The trusted advisers behind the deal will make all the difference for owners looking to maximize the value of their business in a sale.
Every business eventually sells, whether the owner is dead or alive.”
Accepting that guidance, from business-valuation expert Steven York of Stern Brothers Advisory Services, should be the step from which any business owner starts down the path toward selling her or his life’s work. If he chooses to execute that sale before the task is left to his survivors, that owner is going to need some help if he wants to walk away with the highest possible price that meets his goals of corporate legacy, staff security and philanthropic potential.
For millions of businesses in America, and particularly those owned by Baby Boomers on the threshold of retirement, the next five years will be crucial. Many of them, having deferred consideration of what would come after their careers, are only now beginning to grasp the deeper meaning of York’s reference to the timing of a sale. And to get where they want to go, most will need the assistance from more than a good friend, a spouse or a savvy brother-in-law. They’re going to need a team of trusted advisers.
Why? “There is no business that an owner has run successfully for 10 years or better that doesn’t need cleanup ” York says. That may present itself as a car that’s being used personally that needs to come out of the business, or medical expenses that have been covered on top of the regular medical plan, or equipment and hardware that was never titled back over to the corporate entity.
“Some of these things sneak up on owners,” York says. “Those with more than four full-time employees are required to have workers comp coverage, and a lot of times, they have been personal guarantors on that. Same with liability insurance, where an owner has provided personal guarantees. The number of little details that need to be cleaned up are enormous.”
And every one can be a financial land mine if not addressed correctly before setting the terms of a sale. But with every passing day, those that have been deferred take on increasing importance.
“A lot of times, owners get put off by the sale process and end up in their 70s unable to pull the trigger, then their options start to run dry. As you get closer to 80, you’re far less likely to get the free, open-market value, because investors know they can buy from you—or your estate.”
Among the toughest calls an owner may have to make is deciding who will have a seat at the table as his team puts together the legal framework for a sale, along with the financial boilerplate, operational guidelines and security provisions for existing staff-amid a dizzying array of other details.
Some owners will be able to turn to longtime advisers to get through the process, but in many cases, a sale demands assembly of a new team—the ones who brought you to the dance may not be the ones to take you home.
“Closely-held business owners may have a team of outside advisers that may not be up to the task of working on the sale of a business or succession planning for a variety of reasons,” says Jim Lipari, senior vice president for UBS Financial Services. “Transitioning a business either by sale, to inside partners, employees, or family is a significant event that is not routine in the normal course of operations.”
Facilitating the sales process, Lipari says, requires patience, energy, an understanding of a business’s structure and operations, as well as experience working with management teams and family dynamics.
“To maximize the owner’s life’s work, he or she may be better served by engaging specialists that have experience in these type of transitions,” he said. “It’s likely that a business owner will be facing off against professional buyers who have experience with multiple deals. It is important to build a team of professionals who can fill your gaps in knowledge, experience and expertise in building, operating and ultimately transitioning a business.”
That’s not to say your longstanding advisers shouldn’t have a significant role in the process. “It is usually best to start with your existing advisers when you are preparing your business for sale,” said Cindy McClannahan, a partner specializing in transactions for the Seigfreid Bingham law firm. “They should know your business almost as well as you do.”
She recommends starting with a meeting with both your accountant and attorney to determine the steps you need to take to maximize the potential sales price for your business, as well as anticipate issues that may need to be addressed before you sell.
“Once those steps have been completed, then you may need to involve professionals with whom you do not have a relationship, such as a business broker to sell your business and/or a commercial realtor to sell business land,” McClannahan said. “Your existing advisers can recommend professionals for you to consider.”
Dan Danford, CEO of the Family Investment Center, said the most important aspect of an advisory team is enhancing seller value. That’s why seats at the table must be assigned with care.
“The sales process is different than buying something off the shelf at a local grocery store,” Danford said. “There’s a courtship that takes a while and both parties want to present an appealing picture. A fresh set of eyes might really add some glamour to the ritual.”
But even then, Danford said, seller value isn’t always defined by the highest price. “Sometimes sellers want to keep non-monetary or sentimental things. Other times, they want a continuing job for their son-in-law,” he said. “These are part of the package and requires some advance planning.”
