal Dynamics – In order for meaningful improvement to occur, open and honest conversations with the successor must take place. But it’s virtually impossible for a successor to be completely open, honest, and vulnerable when those conversations are with the owner.

Blind Spots – Regardless of the number of years of experience we have, our level of intelligence, and the amount of education we’ve had, we all have blind spots. We can’t see what we’re missing. Owners have blind spots.

Objectivity – Virtually everyone around a successor has an agenda – their co-workers, their spouse and especially the owner. They either want things to change or they want things to stay the same. In order for a successor to hone their thinking and judgment, they need an unbiased sounding board. An owner can’t be unbiased.

Time Constraints – There’s a reason it’s called successor development and not successor training. The growth that needs to occur happens over time. It won’t take place simply by attending a workshop or reading a book. And most owners simply don’t have the time.

Skill Set – Successful owners are expert at the business of their business, but the skills that got them where they are aren’t the same skills required to effectively coach and mentor a successor.

It’s critical for a successor to be properly developed so that the business thrives after the owner leaves and all purchase payments get paid. The risk of handing your company over to a poorly prepared successor is too great to leave their development incomplete.

Contributed by Michael Beck

Protecting Value with the Right Planning Partners

Your business is your most important asset, and you deserve advisors committed to delivering the right advice, the best solutions and the expertise to execute the planning to protect your business value.

The first step to protecting the value of your business is to understand what it is worth in relation to everything else you own (Left Pie Chart) and then what is at risk without good planning (Right Pie Chart). Knowing the value of your business helps you make better decisions. Start by getting a valuation of your business. Today’s technology allows for basic valuations to be completed with speed and accuracy at an affordable cost.

Once you know the value of your business you will need a team of advisors. No Business Value Protection Planning can be effective and completed without Financial Professionals, Attorneys and CPA’s working together for the benefit of you the business owner. Unfortunately, this job is not getting done for the majority of small and mid-sized businesses. This puts 60% to 80% of business value and income at risk.

70% of Small and Mid-Sized Businesses have an incomplete succession plan or none at all. How can this be?

Sole Proprietors can get by with a Single Advisor in most cases. Their business model simple and straightforward. Large Private and Public Companies have access to Full-Service Consulting Firms with the needed team members already in place. The majority of businesses fall in the middle and it is easy to understand why studies have revealed a majority of business owners are not sure about where to begin because there is not an existing team in place. You need a team of advisors. It important to identify those with the skills required and willing to work together rather than independently. Your existing trusted advisors should be able to help you get started.

So how will you know if you have the right team in place? There are three indicators to help you.

Clarity – Communication – Confidence

Clarity – When you have clarity about the value protection planning areas and the role each advisor plays then you are on the right track. The protection areas include Succession, Retirement, Estate and Key Stakeholder Planning. It is the responsibility of your advisors to bring clarity to you. If you are not clear, then they have not done their job.

Communication – Require your advisors to communicate effectively with you and with each other. It is their job to make this a priority and the only way the planning done will be coordinated and complete.

Confidence – When you look at the team assembled to do the work for you, and you have a sense of confidence then you are on the right track. Hoping it works out is not a strategy. Confidence comes when the team combines clarity and effective communication.

Benefits of Partnership Thinking

Your planning team working in partnership will hold each other accountable. This is a huge benefit to you. The planning solutions designed are vetted by your Attorney, CPA, Financial Advisor and others. In partnership they deliver complete solutions. Embrace the partnership approach to planning. Make it a requirement for your advisors to embrace working in partnership with each other. Advisors work best together when committed to a common goal or objective. Require them to focus on the objective of protecting the value of your business, your most important asset. It must be the central theme at all times. This saves you time, money and eliminates much of the frustration associated with planning.

If nothing else, remember the message from the pie charts to keep everyone focused on completing the protection planning process.

Contributed by Doug Marshall

Selecting a Business Broker to Sell Your Company in 2021

Timing, location, quality, and an understanding of market dynamics are critical elements in the successful sale of a product or service. A product or service offered for sale when there is high buyer demand at a location will typically sell. However, a completed sale is a minimum threshold for an entrepreneur seeking customer loyalty, longevity, and profitability. Obtaining those elements requires knowledge, experience, and strong business acumen. The ultimate sale for a business owner is the sale of their entire entity. That sale will end a chapter of their lives and if done correctly will achieve a strong market value, be completed in an environment of confidentiality employing best practices, and mitigate legal and tax liability. Selecting the right business broker to sell a privately held company or family-owned business is commonly regarded as one of the most important decisions an entrepreneur can make during their tenure of ownership.

