Many business owners assume that they’ll own their business until they die. Then reality gets in the way: Perhaps their health turns poor. Or they’re caught unaware by a big change in the industry. Or they require a big investment in technology to stay competitive but can’t raise the money single-handedly.
That’s when a phone call from the right potential buyer can feel like a lifesaver.
When planners at Northern Trust conducted a series of interviews with their own clients, they found that it was often an unexpected offer that triggered the sale of a family business. But the result can
mean that owners go into a sale without having properly gauged its effect on their tax planning, their estate planning or their family.
More Money, More Questions
A sale to an outsider can often bring a great windfall, as well as a tidy reward for years of hard work. But it can also raise a lot of questions. Is the sale price high enough? Could a sale drive a family apart? And how will the family react to a sudden influx of cash?
Selling with confidence requires a lot of advance planning, says Charles Mueller, Trust and Advisory Services practice executive at Northern Trust.
“You really need to plan in three different spheres,” he said. “One is planning for the business. The other is wealth planning for the owner. The third is to plan for the family itself, to preserve family harmony and well-being after the sale.”
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Proper wealth planning can be a big factor in helping a business owner decide whether or not to sell, Mueller says. He helps clients project out a lifetime of needs — paying for kids’ educations and for second homes, making charitable contributions and the like — and then compares the required funding to meet a lifetime of goals with the sale price of the company, after tax.
In cases when the sale price has been higher than the sum the client will need over the course of a lifetime, Mueller has helped clients put the excess into charitable trusts that can reduce income taxes on the sale as well as any eventual estate tax liability. Or they can give the excess away over time to family or charity. Clients are pleasantly surprised to learn they can be more generous while they’re still alive than they expected, he says.
What about the case where the net proceeds are insufficient to meet a lifetime of goals? Then it’s time to re-evaluate the goals, the timing of the sale and the feasibility of retaining the business.
Ready To Let Go?
“For many families, the family business is the main unifying entity,” Mueller said. It’s a source of common pride and also the cornerstone of a family’s reputation in the community, he added.
No wonder it can be so hard to let go.
Mueller says it’s essential to establish a framework for family decision-making well in advance of an unsolicited offer, so that any offer that does come in can be examined dispassionately. And if the family really can’t let go, then some investors may be happy to allow the family to stay involved as majority or minority owners, or as executives or employees.
“There may be arrangements that can create a win-win for the owner and the investor,” Mueller said.
The Art Of Money Management
Many family businesses are accustomed to plowing all of their wealth back into the company. “They don’t think of themselves as wealthy,” Mueller said.
That self-image changes quickly when the business sells for millions of dollars.
Often, the patriarch or matriarch wonders if the inherited wealth will erode the values or the work ethic of the children or grandchildren. How will the family stay together without the business as a rallying point?
Mueller and his colleagues work closely with owners’ families as well as the owners themselves. They develop a family “vision and mission statement” to help younger generations understand the values that undergird their inherited wealth. And they train younger generations in financial literacy so that they are responsible with their money.
Families that once managed a business now must turn to a new task — managing their money. Should they invest in real estate? Launch a new business venture? Start a foundation? Or all of the above?
“Mom and Dad may want everyone to stay together and make decisions about investing the wealth together,” Mueller said. If the family can agree on a mission, vision and governance structure, it can “allow individual households to chart their own course with some portion of the family wealth, but also to participate in joint ventures.”
Many family business owners who originally planned to pass on their businesses have seen great results after accepting an unexpected outside offer. But it helps if they expected the unexpected, and planned for it well in advance.
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