Issue 30: 2015

Your Business

Navigating Your Sale

How to chart your course and pick your crew after you decide to sell your business.

Chris Ryan/Gallery stock

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Running your own business is often more than a full-time job. So-called business hours demand focus on product, people and customers, while the rest of the day — and often night — is devoted to strategy.

Years of careful planning and effort go into making a company a success. Creating something out of nothing and sustaining it demands courage, hard work, perseverance, personal sacrifice and financial risk. For most business owners, it is simply a labor of love.

Eventually, though, the moment comes when the owner must decide who the next owners of the business will be. Here, we focus on the most frequent choice — the outright sale to a third party.

Most owners are surprised by the sheer complexity of the sale process, and the vast divide between the skills required to build and run a business and those required to sell it. Our goal is to shine a light on the latter set of skills — the key questions, assembling the necessary deal team, and the steps required to sell your business at full value.

First steps: A case study

Thirty years into building his company, John Kelly created a new concept. Eighteen months of challenging work later, John’s company has a new client segment and a new product set. With sales contracts in place, revenue will likely rise by double digits over the next five years. With the expected growth in EBITDA (earnings before interest, taxes, depreciation and amortization), John expects the company’s value to jump significantly.

He is wondering what to do. The company will almost certainly outlast his career and probably his lifetime. Yet his outside investments, excluding IRAs, are still less than the company’s excess cash. Meanwhile, he’s about to celebrate the birth of his sixth grandchild, his 36th wedding anniversary and his 60th birthday.  

While his professional goals are largely achieved, some personal goals remain. John and his wife, Mary, have discussed gifts to their kids and educational trusts for their grandchildren, as well as a substantial donation to the medical facility that cared for both of their kids and two of their grandkids. He knows it’s time to move ahead, but he’s not sure how.

Over the course of a breakfast meeting with his attorney, accountant and wealth management advisor, John begins to form a plan to sell his company. He realizes immediately that the involvement of these advisors will be critical before, during and after the transaction.

Many factors require John’s consideration:

  • What type of scrutiny will there be? John will need to prepare historical and projected financial statements including an income statement, cash flow statement and balance sheet. Historical numbers will be audited. And potential buyers will check for obsolete inventory or aged receivables.
  • Who is on the transaction team? John will have to focus on his trusted inner circle, creating a core internal group of his management team that can maintain confidentiality. He should consider incentives to keep this team focused on both the day to day and a successful sale.  
  • What’s my personal financial plan? John needs to build a personal balance sheet, outline financial goals, learn how to transfer wealth efficiently and prepare his kids to handle their new wealth.
  • Is it a sale to a strategic or financial buyer? Since John’s children aren’t interested in going into the business, he needs to consider a third party, whether to retain a minority stake, and the type of buyer. This last item can impact whether the owner is asked to stay on with — or leave — the company.
  • What’s my role in the company post sale? Will the buyer insist on a noncompete agreement? Would John still be able to run research and development while shedding the rest? Could a consulting agreement or earn-out defer some income and capital gains taxes?

After the meeting, John and Mary sketched out their personal goals:

  • Give their kids gifts of $1 million each.
  • Give approximately 10% of the sale price as a gift to the Memorial Hospital NICU.
  • Spend 25% of each year traveling.

John meets again with his attorney, accountant and wealth management advisor to examine these goals and begin assembling the external team to work through the issues. John’s business lawyer refers him to a trust and estate lawyer and a transaction attorney. His wealth management advisor provides referrals to a business appraiser and merger and acquisition (M&A) advisor.

Your Deal Team

The Wealth Management Advisor

The wealth advisor focuses on the personal wealth management aspects of the transaction. “We are often the first to arrive and continue to serve the client long after the company’s sale,” says Mitchell A. Drossman, national director of wealth planning strategies for U.S. Trust.

FINDING A SECOND AFTER THE SALERead more
Finding a Second Act After The Sale

A case study from The Owner’s Journey

 

In 1985, David Karangu, a college student and immigrant from Kenya, accepted a student internship for two summers at a car dealership in Baltimore. The first summer he did manual labor; the second he did finance and sales. He found he had a passion for cars, and continued to work at dealerships for a major car company until, before he was 30, he partnered with the same major car company to start a dealership of his own.

