More than just a transaction
Business is personal—and so is the decision to exit your business.
For business owners, walking away from the company they have spent a lifetime building is never easy. But without a well-constructed exit strategy in place, transitioning to the next generation of management or to new ownership can become far more difficult.
Such was the case for one family-owned business in the US Midwest when its owners—a father, a mother and their adult son—faced a liquidity event while embroiled in a bitter feud over the management and future of their company.
A family divided
When a UBS Financial Advisor first met the owners, the family’s battles over the company were on the verge of spilling over into court. On one side of the dispute was the adult son, a minority shareholder. He oversaw the company’s operations but did not want to stay with the business long enough to weather another recession. On the other side were his parents: his father, who founded the company, and his stepmother, majority owners who were no longer active in the business.
With revenues growing at a healthy pace, the parents felt their distributions from the business should be growing as well. But the son saw things differently, and the two sides had begun to sue each other over the matter. Worse still, the father was terminally ill and the mother had grown increasingly worried about what would happen after her husband passed.
Discovery and planning
Given the depth of the conflict, the family’s UBS Financial Advisor knew it would be essential to maintain an independent viewpoint as he intervened to help the family find a way forward. “For me, it was about being independent, knowledgeable and capable of finding mutual ground to keep the train on the tracks,” the Advisor recalled.
The Advisor started the engagement by having in-depth conversations with the father, mother and son separately, focusing on understanding their individual financial goals and personal values. From there, the Advisor was able to develop financial plans for each family member, including determining the amount of money the son and mother would need to fund their lifetime goals.
Weighing the options
Eventually, the family and the Advisor narrowed the choices to two:
- ESOP: An Employee Stock Ownership Plan would allow the family to sell portions of the business to employees, providing tax benefits for both parties in the process.
- Outright sale: For some owners, selling their company outright is a cleaner option. Under this plan, the family would sell 100% of the business to a buyer from the same industry or with a complementary business model in an M&A transaction.
Selling the business
Given the family’s needs and timeframe, they decided that an outright sale would be best. Their next question: At what price? Like most business owners, the family had an estimate of what they felt the business was worth but did not have a true valuation. After the UBS Advisor and bankers concluded that the company could fetch significantly more than the family’s estimate, the bankers began a competitive auction process to find a buyer. When a competitor ultimately agreed to buy the company with private-equity backing, the sale price was higher still—ultimately more than double the family’s original estimate.
The proceeds were more than sufficient to support the son’s and mother’s future needs. For the father, the arrangement included a deferred compensation plan to help retain key longtime staff, reward them for their loyalty and ensure greater continuity during the ownership transition.
Differentiated service
What enabled the UBS Financial Advisor to achieve the best possible outcome for a family that had been so bitterly divided? The Advisor believes it was a combination of factors, including the ability to bring the resources of UBS to the client relationship, the ability to offer holistic post-liquidity wealth management and helping the family understand their exit options.
Beyond that, the Advisor said it was his willingness to dig deep to understand the needs of each family member and the personal purpose behind their business. By building relationships with each family member during the multi-month engagement, he was able to ease tensions within the family and help them figure out the right way to move forward.
“It was about listening to the clients, but also understanding what was going to make them emotionally happy in the end,” the Advisor said. “It’s more than just a transaction.”
Eight steps for a business transition
Planning toward a smooth transition
As a business owner, you’ve worked hard to build your business. But what about the day when you might want to walk away from it all? Business transition planning is perhaps one of the most complex tasks a business owner will encounter. Many owners have a substantial portion of their family wealth invested in the business, a complexity that requires broader financial planning strategies to address retirement and estate planning needs.
If you lack a comprehensive plan to pass onto your business, now is the time to give serious thought to a formal business transition plan. A well-crafted transition plan identifies a long-term strategy that can inform short-term decisions.
Improve the value of your business
When the time comes to sell a business, many deals collapse during the buyer’s due diligence when problems come to light. So, start cleaning things up before it becomes an issue for a buyer.
As you look to improve the value of your business, think about what factors a prospective buyer will place the most value on. What will drive value for a buyer in the future? Will the business continue to operate effectively and grow if you are no longer at the helm? What roadblocks should be addressed now, instead of closer to the sale?
Reducing business risk is a top priority in a proactive transition strategy. When your business is perceived as a solid opportunity, it may create a competitive buyer environment, increase value, improve negotiation and deal terms, and minimize the time to close the sale.
Preparing for the future sale of your business
Here are eight action steps to help get your business market-ready.
1. Get your business documentation in order. Start by making sure all your business operation and process documentation is up to date. Formalize and extend key customer and vendor contracts and confirm that well-documented processes and procedures are in place.
