IronBridge Private Wealth

Forward with Confidence

selling a business

Value Your Business like it’s Your Retirement Plan, Because it is.

Building a successful business can take decades. While working to grow, it’s common to use all available assets above the salary you pay yourself to fund future expansion. Where does that leave you on the retirement side of things? For most business owners, the retirement plan is some form of exit and monetization of your investment.

As you get close to a transition, valuing the business is paramount. The value comes first, and then the sale, and only then do many business owners think about how the sale proceeds will fund retirement. 

There’s a better way. Start with the amount of money you need to live the retired life you want. That’s your benchmark of the value you want to get for your business. Then work from there to create the value you need.

A Different Valuation Metric: What Do You Need to Retire?

Creating a retirement lifestyle should be about your goals, dreams, and plans for what you want to accomplish in the last several decades of your life. It shouldn’t be about plugging a number into a glorified spreadsheet and then eking a life out of whatever income pops out.

Think of it in three stages:

  1. What’s most important to you in the early stages of retirement? Travel? Family? Starting another business? How much will that cost?
  2. As you age, what do you want your life to look like? Where will you live? How will you spend your time? Do you want to be able to help children and grandchildren? Do you want to devote time to philanthropy? What level of income do you need in these years?
  3. What will your legacy be? How will you fund it?

Once you’ve thought through what your retirement looks like, you can begin to think about the amount of money you’ll need to make that happen.

As you begin transitioning your business to an exit, you’ll want to get a comprehensive, accurate valuation. Bridging gaps between what your business is worth and what you need should be your focus. It should guide your timeline and business investment decisions for several years before getting to a liquidation event.

Increasing Your Value

You’ve likely been focused on the long-term growth of your business and are used to planning and taking steps to keep a consistent upward trajectory in place, even if it’s not profitable right away. Value is a different mindset. You want to position your business to be the most attractive to a buyer, which means focusing on profits and getting everything else in place and ship-shape.

Increasing value breaks down to making improvements across several essential functions:

  1. Improve cash flow – lease instead of buy, reduce expenditures
  2. Increase profitability – improve margins from both cost and revenue
  3. Lower your risk – diversify revenue streams and create recurring revenue streams
  4. Streamline operations – inventory management, payroll control, etc.
  5. Attract and retain high-quality talent – qualified retirement plans, cash balance plans, stock plans
  6. Build or refresh your sales/marketing process
  7. Get your books in perfect shape

If you’re wondering how you’re supposed to do all that while running the business, that’s where it gets interesting. You’re not. The sales process has a very truncated timeline. The value of bringing in outside expertise is correspondingly greater. Even if you could do all those things yourself, you can’t do them all at the same time.

Creating the Team You Need

The best approach to getting ready for a sale is to create a team that can work with you to determine what needs to be done systematically, build a schedule to do it, and identify the right sources. Whether outsourcing or hiring in-house, you’ll need to create a working group of consultants – business, marketing, pension, etc. – along with investment bankers, CPAs for the company and those focused on tax structures, and a legal team that can handle the transaction.

Because your business, both now and in the future, is your source of wealth, it makes sense to work with a financial advisor that specializes in transitioning business owners to liquidity. Decisions should be made with your long-term wealth in mind, whether it is valuation, taxes, sales structure, monetizing assets, or your compensation for ongoing involvement. A fee-only financial advisor doesn’t have a conflict of interest, so they can develop the needed expertise to look across the entire transaction, quarterback your team, and then structure your resulting liquidity to create the retirement you want.

The Bottom Line

Selling a business to fund a retirement should start with the retirement part – that’s the goal. Everything else should be in service to that, and good planning can ensure that takes place. Working with a financial advisor to get your ducks in order can help you navigate the transition.

This work is powered by Seven Group under the Terms of Service and may be a derivative of the original. More information can be found here.

The information contained herein is intended to be used for educational purposes only and is not exhaustive. Diversification and/or any strategy that may be discussed does not guarantee against investment losses but are intended to help manage risk and return. If applicable, historical discussions and/or opinions are not predictive of future events. The content is presented in good faith and has been drawn from sources believed to be reliable. The content is not intended to be legal, tax or financial advice. Please consult a legal, tax or financial professional for information specific to your individual situation.