David’s first business was successful enough for him to pay off his multimillion-dollar loans in 14 months. With continued success, he went on to buy and grow multiple dealerships over the next 10 years. Then, in 2007, someone from a large publicly traded holding company for dealerships offered to buy David’s entire portfolio. After some back and forth, the company offered a sum that David knew was too good to pass up.

But after the closing, David began to feel that he not only had given up his company and his employees but also, in a way, his identity — his entire adult life had been built inside the auto dealership world. His experience was fairly typical. Many entrepreneurs have a difficult time after the sale of a business, and David had a particularly rough time deciding on his next steps. Today, however, David is a different person from the young man he was back when he started his internship. He wants to find a business opportunity to start and grow with the same passion and success as he did with the dealerships. And now he has the time to find it.

For more, read The Owner’s Journey at ustrust.com/ownersjourney.

Photo: GS/Gallery Stock

“At U.S. Trust, we begin by talking at length about post-transaction objectives in terms of income, wealth transfer and philanthropy,” he says. “We also need a thorough understanding of an owner’s financial situation, including an analysis of health and other benefits received through the business.

“As the results of the 2015 U.S. Trust Insights on Wealth and Worth® survey revealed, most business owners’ financial assets and income are tied to their business, and, on average, 60% of their annual household income comes from earned income. These things are key when determining what owners will need to replace business income and maintain their desired lifestyle.

“Once we understand the owner’s priorities and financial situation, we can explore solutions. An upcoming transaction, for example, presents an excellent opportunity for owners to shift assets off personal balance sheets while still keeping them within the family and potentially minimizing tax implications,” Drossman says. “If we’re involved early, we can explore a variety of vehicles that may enable owners to transfer some or all of the upside potential of the business out of their estate.”

Widely used strategies include the grantor-retained annuity trust (GRAT) and the sale of assets to an intentionally defective grantor trust (IDGT) in exchange for a note. “In their simplest forms, both transfer the upside potential of the asset, rather than the asset itself.”

Drossman also recommends developing an investment plan for the sale proceeds prior to the sale. A sound plan will factor in the owner’s return requirements and risk tolerance, and reflect an understanding of the owner’s financial life after a sale.

“It’s important to remember that tax-saving strategies evaporate as the sale approaches. Starting your wealth transfer, income tax and investment planning as early as possible can often save substantial amounts of money and maximize opportunities to create more wealth moving forward,” Drossman says.

The Business Appraiser

Another key early member of the deal team, business appraisers provide opinions of value on the enterprise, stock involved in pretransaction gifting and management compensation, as well as intangible assets. “Business appraisers, or valuation advisors, are involved in the sale process, but they are often engaged long before the sale gets under way,” says Curtis Kimball, national director of wealth management valuations for Willamette Management Associates, a business valuation, forensic analysis, and financial advisory services firm. This often identifies value in intangible assets, intellectual property and goodwill for tax and financial reporting purposes.

FINDING A BUYER WHEN ONE ISN’T APPARENTRead more
Finding a Buyer When One Isn’t Apparent

A case study from The Owner’s Journey

 

Doctor M. Alan Bagden always planned to retire when he turned 65, but in order to make that happen, he needed to sell the orthodontics practice he’d built since 1987. However, even though his practice was top tier, buyers were sparse.

Alan’s two sons had built careers in other fields, so he couldn’t pass the business to them. The ambitious young orthodontist Alan had hired years earlier was also out — she was more interested in working as an employee, especially since she was 49 years old and could see that, if she took out the loans to buy the practice, she wouldn’t be able to retire at 65. And when Alan looked for younger orthodontists, he discovered that most carried student loans of as much as $700,000 and didn’t have the wealth or credit history to make a suitable partner or a credible buyer.

Luckily, Alan had advisors who had experience selling businesses. They set him up with a business broker specializing in orthodontic practices, and the two began working about a year prior to the sale. The broker used the practice’s stellar reputation to find established and growing corporate buyers. Alan liked having a middleman market his practice, while also keeping his values in mind.

In the end, the broker found a buyer who suited Alan’s needs, and who made the process run smoothly. Alan even remained involved as a consultant. Now Alan’s practice is thriving, and he’s achieved his retirement goals.

For more, read The Owner’s Journey at ustrust.com/ownersjourney.