Many business owners will only make the selection from a group of referred parties from their attorney, CPA, banker, wealth advisor, SCORE counselor, friends, and/or family. A referral from a trusted advisor is a wonderful place to start the interview process associated with selecting a business broker. A professional intermediary with a positive reputation that proceeds them is always preferred to the mystery box selection of a person unknown to anyone in your world.

If a referral is not available or if a larger list of merger & acquisition intermediaries is desired to interview, another excellent way to identify the “best of the best” business brokers serving a specific geographic area or industry is to look for online testimonials and reviews. Most successful, established businesses have testimonials on their website, if they do not, one should wonder why? IBA is unique in the business brokerage community in that in addition to standard written testimonials, it offers video testimonials from past clients willing to go on the public record relating to their experience working with IBA on its website. Google, LinkedIn, Facebook, and Yelp also offer venues for customers to provide feedback on their experiences working with individuals and companies that are available for public review.

One insider trick to obtain a referral without disclosing that you are thinking about selling your business to people in your professional or personal network, something many entrepreneurs wish to keep confidential until a buyer has been identified and a deal negotiated, is to look up intermediaries and/or business brokerage firms in your marketplace on LinkedIn and see if they are connected to people you know and trust in the business community.

The decision made to explore a company sale in 2021 and a meeting scheduled to interview a business broker, the next step is to prepare for the meeting. The following is an overview based on my nearly thirty years of experience selling privately held companies and family-owned businesses of the topics for conversation that should be discussed in an introductory meeting.

Knowledge – One of the attributes being purchased when hiring a professional M&A intermediary is knowledge of all aspects of the sale process and the strategies that can be employed to achieve the best possible outcomes in negotiations. Knowledge can be possessed by an individual or firm. No individual person can know everything. This is true whether it involves lawyers, CPA’s, or business brokers. A large, established M&A firm offers its clients a deep pool of diverse and industry specific knowledge and traditionally participates in regular internal and external education programs to keep its brokers current on relevant issues ranging from federal & state tax law changes to legal precedents impacting business, environmental, and real estate law to underwriting & lending policies impacting acquisition capital financing. It is wise for an entrepreneur to inquire about what an intermediary is doing to stay current and enhance their knowledge base.
Experience – There is no substitute for experience. Professional representation of a business sale is a sophisticated, nuanced process requiring completion of numerous, supervised transactions to obtain a satisfactory level of quality as a business brokerage professional. Superior performance requires a greater body of achievement across a spectrum of industries, economic conditions, and geographic areas in a diverse set of circumstances. Don’t hesitate to ask a business broker how long they have been in the business, how many deals they have personally negotiated, how long the firm has been around, and how many deals it has done. These are all questions worthy of honest answers. When personally asked these questions, my answers are 28 years, over 300 deals, since 1975, and over 4200. I am very proud of the legacy experience of IBA. No business brokerage firm in Washington, Oregon, or Alaska has sold more businesses over the last fifty years than IBA. No business brokerage firm in the Pacific Northwest sold more companies in 2020 than IBA. Evidence of knowledge and experience can also be found in whether a business broker has a body of work in terms of seminar speaking engagements; television, podcast, and radio interviews; and written literature online and in print. IBA’s deep and talented team of business brokers has been a sought-after media resource for almost five decades in the Pacific Northwest.
Professional Skill Set – Mergers & acquisitions requires a diverse, specialized skill set. The best business brokers have the ability to wear an accountant’s visor to value a business; a seasoned sales professional’s ability to create a marketplace, persuasively convey the positive attributes of a product, and justify its market value; a professional negotiator’s ability to get intelligent, thoughtful parties to “Yes” with divergent interests; and a skilled administrator’s ability to facilitate progress through necessary steps & processes by accountants, lawyers, banks and/or investors. It is strongly recommended that any business broker being interviewed be asked about their most recent & difficult transactions. Questions should also be asked about their relevant experience selling similar companies in the same industry and/or geographic area. The skill set and knowledge needed to sell a technology company with significant intangible assets is very different than the skillset and knowledge needed to sell a cannabis business and facilitate the relevant licensing process for a buyer.
Resources – One of the common jobs of a business broker is to help the buyer locate the funds necessary to buy a specific business. Although this may appear as a buyer side representation project, it is in fact a responsibility that often falls on the shoulders of the sell-side intermediary since neither the seller nor their representative can achieve their ultimate goal – a completed sale – without the buyer having secured the necessary funds to complete the deal. Business loan approval & underwriting policies can vary greatly in the lending community. It is prudent for an entrepreneur to engage an experienced, knowledgeable intermediary that has an established network of banking professionals with decision making authority they can contact when seeking acquisition capital for a transaction. It is also wise to work with a business brokerage firm that completes a large number of transactions annually, as banks often look at these firms as repeat wholesale clients, versus the single project designation of most individual business buyers, based on the volume of loans they originate for the lending institution and will problem solve more aggressively and fight harder internally for loan approval recognizing the value of being a preferred lender for a high performing, regional business brokerage firm. It is also common at IBA to find buyer acquisition financing when a party has appeared to strike out seeking funding on their own. A business broker can also be a great source for referrals of attorneys, accountants, wealth advisers, appraisers, 1031 exchange facilitators, and a spectrum of other specialized professionals relevant to an M&A transaction.
Likeability & Integrity – The relationship between a business broker and their client is commonly short (3 – 9 months at IBA), but personal with frequent communication. As a general rule, people do business with people they know, like, and trust. If initial communication with a business broker is not collaborative, informative, and positive then an alternative professional representative should be interviewed for the position.
Broker Compensation – There are two dominant business models in business brokerage. One business model, the compensation model employed by IBA, is a real estate business model where the business broker is paid 100% on performance at completion of the transaction when their client is paid. The other business model involves the business broker being paid upfront fees & retainers. In theory, both business models end with approximately the same level of compensation for the broker after a successful sale. However, it is also true that many businesses represented for sale by business brokers do not sell due to incorrect pricing, the business broker’s inability to create a marketplace for the company filled with interested parties, an intermediary’s inability to get interested parties to reach across the table and shake hands on a deal and/or the inability to locate the funds necessary to complete the transaction. Business brokerage is a “black & white” profession with a clear objective, sell businesses. It is my professional opinion that the “best of the best” in business brokerage are paid 100% on performance. Any salesperson that seeks a retainer generally does not have confidence in their abilities as a salesperson.