2. Organize your financial statements. Make sure your financial recordkeeping and reporting are transparent and easy to evaluate. As you think about making your business more professional, look for clear lines of separation between personal and business expenses.
3. Develop formal strategic plans. Start with your business’ core competencies. What is your long-term vision? What is your strategy to diversify your customer base? How will you continue to grow and expand?
Have a strategic plan for each key area of your business, such as sales, marketing, operations, technology, finance and legal. Know how your business is valued in your industry and look to boost the key metrics.
4. Create business succession and contingency plans. Prepare formal succession plans and communicate them to your leadership team. Decisions around who takes over and how can be essential to the survival of your business.
5. See that legal records are in good order. Are your legal contracts in order? Are your employee procedures and agreements solid, with a change in control in place? Are there any environmental, compliance or regulatory issues that need your attention? Is there a chance to extend lease agreements or take a closer look at real estate holdings? Is your intellectual property adequately protected?
6. Secure your leadership team. Be certain you have a leadership team that is ready for a smooth transition when the time comes. The next owner of your business will look for a strong leadership team that will stay with the business through the transition period or longer.
7. Consider a formal board of directors with outside members. Establish an advisory council or a formal board of directors. Look to include outside members who own or have owned successful private companies.
8. Minimize your business’s reliance on you. Many business owners are justifiably proud to be the leading driver of sales and revenue. However, to truly drive a growth strategy, you need to make the business less reliant on you.
Each business is different and preparing for a transition is a complex process. Start thinking about how you can maximize the value of your business today.
Life after the sale of your business
Preparing for what comes next
Where you are today is the result of your passion for the business you’ve built—and a lifetime of work. But what is your vision for life after you walk away from your business? What you do next is critical for you and your family. It’s a time when you need to shift your focus to personal fulfillment, wealth planning and more.
You. Your family. Your employees.
Your business goes to the heart of who you are and what you do. Even for family members, your decision to sell your business may represent a significant change in wealth and status. Some owners have a clear separation between family and their business. However, communicating with those who could benefit the most may be important to a successful plan.
Many owners assure employees that a sale will have no practical impact on them. However, once the sale has gone through and you are no longer involved in the decisions, it can be hard to know. This may mean a period of tension and uncertainty—which can have an emotional impact on you.
Here’s what we heard from business owners:
“ It’s sad and hard when you sell because you’ve not only invested time and money, but also a bit of your soul.”
“ A part of me was delighted but another part of me was sad. The office was like a second home.”
Prepare for your exit
In the February 2018 issue of UBS Investor Watch, we found that 48% of business owners don’t have a formal exit strategy in place. Here are three key tips for getting started.
1. Plan ahead. Long-term planning is key to any successful sale, because it helps you focus on what’s important. Starting planning conversations early with your financial advisor, tax professional and estate planning attorney will help you be confident about your future. Be certain that advanced income, legacy and tax planning are a part of these conversations.
2. Define what you want. Spend time thinking about what you want after the sale. Reflect on your passions and plan for what you want to accomplish. UBS Investor Watch research found that 48% of business owners look forward to traveling more, while 26% plan to give back to their community or causes.
3. Break the silence. UBS Investor Watch research shows that only about 25% of former business owners engaged their children and heirs in a conversation about family wealth. Communicate early about what you expect or hope for. This creates a clearer picture and gives everyone involved a chance to contribute.
The power of emotions
Selling your business is about letting go. This can be a profound change with powerful emotional impacts. For some owners, it’s confusing. For others, there’s a sense of elation. Many talk about feelings of depression and a lack of purpose.
Here’s what we heard from business owners:
“I felt very muted. I didn’t know how to process it.”
“I had to figure out how to deal with a new reality.”
“I had been working hard for a long time. At the beginning, I did nothing, and it was great. People say you get bored, but I didn’t—it was wonderful.”
Planning for life after the sale: the six stages
As business owners contemplate a transition, they wonder what life will look like after the sale. We’ve identified six stages that most owners go through. Think through these questions well before your transition.
1. Recharge. Do you want a vacation or dream purchase? Do you need some time to think? Is an escape and recharge needed?
2. Self. How much money do you have and need? Is your wealth life-changing or life-enhancing?
3. Enabling. What professional advice do you need? Do you have the right advisory team?
4. Family. How should you support your family? Should you set money aside for home purchases and education?
5. Legacy. What do you want to leave for future generations and your employees? How should it be left?
6. Opportunity. How do you find personal fulfillment in the future? How can you best contribute to others?
Whether your transition is a few months or a few years away, it’s important to start planning for how you want to live your life after selling your business.