Photo: GS/Gallery Stock

“There’s often a phase of the sale that incorporates the owner’s plan to transfer ownership interests to other parties who could benefit from the eventual sale,” he says. “An owner may decide to gift or sell minority interests to children, or make a charitable gift. Those gifts have to be substantiated with an independent appraisal. If the seller has objectives in either of these areas, a valuation advisor is necessary.”

Appraisers are also required whenever company equity is offered to management as part of compensation or when company shares are owned in an employee stock ownership plan (ESOP).

Appraisers can also “identify value drivers for companies and industries, as well as potential buyer concerns in a consulting context, without issuing a formal appraisal,” Kimball says.

“It is critical to take many of these valuation steps before the company is in play,” he says. Does Kimball have any advice for owners contemplating a sale? “I would ask any owner thinking about selling their company to look into their hearts and think through what they’re going to do with their lives after the sale and whether it will really make them happy.”

The Transactional Attorney

Among other things, transactional attorneys guide on structure, obstacles and critical deal terms. They also ensure compliance with regulatory requirements and work through any deals with management incentives.

“It’s important to know that we do more than draft agreements,” says Stuart M. Cable, chair of the M&A group at the international law firm of Goodwin Procter. “We negotiate every term and condition other than price.

“We understand the prevailing market practices in both strategic and private equity transactions, so we can advise the seller and M&A advisor as to whether the proposed deal is better, on par or worse than market terms,” he says.

What advice would Cable give to our hypothetical business owner, John Kelly? “The first order of business is to assemble a collaborative team of experts in whom you have trust and confidence. The team should include an investment banker and an M&A attorney. You should anticipate a six-month process. You should consider carefully the motivation and incentives of your key employees. You should also commission an up-front legal diligence review so that you identify and remediate any major legal impediments to value maximization before you are confronted with those issues by your buyer.”

Cable also highlights the importance of discussing with owners how they go to market, their interest in maintaining a role in the business, and how they are going to handle key people pre- and post-sale.

Does Cable have any final advice? “Trust your deal team,” he says. “This isn’t always easy, but the best results happen when the owner makes important strategic decisions but doesn’t dig in too deep on day-to-day tactical decisions.”

The Merger and Acquisition (M&A) Advisor

While M&A advisors take center stage as the sale approaches — marketing the company to a qualified pool of investors — these critical members of the deal team are often active throughout the sale process. “Long before the bidding starts, we focus on sources of value, working with the owner and the deal team to put into place those factors that will facilitate the sale,” says Peter R. Worrell, Managing Director and CEO of Bigelow LLC, an independently owned M&A advisory firm.

FINDING A WAY TO KEEP THE REINSRead more
Finding a Way to Keep The Reins

A case study from The Owner’s Journey

 

Scott Belsky saw an opportunity to help the creative community. Although in high demand, creative professionals were some of the most disorganized people on the planet. Photographers, brand developers and graphic designers compelled people to take action, to buy things and to become passionate, but they needed a central place to connect and showcase their work.

In 2006, Scott started a website where people could do just that. The goal was to enhance the community, so he called it Behance. From 2006 to 2012, he built Behance from the ground up, supported by a few hundred thousand dollars from fundraising. In 2012, he raised an additional $6 million based on a $36 million valuation, which allowed Scott to retain the talent he had and bring on new members.

During the process, Scott never considered an exit strategy. “Does an artist think about the price they will sell a painting for when they create their work?” he asks.

Soon, the Behance team grew from 12 to 32 people and their users quadrupled in a single year. Then a buyer came knocking. A major supplier of creative software was looking to expand into the service business, and saw Behance as a major stepping stone — one they aggressively pursued. Scott thought it was too early to be acquired, but the company kept raising the price, eventually offering $150 million.

Scott accepted the offer, but made sure that it wasn’t the end of Behance. He worked with the software company to ensure that his vision continued, and that his staff, 12 of whom became millionaires in the deal, kept their jobs. Two years after the deal, the Behance network continues to grow, and because Scott was clear on his goals, his team is still running the site.

For more, read The Owner’s Journey at ustrust.com/ownersjourney.

Photo: Chris Ryan/Gallery Stock

Worrell says, “At Bigelow, the first couple of meetings with an owner center around the subject of timing — for the owner, the company and the industry.