Thinking Through “Life-Changing” Wealth

my new life chapter one. planning considerations when selling a business, receiving an inheritance or a successful investment.

Incorporating a large lump sum of money into a financial plan requires thinking through a series of impacts that happen over time.

There are financial, emotional, tax, legacy, employment and a host of other issues to be addressed.

Whether the influx is due to an inheritance, an asset sale, or an IPO, taking some time to adjust before making any decisions is a good idea.

We get into some immediate implications, and then some further down the road.

Take Time to Breathe

Before you address the changes a large sum of money will bring, you may want to process the events that led to the inflow.

The loss of someone you care about, the sale of a business you’ve built, the monetization of the work you’ve put into a career are all emotional events.

The cardinal rule of investing is to remove as much emotion as possible. So taking time to work through the underlying feelings before you think about the ongoing changes to your life is a healthy approach.

Prioritize

By far the most important part of this process is to prioritize your actions.

There are some issues that require your immediate attention:

Following the death of a loved one, for example, there is the ugly “business” of processing and settling the estate. Good planning can help make this transition a smooth one, but there are still steps you must take those first few weeks and months.

Selling a business or having a large inflow of stock options require careful tax analysis, which we discuss below.

With any inflow of wealth, you’ll need to address these immediate deadlines.

However, you shouldn’t feel that you need to develop an investing plan right away. Yes, there may be opportunity costs of not immediately getting funds invested, but it is far more prudent to develop a disciplined investment plan to avoid making costly investment mistakes with large sums of money. And the volatility you may be used to with your portfolio takes on a different meaning when you add a zero or two to the end of the values.

Also, if possible, you should avoid any large amounts of spending right away. Your needs, wants, goals, etc. may change as you get used to your new reality, and you don’t want to do anything that can’t be undone.

By prioritizing what decisions you need to make first, you can more easily process the inflow of wealth to help you avoid costly mistakes.

Understand the Cost of Taxes

The money may be yours – but the government most likely has a claim on some of it.

Having a very clear accounting of how much tax is due and when, and how you are going to pay it, is the first step. The taxes due may come out of the lump sum, or it may be more advantageous to pay the taxes from other sources of funds. You’ll need a plan to understand the right choice for you.

For example:

  • An inheritance may include very low-basis stocks that you do not want to sell. But it could have a step-up in cost basis that may warrant selling them first. Tax laws change over time, and understanding what you need to do to is critical.
  • You may choose to structure the sale of a business in a deferred sales trust, so that you can minimize taxes. You’ll need to set up and implement that structure, and plan for gaining access to the funds over time.
  • Post-IPO, you’ll be subject to taxes on your shares, and you’ll have some timelines you need to be aware of and taxes you’ll need to pay, whether you hold on to the stock or not.

Be sure to identify all tax strategies with a tax professional, because there may be ways to reduce your overall tax bill in the year that the event happens.

For example, if you have charitable inclinations, you might want to consider a gift in the year you received the lump sum. One example is via a Donor Advised Fund. Learn more HERE.

The ideal situation is to discuss potential tax implications prior to a large liquidity event when possible.

Rethink Your Approach to Risk Management – Both Investment Risk and Asset Risk

Adding a large sum to your overall financial picture will change how you think about risk.

You’ll need to assess your liability and protect your overall assets. This may mean an umbrella policy, structuring or titling assets differently, or in the case of an inheritance, it may mean a different insurance strategy.

Your investment goals may also change with time.

If you’ve sold a business and this is your retirement fund, your risk profile will look different than it did when you had a business creating income.

With an inheritance, an IPO, or other lump sum, you may decide to change, cut down, or stop work. This will create different time horizons for investing and different risk tolerances.

It may take time to understand what you want to do and put a plan in place.

Keeping assets as flexible as possible is the key to giving yourself choices as you move forward. You’ll want to minimize risk and avoid locking up funds until you have a clear understanding of your new goals.

