The Road to Retirement: How to Succeed in Selling Your Business – with Planning

Business owners and executives typically have a lot on their mind, such as improving operations, managing cash flow, tariffs, risk and taxes, handling healthcare costs and inflation. Things like succession planning, retirement and transitioning the business can drop to the bottom of the list.

Selling the business, succession and retiring should be a reward, but can easily turn into a missed or mishandled opportunity. The big secret in business, then, may be that many retirements soon turn into regret rather than simply reaping rewards.

“Seventy-five percent of the people who sell their business are disappointed that they sold their business a year later,” said Robert Melle, a senior wealth  advisor at Peapack Private Bank & Trust. “Maybe they didn’t plan or they planned what they’re retiring from, but not what they’re retiring to. What do you want to do? Do you want to start another business?”

Melle spoke at a recent special session on business transition by Peapack Private, a private bank with clients in 49 states, at Mutual of America, 320 Park Ave., titled “Mind Your Business & Legacy: Smart Strategies Every Business Owner Needs to Know.”

Private bankers and advisers from Peapack Private discussed with about 100 executives at a breakfast proper transition planning including succession planning, possible sale and other options and retirement.

“So many of our clients are so focused on running their day-to-day business. They admittedly lose sight of the journey they’re on and their transition plan,” said Andrew F. Corrado, President of Peapack Private’s New York office. “How do I retire? What will be the fate of my business when I retire? How do I retire comfortably? What will I do during retirement?”

You need to look at finances, from saving on taxes to spending your time, and consider numerous options.

“Most people just push one solution,” said Matthew Luczyk, senior vice president / head of corporate advisory at Peapack Private Investment Banking. “I think the most helpful thing that we do is take that agnostic approach of understanding, not just pushing one solution, listening to the business owner and figuring out the best solution to achieve their goals.”

Transitioning your business is one of the biggest decisions executives make, too often handled in a sudden, unstructured way.

“A lot of it has to do with a breakdown in communication,” Peapack Private wealth advisor Ray Radigan said of issues. “The business owner can be so focused on running the business that they’re not thinking about having a transition.”

TRANSITION TIME

Many business owners are “thinking” about transition as Baby Boomers age, but proper planning is something else entirely.

“There’s an unprecedented amount of wealth transfer happening with businesses and real estate,” Peapack Private Bank & Trust President of Wealth Management John Babcock said. “Some people are doing well planning from an estate and tax standpoint; others aren’t.”

Decisions need to consider economic and emotional factors, starting with who you invite into the process.  Corrado said Peapack Private has experts licensed in a wide range of scenarios to work with CPAs and law firms “to create solutions appropriate for the client.”

“When you have an advisory team working together to your benefit, things will move much more smoothly for you,” Radigan said.

The earlier you begin “preparing” for transition the better, including structuring for tax purposes. “That’s something you need to do over the course of years,” Babcock said.

Half of businesses in the United States are sold involuntarily due to death, divorce, disability, distress or disagreement, leading to lower prices. “We’re finding most people are not prepared,” said Melle. “Start looking long term at your goals, personal and business wise.”

Melle said it’s important to decide whether you will hand the business down to family or others or sell to outsiders.

“Is there someone you are going to pass this to or are you going to sell the business?” Melle said. “There’s a lot of money out there and a lot of appetite for small businesses. It really depends on your niche market.”

DETERMINING VALUATION

A person’s business is their baby, but how do you know what it’s worth? The obvious answer is it’s worth what others will pay, but there is a process that can help business owners get an objective assessment of value. Becky Wuest Creavin, a Peapack Private wealth advisor, said “knowing what enhances the value of the business lets business owners maximize the value of their business.”

“We have a separate subsidiary that can help you with the valuation of the company. If a company has a succession plan in order, the value is greater,” Melle said. “They see that the company can continue on, because of the steps you took to continue on with that company.”

Companies can be valued using multiples, revenue, EBITDA, margins, projections, profits and cash flow.  Private companies also can be valued by looking at comparable “market transactions” in the same or similar industries.

SUCCESSION

Decisions regarding family businesses typically start with whether family members should take over.  Radigan said 70% of business owners plan to pass the business down to family, but only 30% survive the second generation.

“Have meetings where you sit down annually and talk about transition, how long the senior generation will run business,” Radigan said. “When will the junior generation start to take over the duties they need to be familiar with?”