“For the owner, the question is whether he or she is ready to let go of running the company both professionally and personally. There is a moment of simultaneity we look for when professional goals are reached and the owner is ready to sell.”

The same goes for the company. “We would evaluate the company and its readiness for the process,” Worrell says. “We would assist the owner in understanding the viability of a complete sale or perhaps a partial sale.”

Then there’s the industry question. “The state of the industry can determine whether it’s possible to create a market for the company,” Worrell says. “If the industry is in favor, then anything can happen. If it’s not, almost nothing can happen. The timing of your decision needs to be considered in the context of your industry.” He adds, “Sometimes an industry not in favor is opportune. It provides an owner the chance to prepare for sale, develop untapped value and remove impediments.”

When the timing is right, the deal team can begin. “We assemble data on the business and advise the owner about how best to position the company to the investor,” says Worrell. “We seek out the best financial and strategic investors and initiate a dialogue. We ensure that potential buyers have access to information, but only in proportion to their demonstrated desire and capacity to acquire.

“Eventually we get to a point where the owner can understand what the alternatives are in terms of deal structures and the likely valuation range of a final offer.” However, the private market is often opaque and risky. The seller is facing a market of investors, all of whom have more experience than the seller typically has. “Our role is to level the playing field,” Worrell says.

In the early stages, Bigelow serves as the primary contact with potential buyers, allowing the owner/manager to focus on the company and its stakeholders. “We’re also working closely with the deal team on the owner’s behalf,” he says.

Worrell agrees that owners need to think about what life
will be like post-sale. “It could change as little as having a new boss, or as great as no longer having a job. I’ve never met an owner who’s correctly estimated just how difficult it was going to be. The good news is that most owners get through it okay in the end.”

After the deal closes

“The sale of a company is more like a marathon than a sprint,” says Andrew Tanner, national manager of U.S. Trust’s private business group.

During the process, a successful transaction usually becomes clear. “With a well-chosen deal team in place, chances are that the owner has been giving thought to the deployment of both the cash proceeds from the transaction and his or her own human capital,” says Tanner.

“In terms of reinvesting the proceeds, the wealth management team will have been positioning investments in advance of the sale and developing a post-sale investment plan,” he says.

The transition from being entirely invested in the company to having mostly liquid assets and an open calendar can be both exhilarating and challenging.

For most business owners, though, post-transaction life gets easier over time. “Just as careful planning and a great deal team can streamline the transaction process,” says Tanner, “thinking through post-transaction life and anticipating potential challenges can make it even easier.”

Photographs of rowing teams by GS/Gallery Stock

IMPORTANT INFORMATION

Some of the featured participants are not employees of U.S. Trust. The opinions and conclusions expressed are not necessarily those of U.S. Trust or its personnel. Any of their discussions concerning investments should not be considered a solicitation or recommendation by U.S. Trust and may not be profitable.

Any information presented about tax considerations affecting client financial transactions or arrangements is not intended as tax advice and should not be relied upon for the purpose of avoiding any tax penalties. Neither U.S. Trust and its representatives nor its advisors provide tax, accounting or legal advice. Clients should review any planned financial transactions or arrangements that may have tax, accounting or legal implications with their personal professional advisors.

Always consult with your independent attorney, tax advisor, investment manager and insurance agent for final recommendations and before changing or implementing any financial, tax or estate planning strategy.

OTHER IMPORTANT INFORMATION

Case studies are intended to illustrate products and services available through U.S. Trust. The case studies presented are based on actual experiences. You should not consider these as an endorsement of U.S. Trust or as a testimonial about a client’s experiences with us. Case studies do not necessarily represent the experiences of other clients, nor do they indicate future performance. Investment results may vary. The investment strategies discussed are not appropriate for every investor and should be considered given a person’s investment objectives, financial situation and particular needs. Clients should review with their U.S. Trust advisor the terms, conditions and risks involved with specific products and services.

The 2015 U.S. Trust Insights on Wealth and Worth® survey is based on a nationwide survey of 640 high-net-worth and ultra-high-net-worth adults with at least $3 million in investable assets, not including the value of their primary residence. Among respondents, 55 percent have between $3 million and $5 million in investable assets, 32 percent have between $5 million, and $10 million, and 13 percent have $10 million or more. The survey was conducted online by the independent research firm Phoenix Marketing International in January and February of 2015. Asset information was self-reported by the respondent. Verification for respondent qualification occurred at the panel company, using algorithms in place to ensure consistency of information provided, and was confirmed with questions from the survey itself. All data have been tested for statistical significance at the 95 percent confidence level.