Create a New Path Forward

Once you get used to your new situation, many people decide to make big changes.

These could include creating a legacy, actively gifting to help others, or using your funds to provide income for yourself so that you can devote your most valuable resource – your time – to causes you care about.

Or it may mean making a big purchase you’ve always wanted, travel, or just taking time to spend with family.

Most likely it is a combination of these dreams.

In the case of a business owner, you worked hard to get to where you are. You most likely made sacrifices that no one sees or knows about.

It is okay to enjoy your new wealth while still using it to positively impact others in whatever way you choose.

The Bottom Line

Thinking through your options means working carefully to create a financial plan that maximizes your assets, minimizes your taxes and provides for you and your loved ones.

The new plan may be bigger and more complicated, but the basic principles will still apply. You’ll still need to take the time to work with your team to set out what you want, and then put it into action.

We’re always here to talk it through with you.

Eggs in How Many Baskets? Prioritizing Building Wealth While You Build Your Business

Don't have too many eggs in one basket when you're a business owner.

Employees of publicly traded companies are often granted company stock as part of the compensation package. From a portfolio management perspective, holding outsize amounts of stock in the same company that provides income can increase risk. If the business were to become wobbly, not only would the stock decrease in value, but the employee could also potentially find themselves out of a job. Employees who are granted stocks often mitigate this risk by selling some of the company stock and reinvesting it in other assets, to diversify growing wealth away from the source of income.

But what about when you own your business?

The situation becomes more complex. One strategy that’s often followed is to put everything except living expenses back into the business while you are growing it, and then sell part of the business or take on a strategic investor to help you begin to diversify elsewhere. Retirement planning is put on the back burner until the business has grown to a point where the business can be monetized.

We think there is a more thoughtful approach that may work for business owners.

The Key: Diversification

While it may seem like a good idea, relying solely on your business as your source of wealth can expose you to a lot more volatility than you think. Whether it’s saving for a rainy day, or longer-term goals like retirement, if all of your wealth is tied up in your business, your business dictates your moves. Creating and regularly adding to a separate investment portfolio may help diversify your assets.  And if you invest away from areas you are already exposed to in your business, it can be a powerful tool to help you smooth volatility across both your business and life.  For instance, if your business is vulnerable to cyclical sectors, you’ll want to create an investment portfolio that is defensive against those sectors. 

Retirement Savings Tax Advantages

There can be significant tax advantages to setting up the right kind of retirement plan for your business and ensuring that you set aside money to invest as close to the maximum as possible every year. While there are of course upfront fees and ongoing costs associated with formal retirement plans, they also allow you to save in a very tax-advantageous manner. Depending on your situation, a 401(k) plan and a cash balance plan are tools you can use to save and look towards a future income stream you can access without having to sell your business. They can also be a great way to attract and retain talented employees.

How About Timing?

When you’re putting everything back into your business with the idea that you’ll eventually fund your retirement by selling all or part of it, you’re essentially making two bets: That you’ll be able to sell when you are ready and not before, and that when you are ready the market for your business will be at a good point for an exit.  Having to liquidate early because you are no longer able to run the business, or having to sell when either the business is struggling or the market isn’t right, can limit the amount you realize. You only get to sell it once, and your retirement life will be dependent on what you realize. If you’ve planned for a source of retirement income away from your business, you’ll have more flexibility when it comes time to sell.

 The Bottom Line

Even as you’re building your business, it makes sense to think about your personal wealth as a completely different stream of future income. Thinking about diversification across your total asset profile can get you started on a journey to financial independence.

The information contained herein is intended to be used for educational purposes only and is not exhaustive.  Diversification and/or any strategy that may be discussed does not guarantee against investment losses but are intended to help manage risk and return.  If applicable, historical discussions and/or opinions are not predictive of future events.  The content is presented in good faith and has been drawn from sources believed to be reliable.  The content is not intended to be legal, tax or financial advice.  Please consult a legal, tax or financial professional for information specific to your individual situation. This work is powered by Seven Group under the Terms of Service and may be a derivative of the original. More information can be found here.