Consider just the wealth-management aspects of sale. Many business owners have deep relationships with wealth managers, who have provided years of guidance on creating personal wealth and well-being, but not all of them are business consultants, so that needs to be a factor when assembling that aspect of an advisory team.
Not all wealth advisory services have business-transition expertise. But virtually all are dialed into what business owners need to understand about how their enterprises factor into long-term wealth strategies.
At fee-only wealth adviser Stepp & Rothwell, partner Ken Eaton says the firm encourages business owners to “always be planning for succession, whether internal or external, and their existing advisers should be helping them do that.” “As financial planners, our job is to help our clients understand how much they need to realize from the sale of the business to continue to live comfortably, and how different components of the sale, like an asset sale vs. a stock sale or an earn-out provision, will affect them from a tax and cash flow perspective, and to help them understand how to work that sale into their personal legacy.”
Or think about the legal piece. “Sure, any lawyer can write a will, but that doesn’t make them an estate-planning expert,” Danford said. “A true estate-planning expert has worked with hundreds of families, appeared before the probate judge, and maybe settled a lawsuit or two. Selling a business is complicated, you want someone with genuine experience.”
So it’s important for owners and advisers alike to understand the limits of expertise and responsibilities, and for that owner to enlist the appropriate, collaborative experts. “For instance, we cannot appropriately value a business for our clients or negotiate a sale,” Eaton said. “Similarly, the accountant who has done his client’s taxes and advised her on day-to-day business decisions may not be an expert in mergers and acquisitions.”
So an adviser who recognizes and understands his limitations and stays in his lane can be a valuable part of the team because he can help new members of the team understand the background and his-tory of the business and its owner. That, in turn, can help the business owner make a better deal, Eaton said.
What every owner should be attuned to, advisers say, is someone who tries to advise in areas where they simply lack qualifications. In that case, Eaton said, the offender “should be politely asked to step aside. Of course, any business owner should also understand the motivations of her advisers. Ideally, they will be fiduciaries who only have her best interests at heart, but people who work on commission or who are dependent upon her for a significant amount of revenue may have conflicts of interest that she needs to recognize and take into consideration.
“The bottom line,” Eaton said, “is that a good adviser of any stripe who has his client’s best interests at heart should not only be willing to work with other experts, but should encourage his client to do so. If he isn’t, that is probably the best indication that he shouldn’t remain on the team.”
“Lawyers who specialize in M&A aren’t regular corporate counsel,” said York. “It’s the same as if you have to do litigation, you’ve got to get a litigation attorney. Or a real-estate deal, where you need a specialist.” As a group, he said, lawyers, are generally accommodating with free referrals for their clients, allowing them to test the wa-ters and find those with whom the chemistry seems best. “But they have to be M&A specialists,” he said.
The CPA you work with today may bring his or her own biases to the process, and while York says “we’re not uncomfortable working with that, when you’re doing business valuations, every CPA thinks he knows value and it can be a real spitting contest.”
He also said owners need to be aware of titling problems with the personal property and real property that is the foundation of business operations.
“When you are selling a business, there are always titling problems, but they can be overcome,” York said. “Some of it is simple—the copy machine may be in the name of an owner, instead of a business, so you get hold of the company and get it changed. But some far more complex.”
Into that realm falls personal property that is permanently mounted in the business. Think of mineral rights attached to land sold as part of a business deal. “You don’t always need a specialist, but some-times you do,” York said, “and if it deals with oil and gas, you’d better have an oil and gas expert to help you with the mineral interests, pipeline rights, easement access—those are very specialized.”
Some owners are likely to look at the professional-services costs for a lawyer, a CPA and others on the team and shrink at the prospects of a team meeting that could run well into a combined four figures per billable hour.
That, advisers say, is where they need to do the calculus on how much will be left on the table if an owner tries to work through the process on the cheap. A single lawsuit over a disputed outcome will easily wipe out any phantom savings achieved by cutting corners.
That kind of cost, said York, “is a real teeter-totter. Typically, specialists maybe charge $650 an hour vs. the generalist at $250, and the owner is thinking, ‘I can’t afford this.’ What I suggest is that we have an all-hands meeting, bringing people who might help, who have helped in the past, and discuss it.”
