As we continue to navigate the COVID-19 pandemic, the succession and exit strategy planning conversation has come to the forefront for many business owners and their families. Some are emotionally drained and not sure if they have the energy to continue to lead their organization. Many businesses that have thrived during the pandemic and achieved record results in 2020 now find themselves being courted by private equity buyers, banks with capital to lend and competitors looking for a strategic acquisition. These current conditions have triggered a significant amount of merger and acquisition activity in 2021.
With selling on the minds of many, what can businesses do to stand out from the rest, attract multiple offers and ensure a smooth transition? We propose the following framework to help create a highly marketable business that can maximize the enterprise value for its shareholders:
Get The House in Order
Some businesses are well prepared to be sold: Their financial accounting systems are in good order, owner expenses are not run through the business, there are no unusual accounting practices, and they complete full audits of financial statements annually. Other indicators of sale readiness include expanding sales growth, diversification in the customer base, a stable pool of employees, strong relationships with those employees or related unions, and an absence of pending regulatory actions, including environmental liability.
Conduct an analysis and identify any weaknesses or threats in these areas; they will be important to address before the company can receive its highest value in the marketplace.
Prepare the Business for Change
Select a specific leader to oversee business management during this phase. It need not be the existing CEO—the COO or another senior level manager with the broad operational experience and authority to handle the day-to-day operations may be a good choice. It should not be the person tasked with completing the transition of ownership.
Develop a clear plan for how the responsibilities of the current CEO will shift during or at the conclusion of a transition. In a family-owned business, it is particularly important that the current CEO support—not undermine—the transition. This is a stage of potential friction and the most common place where a succession plan may run into trouble.
Communicate the plan to all stakeholders (family members, management, employees, customers, key vendors and financial partners) consistently and be mindful of necessary confidentiality and nondisclosure agreements. Everyone needs to be on the same page to have faith in the transition plan. Be alert to distractions caused by the anxiety of an uncertain future. The better the communication is during the transaction planning, the healthier the company will likely be upon its conclusion.
Build a Transaction Team
Today’s business environment is more complex than ever, and owners need advice across a broad spectrum of capabilities in order to navigate a transition successfully. It is imperative to work with a team of professionals who can provide a sound valuation as well as provide feedback on whether the business sale price will support family and future goals.
Your clients' team should consist of the following professionals:
Corporate attorney(s) with experience in mergers and acquisitions to better help protect the family’s interests and provide a wider range of structuring ideas. These lawyers are specialists and can complement the family’s and company’s existing attorney if necessary.
CPA(s) accustomed to the purchase or sale of businesses and familiar with how buyers evaluate financial statements to ensure you maximize the enterprise value. The CPA will be critical in helping structure the deal with tax sensitivity and may also recommend adjusting the corporate structure to facilitate a better tax outcome. The tax advisor should be a specialist in transition and transaction strategies that are appropriate in their specific state.
Investment banker(s) should be able to market the business, screen for viable purchasers, and provide market knowledge on similar transactions. Investment bankers may have a principal role in negotiating the sale depending on the industry, the size of the transaction and whether sale prospects have already been identified. They are capable of opening doors to suitors outside the target industry, resulting in a higher transaction value.
Wealth advisor(s) can help the family identify its values, prioritize its goals, align the transition or sale with its mission, and ensure the owner’s personal financial planning will preserve and protect the wealth created by the transaction, assuring them financial independence after the transition is complete.
Trust and estate attorney(s) can be instrumental with intergenerational transfers and recommend deal structures that are responsive to the family’s objectives while maneuvering within the existing gift and estate tax limits.
Every business eventually must go through a transition, and it is never too early to start planning. In addition to the framework outlined above, it can be helpful to set up meeting for clients with owners of similar businesses who have gone through a transition so they too can peak at the right time!
Jeremy Kuhlen is senior wealth advisor and principal at The Colony Group