Three business brokerage services stand out in importance above all others in the sale of a business. Each of these should be discussed in detail when interviewing a professional intermediary to potentially sell a privately held company or family-owned business.

Business Pricing – The proper valuation of a business requires the ability to combine accounting, finance, and investment knowledge with market information related to specific industries, geographic areas, economic conditions, and buyer demand. It is impossible to do this without active engagement in the relevant marketplace. The most accurate business valuations are delivered by local firms employing knowledgeable, experienced professionals. Ultimately, a business value will be validated or rejected by the marketplace. Most business values need to pass scrutiny by the buyer, their CPA, bank, and/or investors before a deal will be completed. It is critical to hire an intermediary that has the ability to justify a price to a demographic spectrum of buyers and their professional advisors. The best way to assess the skill & knowledge of a business broker in valuing a business is to have them value your company. Firms like IBA that are paid 100% on performance will provide a professional opinion of the market value of a business as a complimentary service to demonstrate their knowledge, experience, and ability. The other reason the service is free is because the paid-on-performance business model does not work unless transactions are completed, so on the M&A firm’s end they want to insure there is a market for the business, they can effectively work with ownership, and sale objectives are in alignment with the client.
Marketing – The marketing of a business for sale is a unique challenge. On one level, as with all products, the goal is to create the most robust marketplace for the sale as possible. However, in the sale of a business most sale-side clients do not wish for their customers, employees, competitors, or vendors to know the business is for sale, so equally important to a high exposure marketplace is maintenance of an environment of confidentiality throughout the sale process. These conflicting objectives require development of a sophisticated, comprehensive marketing strategy. It is important for an entrepreneur to understand and approve a business broker’s marketing strategy before selecting them for exclusive representation.
Negotiations – Few sales have as many significant elements that require negotiation as a business sale transaction. A properly negotiated and structured business sale will commonly incorporate business, tax, legal, employment, and real estate components. Each element has financial and liability creating implications. It is prudent to have experienced, knowledgeable, highly skilled professional representation to insure the best possible outcome is achieved in a multiple tiered, nuanced negotiation. A quality business broker should be able to provide an overview of all the areas where future negotiations will be probable before an entrepreneur starts down the path to sale.

If you are considering the sale of your business in the Pacific Northwest in 2021, IBA would welcome the opportunity to interview for the job of business broker. We strongly believe you will recognize a difference between our professionals and firm versus others serving the Main Street and Middle Market as mergers & acquisitions intermediaries. All communication is held in strict confidence.

Contributed by Gregory Kovsky

Every Owner Has a Plan Until…

Mike Tyson, the heavyweight boxer, was quoted as saying, “Everyone has a plan until they get punched in the mouth.” Regardless of what you may think of him as a boxer or a person, it was a great observation.