Running your own business is often more than a full-time job. So-called business hours demand focus on product, people and customers, while the rest of the day — and often night — is devoted to strategy.

Years of careful planning and effort go into making a company a success. Creating something out of nothing and sustaining it demands courage, hard work, perseverance, personal sacrifice and financial risk. For most business owners, it is simply a labor of love.

Eventually, though, the moment comes when the owner must decide who the next owners of the business will be. Here, we focus on the most frequent choice — the outright sale to a third party.

Most owners are surprised by the sheer complexity of the sale process, and the vast divide between the skills required to build and run a business and those required to sell it. Our goal is to shine a light on the latter set of skills — the key questions, assembling the necessary deal team, and the steps required to sell your business at full value.

First steps: A case study

Thirty years into building his company, John Kelly created a new concept. Eighteen months of challenging work later, John’s company has a new client segment and a new product set. With sales contracts in place, revenue will likely rise by double digits over the next five years. With the expected growth in EBITDA (earnings before interest, taxes, depreciation and amortization), John expects the company’s value to jump significantly.

He is wondering what to do. The company will almost certainly outlast his career and probably his lifetime. Yet his outside investments, excluding IRAs, are still less than the company’s excess cash. Meanwhile, he’s about to celebrate the birth of his sixth grandchild, his 36th wedding anniversary and his 60th birthday.  

While his professional goals are largely achieved, some personal goals remain. John and his wife, Mary, have discussed gifts to their kids and educational trusts for their grandchildren, as well as a substantial donation to the medical facility that cared for both of their kids and two of their grandkids. He knows it’s time to move ahead, but he’s not sure how.

Over the course of a breakfast meeting with his attorney, accountant and wealth management advisor, John begins to form a plan to sell his company. He realizes immediately that the involvement of these advisors will be critical before, during and after the transaction.

Many factors require John’s consideration:

  • What type of scrutiny will there be? John will need to prepare historical and projected financial statements including an income statement, cash flow statement and balance sheet. Historical numbers will be audited. And potential buyers will check for obsolete inventory or aged receivables.
  • Who is on the transaction team? John will have to focus on his trusted inner circle, creating a core internal group of his management team that can maintain confidentiality. He should consider incentives to keep this team focused on both the day to day and a successful sale.  
  • What’s my personal financial plan? John needs to build a personal balance sheet, outline financial goals, learn how to transfer wealth efficiently and prepare his kids to handle their new wealth.
  • Is it a sale to a strategic or financial buyer? Since John’s children aren’t interested in going into the business, he needs to consider a third party, whether to retain a minority stake, and the type of buyer. This last item can impact whether the owner is asked to stay on with — or leave — the company.
  • What’s my role in the company post sale? Will the buyer insist on a noncompete agreement? Would John still be able to run research and development while shedding the rest? Could a consulting agreement or earn-out defer some income and capital gains taxes?

After the meeting, John and Mary sketched out their personal goals:

  • Give their kids gifts of $1 million each.
  • Give approximately 10% of the sale price as a gift to the Memorial Hospital NICU.
  • Spend 25% of each year traveling.

John meets again with his attorney, accountant and wealth management advisor to examine these goals and begin assembling the external team to work through the issues. John’s business lawyer refers him to a trust and estate lawyer and a transaction attorney. His wealth management advisor provides referrals to a business appraiser and merger and acquisition (M&A) advisor.

Your Deal Team

The Wealth Management Advisor

The wealth advisor focuses on the personal wealth management aspects of the transaction. “We are often the first to arrive and continue to serve the client long after the company’s sale,” says Mitchell A. Drossman, national director of wealth planning strategies for U.S. Trust.

FINDING A SECOND AFTER THE SALERead more
Finding a Second Act After The Sale

A case study from The Owner’s Journey

 

In 1985, David Karangu, a college student and immigrant from Kenya, accepted a student internship for two summers at a car dealership in Baltimore. The first summer he did manual labor; the second he did finance and sales. He found he had a passion for cars, and continued to work at dealerships for a major car company until, before he was 30, he partnered with the same major car company to start a dealership of his own.

