Antique collectors and small business owners often have the same nightmares. Antique collectors spend their life amassing a collection of 17th century glassware. They proudly display it in their home. They die. Their children who live faraway and rarely visit clear out the house and settle the estate. That “old glass” goes into a dumpster. A huge amount of value is lost as the heirs wonder why the expected money has somehow disappeared.
The small business owner doesn’t think their factory or shop will end up in the dumpster, but it might be sold at a fire sale for a fraction of its true value. As a financial advisor, how can you help your client?
Your business-owning client needs an exit strategy. This is not a deathbed decision. It is a decision that requires years of advance planning. Let us look at eight possible solutions for achieving that goal of a successful retirement.
1. The next generation steps up
According to PwC, 67% of U.S. family-owned businesses have the next generation working in the business. Yet only one-third (34%) of U.S. family businesses say they have a robust, documented and communicated succession plan in place, the survey found. It’s true that many family businesses have trouble transitioning from one generation to the next — they may no longer be in the legacy business, they may have been sold to outsiders or they may even have failed. But it may certainly help the longevity of the operation if the younger generation gets involved, and it may give the older generation the ability to step back or retire. The ideal strategy is to groom the next generation to take the reins.
2. Bring in outside professional management
This is what the Marriott family famously did. Arne Sorenson started as an attorney at Marriott in 1996. During his career he became CFO and COO, and then in 2012, CEO. He was the third CEO in Marriot’s history and the first non-family member to lead the firm. This strategy may not work for many small businesses, but it can be a good strategy when the owner wants to keep the company under family ownership, but the family either isn’t interested or is not the best choice for running the business. Eventually, founders and entrepreneurs realize they need managers.
3. Sell the business to the employees
“What happens to our people” is a big concern for business owners. They have longtime employees who built their careers at the firm. Turnover is low, which speaks to employee loyalty. The owner does not want to place them at a disadvantage. They also know the value of the company rests with the employees and the loyal customer base. Another strategy is to sell the business to your employees. This is referred to as an Employee Stock Ownership Plan or ESOP. The business is valued. The owner is given an interest-paying note representing future payment, often secured by the stock of the company. The owner is gradually paid off over time through company profits. It’s not immediate cash, but the owner knows the company is in good hands. Can your firm help your client set up an ESOP?
4. Is the value in the real estate?
Suppose years ago, your couple client set up a storefront dry-cleaning business. Over time, they bought the building and ran the business themselves, rarely taking any time off. As they approach their golden years, they decide they would like to stop working. It is time to sell. Did I mention the dry-cleaning business in on Lexington Avenue on the Upper East Side of Manhattan? The value of the business based on the annual revenue pales in comparison to the value of the real estate! Closing the business and selling the property can be extremely lucrative when the property will be redeveloped by the purchaser.
5. Merge with another local business
Another client runs a print shop in town. They’ve been there for years, and decide they want to expand. One of the easiest ways to do it is to buy another healthy business in the same field and become a larger firm. Either your client buys out someone who is struggling, or they find someone seeking to expand and sell their business to them. The actual transaction might be more like a merger because the value of your client’s business might be in their customer base. The new owner wants those clients to remain clients. Your client still needs to be their own clients’ point of contact until he or she retires. This type of sale tends to pay off over time as your client’s loyal client base becomes their loyal client base.
6. Take on a younger partner
This strategy is similar to bringing in professional management. Your client hires and trains several people. Gradually, your client realizes which employees are the best — the ones capable of leading the business into the future. Your client then gives the younger partner a path to make the transition from employee to partner. Over time, you transition into the role of silent partner. You are giving up full ownership and no longer get all the profits, but you gain time to enjoy retirement.
7. Sell to a private equity firm
If you read business magazines you are aware private equity firms are buying into lots of industries. You might have heard how private equity firms are buying veterinary practices, registered investment advisory firms or air ambulance services. A firm might specialize in one sector, buying into individual businesses and operating them as a group while bringing in economies of scale. Is your client in an industry that’s attracting the attention of private equity investors?
8. Prepare the company for sale
The traditional way to exit a business is to sell it to someone else. Business brokers sell businesses like real estate brokers sell houses. Athletes train for months before the season starts. You try to lose weight before visiting your family doctor and stepping on the scale. Your client needs to get their business into shape before selling it. This means boosting revenue and cutting expenses. Getting a realistic valuation of the business is most important because that’s the basis of the negotiation and eventual deal.
Selling a business is different than selling stock in an investment portfolio. It is more similar to selling a house. You are getting the business into the best shape possible with the objective of getting the highest price possible. It takes advance planning. This is an area when you can help your client from a financial planning perspective.
Bryce Sanders is president of Perceptive Business Solutions Inc. He provides HNW client acquisition training for the financial services industry. His book, “Captivating the Wealthy Investor,” is available on Amazon.