At some point, an owner is going to have to make the decision about who will be on the team during the final phase to a sale. But before you get to that point, you have to have the right candidates under consideration. “I would tell owner to get a copy of a potential team member’s CV and take a look at their background and see where it crosses with what you want to do,” York said. And be prepared to do some detective work.
“If you’re thinking about a particular specialist who helped someone get through a buy or a sale in your industry, call that person who went through it and just ask them. We struggle with this all the time, not in a bad way, but when we first meet a business own-er interested in having valuation services, and owners often are loath to hire anybody for services because they are all pretty convinced they know what the value is.”
If, as an owner, you’re not convinced that a potential adviser is the right fit, don’t commit—it won’t serve you well to start a relationship with less than full confidence, and it won’t be helping the adviser, either.
“If an owner can’t be convinced you’re providing value in spite of the fact they know everything they need to know, that’s not a good fit for either side,” York says. Whatever path an owner takes to a sale, he needs to understand the direct correlation between optimal outcome and the time allocated to the process of finding the right adviser. Give it the time it needs.
“Normally, our experience is six months to a year” just to set the foundation for starting work, York said. “We have several out to two years before were retained and engaged. We know the lead time is long.”
Owners in this environment, York said, would be well-advised to consider what they’re up against in the market-place—with so many businesses up for sale, you’ll be competing with other companies looking for the right advisory talent. That’s why enterprises like Stern brothers have seen an uptick in unsolicited inquiries from owners.
“We don’t do anything but valuation,” he said. “A lot of referrals come from those who know we won’t encroach on anything they do. But those inbound calls are more important than trying to make the outbound ones, so you do drop everything and try to get on it right away.”
So if you’ve assembled the team, only to find out that the pieces aren’t working together, what are your options?
“This is really tough,” York said. “Most business owners only sell their company once. Advisers can be a little self-assured; they can get into situations where it looks like they’re not respecting that the owner thinks he knows all he needs to know about the business.”
If there is a conflict that rises to the level of imminent separation, pulling that trigger quickly can only serve an owner’s interests. “If the total fee expected for and adviser was $20,000, I’d hope by the time it hit $10,000 worth of time it’s been brought up that it’s not a right fit and that the owner is supported and made to feel comfortable and you indeed go ahead and recommend new team members you know would be a better fit,” said York.
Lipari offers these cautionary signs that may require adjustments in the roster:
To handle friction, Lipari says, a business owner has to be open and honest with current advisers: “This is about the owner. It is important to indicate that a business transition is a significant and complex event that involves a full range of personal, business, wealth management and family concerns. An existing adviser may not have the relevant experience. It should be both the onus of the owner and their advisers to come up with a cohesive timeline that has concrete deadlines and to cultivate team environment.”
And one way to foster an owner-centric and compatible team of advisers, he says, is to have a process in place and to have the plan written down. One of the most important things an owner can bring to the process is a commitment to remain focused on what got him to the table in the first place: keeping the business in tip-top shape operationally and financially so that the full value can be extracted upon sale.
“For God’s sake, run the business,” York said. “Give us two contacts within the company where we can get document requests fulfilled, and go do your thing.”
Occasionally, he said, an owner will try to do the transaction on the sly, “then announce to the staff that ‘I got $20 million of the business; good luck to you all.’ An owner who wants to do that spooks us a bit. It goes back to the chemistry question. We really like to see a team of at least three we can contact during the process, and that’s related to picking the right person.”
McClannahan concurred. “The sale of your business is the most important sale that you will make,” she said. “While you are working on that sale, it is very important that your existing customers continue to receive quality service and that your advisory team receive all of the information that they need.”
She recommends that, after each meeting with your advisory team, you “delegate to senior executives the task of compiling the key information that your advisors need. But you should still review that in-formation and attend the meetings with the advisory team.”
Ideally, said Lipari, senior executives can focus on daily operations, leaving the owner time to work with the transition team. But there will be instances where that model won’t hold. “This is very different for every situation,” he said. “Most business owners want to keep a potential sale or succession very confidential. It also can be very emotional and very personal. In this case, delegating the task to senior executives to work with the transition team probably is not the best course.”