It doesn’t matter whether we’re talking about boxing or business, the truth is that owners all have a plan for a transition until they get hit with a setback. Some will give up after being derailed, but others will take a step back, correct their course of action, and find a way to succeed. Giving up on a course of action is not the same as giving up on a goal.

Having a strong attachment to the process with which to achieve a goal often undermines our success.

Let’s look at the typical transition options, the potential setbacks, and how to recover from a setback.

Typical Transition Options:
Generally, owners have two practical options – an External Sale (Exit) or an Internal Sale (Succession). (The other option is to close the doors and sell the assets.) An Exit is generally a sale to an Individual Buyer or it’s some form of Strategic Acquisition (M&A/Investment Bank/Private Equity). In contrast, a Succession is a sale to a Family Member, a Key Executive, or via an ESOP (Employee Stock Ownership Plan). A number of these options can be the right path for an owner, depending on the nature of the business and the needs of the owner. The problem is that many times, things don’t go as planned.

Potential derailers for a planned External Sale
Circumstances that can derail an Exit include:

Can’t find a buyer or attract capital – This can be due to a surplus of businesses for sale or to the nature of the business. The greater the surplus of sellers, the more selective buyers can afford to be. Additionally, the more dependent on the owner and his/her relationships, the less attractive the business.
Price too low – This can also be due to a surplus of businesses for sale or it can be due to business valuation issues like customer concentration, weak leadership, market concentration, etc.
Unacceptable terms – Sometimes buyers require an owner to stay active in the business for an extended period of time and or defer payment of monies pending performance.
Health issues (yours or a family member) – Clearly, this situation is unexpected, and a sale would be undertaken under pressure, which would result in a loss of leverage.

Potential derailers for a planned Internal Sale
Circumstances that can derail a Succession include:

No qualified or interested successor – Either the person you had in mind to take over the business doesn’t want to, or you don’t have confidence in the person who wants to take over. Additionally, it’s not unusual for the person to lack the personal net worth that banks would deem adequate for funding the sale.
More than one interested family member or executive – You have more than one person who wants to be the successor and it creates conflict – sometimes significant conflict.
Too small for an ESOP – You like the idea of creating an employee-owned company, but the cost is too high and/or there aren’t enough savvy leaders to take charge.
Health issues (yours or a family member) – Clearly, this situation is unexpected, and a transition would be required before a successor is ready.

How to Reduce the Chance of Your Plans Getting Derailed:
The best approach to planning a transition is to be proactive, well in advance of your anticipated departure. Start by pulling together a team of professionals sooner than later. Their expertise can help you choose the best exit strategy for your situation, identify and resolve potential issues, and refer you to people with any additional expertise if needed.

• Wealth Manager
• Tax Planning Attorney
• Successor Recruiting
• Successor Development
• Succession Attorney
• Private Equity Firm
• M&A Advisor

• Investment Banker
• Exit Planner
• Executive Coach
• Estate Planning Attorney
• Commercial Banker
• Business Broker

If your goal is an external sale, consider having a preliminary Quality of Earnings Report done along with a Quality of Leadership Report. These two reports will highlight any shortcomings and/or impediments in advance of a sale so they can be addressed before going to market. Additionally, consider selling sooner than later to avoid the surplus of Boomer-owned businesses coming to market and/or to avoid being forced to retire due to health issues.

If your goal is an internal sale, ensure you’ve identified your successor well in advance and make sure they want the role. (If there is no one, then start the process of recruiting a potential successor as soon as you can.) Once that’s done, start working on developing that person. Develop their business savvy, their leadership effectiveness, their strategic thinking, and their owner mindset. If more than one successor will be involved, objectively assess them and decide how to split/share responsibilities.

How to Recover from a Setback on an External Sale:
Basically, there are two paths to recovering from a setback on an external sale. Start by attempting to make the business more attractive. If possible, address the issues that caused the business to be less attractive, caused it to be worth less than you hoped for, or caused the terms to be undesirable. If that can’t be accomplished, then switch to an internal sales solution by choosing or finding a suitable successor and grooming them to take over.

How to Recover from a Setback on an Internal Sale:
If your plan to have a particular person take over the business fails, re-evaluate and assess alternative successors and/or start the process to recruit a successor from outside the company. Once you’ve chosen someone, begin grooming them to take over.

By the way, if you want to accelerate the development of your successor, consider bringing in a professional executive coach. Having an objective, confidential sounding board can help them gain new perspective and develop the skills they need to succeed.

Contributed by Michael Beck