David’s first business was successful enough for him to pay off his multimillion-dollar loans in 14 months. With continued success, he went on to buy and grow multiple dealerships over the next 10 years. Then, in 2007, someone from a large publicly traded holding company for dealerships offered to buy David’s entire portfolio. After some back and forth, the company offered a sum that David knew was too good to pass up.

But after the closing, David began to feel that he not only had given up his company and his employees but also, in a way, his identity — his entire adult life had been built inside the auto dealership world. His experience was fairly typical. Many entrepreneurs have a difficult time after the sale of a business, and David had a particularly rough time deciding on his next steps. Today, however, David is a different person from the young man he was back when he started his internship. He wants to find a business opportunity to start and grow with the same passion and success as he did with the dealerships. And now he has the time to find it.

For more, read The Owner’s Journey at ustrust.com/ownersjourney.

Photo: GS/Gallery Stock

“At U.S. Trust, we begin by talking at length about post-transaction objectives in terms of income, wealth transfer and philanthropy,” he says. “We also need a thorough understanding of an owner’s financial situation, including an analysis of health and other benefits received through the business.

“As the results of the 2015 U.S. Trust Insights on Wealth and Worth® survey revealed, most business owners’ financial assets and income are tied to their business, and, on average, 60% of their annual household income comes from earned income. These things are key when determining what owners will need to replace business income and maintain their desired lifestyle.

“Once we understand the owner’s priorities and financial situation, we can explore solutions. An upcoming transaction, for example, presents an excellent opportunity for owners to shift assets off personal balance sheets while still keeping them within the family and potentially minimizing tax implications,” Drossman says. “If we’re involved early, we can explore a variety of vehicles that may enable owners to transfer some or all of the upside potential of the business out of their estate.”

Widely used strategies include the grantor-retained annuity trust (GRAT) and the sale of assets to an intentionally defective grantor trust (IDGT) in exchange for a note. “In their simplest forms, both transfer the upside potential of the asset, rather than the asset itself.”

Drossman also recommends developing an investment plan for the sale proceeds prior to the sale. A sound plan will factor in the owner’s return requirements and risk tolerance, and reflect an understanding of the owner’s financial life after a sale.

“It’s important to remember that tax-saving strategies evaporate as the sale approaches. Starting your wealth transfer, income tax and investment planning as early as possible can often save substantial amounts of money and maximize opportunities to create more wealth moving forward,” Drossman says.

The Business Appraiser

Another key early member of the deal team, business appraisers provide opinions of value on the enterprise, stock involved in pretransaction gifting and management compensation, as well as intangible assets. “Business appraisers, or valuation advisors, are involved in the sale process, but they are often engaged long before the sale gets under way,” says Curtis Kimball, national director of wealth management valuations for Willamette Management Associates, a business valuation, forensic analysis, and financial advisory services firm. This often identifies value in intangible assets, intellectual property and goodwill for tax and financial reporting purposes.

FINDING A BUYER WHEN ONE ISN’T APPARENTRead more
Finding a Buyer When One Isn’t Apparent

A case study from The Owner’s Journey

 

Doctor M. Alan Bagden always planned to retire when he turned 65, but in order to make that happen, he needed to sell the orthodontics practice he’d built since 1987. However, even though his practice was top tier, buyers were sparse.

Alan’s two sons had built careers in other fields, so he couldn’t pass the business to them. The ambitious young orthodontist Alan had hired years earlier was also out — she was more interested in working as an employee, especially since she was 49 years old and could see that, if she took out the loans to buy the practice, she wouldn’t be able to retire at 65. And when Alan looked for younger orthodontists, he discovered that most carried student loans of as much as $700,000 and didn’t have the wealth or credit history to make a suitable partner or a credible buyer.

Luckily, Alan had advisors who had experience selling businesses. They set him up with a business broker specializing in orthodontic practices, and the two began working about a year prior to the sale. The broker used the practice’s stellar reputation to find established and growing corporate buyers. Alan liked having a middleman market his practice, while also keeping his values in mind.

In the end, the broker found a buyer who suited Alan’s needs, and who made the process run smoothly. Alan even remained involved as a consultant. Now Alan’s practice is thriving, and he’s achieved his retirement goals.