Selling a Family Business: Preparing for a Transformational Event

Portrait of multigenerational winery owner family standing at wine cellar. Senior winemaker and young sommelier standing at background and holding in hands a glass of red wine while middle age businesswoman looking at camera and smiling. Small business.

It’s generally thought that there are several cycles that reflect where a business is in preparedness for a sale. These capture the economy, the market, and the mindset and planning of the business owners.

From an economic standpoint, the liquidity cycle is the one that matters. This cycle gauges the amount of available liquidity and the current appetite of investors to invest in companies.1 With record amounts of cash sloshing around looking for investments and interest rates continuing to be low, the liquidity cycle is currently at an advantageous point, and looks poised to remain so.2  While getting the right price is clearly a big consideration, there are a lot of other things to think through that are just as important.

From setting a realistic timeline to thinking about the implications of the sale on other family members, to planning for a life after the sale, each stage brings its own challenges. Assembling a team of advisors with specialized knowledge in every area will be critical, and since this will have a major impact on your wealth and your legacy, you’ll need a quarterback that can keep your big picture in focus all the way through.

The Timeline

Starting well before you want to complete a sale can allow for a productive series of negotiations. It gives you time to surface – and mitigate – any issues that come up, which can leave you in a stronger position. It also provides time to ensure that all shareholders and stakeholders such as creditors, vendors, and employees have time to adjust to the changes the sale may bring, which can facilitate a successful transition. Finally, a longer timeline means you can keep growing the business while you give thought to where you want to be after the sale.

Selecting Your Team

Selling a privately held business is a very specialized transaction. Depending on the size and complexity of your business and the market you compete in, you may need to hire an investment banker, business broker, or third-party business appraiser. Besides advising on the value and the sale, they should be able to help you structure the transaction. You likely already have trusted legal counsel, but unless they also have experience in purchase and sale agreements, you may want to engage an additional resource. The same is true for your tax accountant. You’ll need specific expertise on minimizing the tax consequences of monetizing a business.

Gauging the Cycles

We’ve already discussed the liquidity cycle. The other externally focused cycle to think about is the business cycle for your company’s sector. You’ll need to determine the potential for growth and whether the business is well-positioned to take advantage of opportunities as they arise, or if there are headwinds that can be mitigated.

The last cycle to think about is whether you are ready to sell. What will your life look like after the transition? If you’ve been very involved in the business, how will your new life be structured? Will you continue to play a role, or will you cut all ties? How do family stakeholders feel about the change? Even if the other cycles are at strong points – if you’re not ready to sell, it’s better to wait. It can make sense to assemble your team and proceed with information gathering even if you aren’t sure about an eventual sale. Once you have a clear idea of what the company is worth, you may be able to make a more informed decision.

Breathe

You’ve decided to sell, the cycles are lined up and the structure is right. Now what? This is where having a solid plan comes into play. Acquiring potentially life-changing wealth can be disorienting, to say the least. Imposing a period of time to create and assess various plans, get used to your new life, and have time to decompress can help you to avoid mistakes and when you are ready, you’ll have a better idea of what is really important to you. Eventually, you’ll need a good investment plan that protects your capital, provides you with what you want, and allows you to create the legacy you’d like. But initially, it’s important to maintain a flexible investment plan that can change as you explore your new life.

The Bottom Line

Selling a family business can be stressful and complicated. Assembling a strong team that works hand-in-hand with your financial advisor can smooth the road and ensure your new life plans get a good start.

  1. What to Consider When Selling the Family Business. Grimes, McGovern & Associates.
  2. 2021 Global Private Equity Outlook. S&P Global. March 2, 2021.

The information contained herein is intended to be used for educational purposes only and is not exhaustive.  Diversification and/or any strategy that may be discussed does not guarantee against investment losses but are intended to help manage risk and return.  If applicable, historical discussions and/or opinions are not predictive of future events.  The content is presented in good faith and has been drawn from sources believed to be reliable.  The content is not intended to be legal, tax or financial advice.  Please consult a legal, tax or financial professional for information specific to your individual situation. This work is powered by Seven Group under the Terms of Service and may be a derivative of the original. More information can be found here.