For more, read The Owner’s Journey at ustrust.com/ownersjourney.

Photo: GS/Gallery Stock

“There’s often a phase of the sale that incorporates the owner’s plan to transfer ownership interests to other parties who could benefit from the eventual sale,” he says. “An owner may decide to gift or sell minority interests to children, or make a charitable gift. Those gifts have to be substantiated with an independent appraisal. If the seller has objectives in either of these areas, a valuation advisor is necessary.”

Appraisers are also required whenever company equity is offered to management as part of compensation or when company shares are owned in an employee stock ownership plan (ESOP).

Appraisers can also “identify value drivers for companies and industries, as well as potential buyer concerns in a consulting context, without issuing a formal appraisal,” Kimball says.

“It is critical to take many of these valuation steps before the company is in play,” he says. Does Kimball have any advice for owners contemplating a sale? “I would ask any owner thinking about selling their company to look into their hearts and think through what they’re going to do with their lives after the sale and whether it will really make them happy.”

The Transactional Attorney

Among other things, transactional attorneys guide on structure, obstacles and critical deal terms. They also ensure compliance with regulatory requirements and work through any deals with management incentives.

“It’s important to know that we do more than draft agreements,” says Stuart M. Cable, chair of the M&A group at the international law firm of Goodwin Procter. “We negotiate every term and condition other than price.

“We understand the prevailing market practices in both strategic and private equity transactions, so we can advise the seller and M&A advisor as to whether the proposed deal is better, on par or worse than market terms,” he says.

What advice would Cable give to our hypothetical business owner, John Kelly? “The first order of business is to assemble a collaborative team of experts in whom you have trust and confidence. The team should include an investment banker and an M&A attorney. You should anticipate a six-month process. You should consider carefully the motivation and incentives of your key employees. You should also commission an up-front legal diligence review so that you identify and remediate any major legal impediments to value maximization before you are confronted with those issues by your buyer.”

Cable also highlights the importance of discussing with owners how they go to market, their interest in maintaining a role in the business, and how they are going to handle key people pre- and post-sale.

Does Cable have any final advice? “Trust your deal team,” he says. “This isn’t always easy, but the best results happen when the owner makes important strategic decisions but doesn’t dig in too deep on day-to-day tactical decisions.”

The Merger and Acquisition (M&A) Advisor

While M&A advisors take center stage as the sale approaches — marketing the company to a qualified pool of investors — these critical members of the deal team are often active throughout the sale process. “Long before the bidding starts, we focus on sources of value, working with the owner and the deal team to put into place those factors that will facilitate the sale,” says Peter R. Worrell, Managing Director and CEO of Bigelow LLC, an independently owned M&A advisory firm.

FINDING A WAY TO KEEP THE REINSRead more
Finding a Way to Keep The Reins

A case study from The Owner’s Journey

 

Scott Belsky saw an opportunity to help the creative community. Although in high demand, creative professionals were some of the most disorganized people on the planet. Photographers, brand developers and graphic designers compelled people to take action, to buy things and to become passionate, but they needed a central place to connect and showcase their work.

In 2006, Scott started a website where people could do just that. The goal was to enhance the community, so he called it Behance. From 2006 to 2012, he built Behance from the ground up, supported by a few hundred thousand dollars from fundraising. In 2012, he raised an additional $6 million based on a $36 million valuation, which allowed Scott to retain the talent he had and bring on new members.

During the process, Scott never considered an exit strategy. “Does an artist think about the price they will sell a painting for when they create their work?” he asks.

Soon, the Behance team grew from 12 to 32 people and their users quadrupled in a single year. Then a buyer came knocking. A major supplier of creative software was looking to expand into the service business, and saw Behance as a major stepping stone — one they aggressively pursued. Scott thought it was too early to be acquired, but the company kept raising the price, eventually offering $150 million.

Scott accepted the offer, but made sure that it wasn’t the end of Behance. He worked with the software company to ensure that his vision continued, and that his staff, 12 of whom became millionaires in the deal, kept their jobs. Two years after the deal, the Behance network continues to grow, and because Scott was clear on his goals, his team is still running the site.

For more, read The Owner’s Journey at ustrust.com/ownersjourney.

Photo: Chris Ryan/Gallery Stock

Worrell says, “At Bigelow, the first couple of meetings with an owner center around the subject of timing — for the owner, the company and the industry.

“For the owner, the question is whether he or she is ready to let go of running the company both professionally and personally. There is a moment of simultaneity we look for when professional goals are reached and the owner is ready to sell.”

The same goes for the company. “We would evaluate the company and its readiness for the process,” Worrell says. “We would assist the owner in understanding the viability of a complete sale or perhaps a partial sale.”

Then there’s the industry question. “The state of the industry can determine whether it’s possible to create a market for the company,” Worrell says. “If the industry is in favor, then anything can happen. If it’s not, almost nothing can happen. The timing of your decision needs to be considered in the context of your industry.” He adds, “Sometimes an industry not in favor is opportune. It provides an owner the chance to prepare for sale, develop untapped value and remove impediments.”

When the timing is right, the deal team can begin. “We assemble data on the business and advise the owner about how best to position the company to the investor,” says Worrell. “We seek out the best financial and strategic investors and initiate a dialogue. We ensure that potential buyers have access to information, but only in proportion to their demonstrated desire and capacity to acquire.

“Eventually we get to a point where the owner can understand what the alternatives are in terms of deal structures and the likely valuation range of a final offer.” However, the private market is often opaque and risky. The seller is facing a market of investors, all of whom have more experience than the seller typically has. “Our role is to level the playing field,” Worrell says.

In the early stages, Bigelow serves as the primary contact with potential buyers, allowing the owner/manager to focus on the company and its stakeholders. “We’re also working closely with the deal team on the owner’s behalf,” he says.

Worrell agrees that owners need to think about what life
will be like post-sale. “It could change as little as having a new boss, or as great as no longer having a job. I’ve never met an owner who’s correctly estimated just how difficult it was going to be. The good news is that most owners get through it okay in the end.”

After the deal closes

“The sale of a company is more like a marathon than a sprint,” says Andrew Tanner, national manager of U.S. Trust’s private business group.

During the process, a successful transaction usually becomes clear. “With a well-chosen deal team in place, chances are that the owner has been giving thought to the deployment of both the cash proceeds from the transaction and his or her own human capital,” says Tanner.

“In terms of reinvesting the proceeds, the wealth management team will have been positioning investments in advance of the sale and developing a post-sale investment plan,” he says.

The transition from being entirely invested in the company to having mostly liquid assets and an open calendar can be both exhilarating and challenging.

For most business owners, though, post-transaction life gets easier over time. “Just as careful planning and a great deal team can streamline the transaction process,” says Tanner, “thinking through post-transaction life and anticipating potential challenges can make it even easier.”

Photographs of rowing teams by GS/Gallery Stock

IMPORTANT INFORMATION

Some of the featured participants are not employees of U.S. Trust. The opinions and conclusions expressed are not necessarily those of U.S. Trust or its personnel. Any of their discussions concerning investments should not be considered a solicitation or recommendation by U.S. Trust and may not be profitable.

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OTHER IMPORTANT INFORMATION

Case studies are intended to illustrate products and services available through U.S. Trust. The case studies presented are based on actual experiences. You should not consider these as an endorsement of U.S. Trust or as a testimonial about a client’s experiences with us. Case studies do not necessarily represent the experiences of other clients, nor do they indicate future performance. Investment results may vary. The investment strategies discussed are not appropriate for every investor and should be considered given a person’s investment objectives, financial situation and particular needs. Clients should review with their U.S. Trust advisor the terms, conditions and risks involved with specific products and services.

The 2015 U.S. Trust Insights on Wealth and Worth® survey is based on a nationwide survey of 640 high-net-worth and ultra-high-net-worth adults with at least $3 million in investable assets, not including the value of their primary residence. Among respondents, 55 percent have between $3 million and $5 million in investable assets, 32 percent have between $5 million, and $10 million, and 13 percent have $10 million or more. The survey was conducted online by the independent research firm Phoenix Marketing International in January and February of 2015. Asset information was self-reported by the respondent. Verification for respondent qualification occurred at the panel company, using algorithms in place to ensure consistency of information provided, and was confirmed with questions from the survey itself. All data have been tested for statistical significance at the 95 percent confidence level.