Some children may be involved with the business, while others are not. What benefits, such as dividends and future cash flow, and responsibilities are there?

Radigan said it’s possible to sell to partners, employees, strategic third parties or private equity or have family take over. Matthew Luczyk, head of corporate advisory, said, “It’s important to have a plan and that takes time.”

“You have to evaluate your family. Is your family the right succession?” Radigan said.  “If you want to transition to a family, make sure that’s a realistic option.”

PREPARATION

Preparation means anticipating drastic change. Melle worked with a couple who owned a spice packaging company with a Walmart contract. They decided to divorce but had a post-nuptial agreement.

“They took steps and our team helped them,” Melle said. “Because of the planning and steps they took, the only thing not dragged into court was the business.”

Radigan talked about two partners who didn’t talk frequently, but had a written (and that word is key) succession plan. “The succession plan was implemented and it worked,” Radigan said.

Preparation includes the right paperwork, documenting the business, so you have information you need in case of a sale.

“You need to make sure that your books and records are in good shape,” Babcock said. “Do you want to retain ownership or retire and never think about it again? Do I want my children involved in the business?”

You also need to focus on taxes or Uncle Sam could be the member of your family who does best. “It’s not how much you make. It’s how much you retain,” Corrado said. “Planning is key.”

He added it’s important to prepare others and create a company that can operate without its owner.

“If you can’t turn the keys and the business over and if you as the business owner haven’t documented a process and transitioned that knowledge, you can’t walk,” Corrado added. “Because you are the business.”

A PERSONAL PLAN

Business planning, Peapack Private advisors said, is only part of planning which should include what you want to do next.

“It’s important to have a full understanding of what you want to accomplish and what it will cost,” Creavin said. “To avoid regret, you need to take an inventory of your passions, what motivates you? Knowing what your goals and objectives will cost you is important.”

Creavin said, “A personal plan is as important as a business plan” in order to be prepared for life after the office.

She mentioned someone who did retirement planning, changing his residence to Florida and setting up family trusts, only to feel at a loss after retiring while his former partner stayed busy.

“He missed all that,” Creavin continued. “The other guy was a serial entrepreneur buying and selling with a lot going on.”

She laid out options, such as mentoring and serving on charity boards. You want to figure out your future before it arrives. “You have to have some idea of what you want to do,” Creavin said.

Private equity is thinking small, buying locksmiths, landscapers, funeral homes and real estate, often providing another option. “All sorts of companies are now being rolled up into mega companies under one ownership,” Babcock said, noting that may be an option that companies don’t consider

“The bottom line is, once you have these goals, you have to figure out how to fund it,” Radigan said. “Whether it’s your portfolio, income stream, after tax stream from your business. Those are sources you can use to fund these strategies.”

GIVING THEM THE BIZ

While it may be better to give than receive, there are better ways to give, for tax purposes. Trusts can help your estate planning, preventing or lowering recipients’ taxes on appreciation.

“Make gifts in trust versus outright,” Radigan said. “Maximize asset protection for the recipient. There are tax benefits by creating a trust.”

A gift to a child could become problematic in case of divorce and creditors can seek to recover gifts, while trusts can be drafted to protect assets.

Family limited partnerships include general partners who run the business with managerial responsibilities and limited partners who own without managerial responsibility.

“When you make a gift of a limited partner interest to your children, it’s discounted for gift purposes because they don’t have managerial responsibility,” Radigan said.

Trusts can be set up so the grantor pays taxes, although they can be written so that aspect can be withdrawn.

A Grantor Retained Annuity Trust or GRAT can provide an annuity with the remainder going to benefit children when a period expires.

“The problem with closely held business owners is a lot of times, there isn’t enough liquidity in the estate to pay estate taxes,” Radigan said. “An irrevocable Life Insurance Trust can be structured so that when the owner dies, the life insurance proceeds insuring the owner’s life can be kept out of the owner’s estate. Instead, the insurance proceeds can be paid to the children who can use this liquidity to pay the resulting estate taxes.  This is an efficient way to pass on liquidity to the children to help pay taxes.”

A good process can lead to a better result, but it’s important you be satisfied that you’re making informed choices.

“What we’re offering you hopefully is peace of mind,” Melle said. “You’ll have the peace of mind to concentrate on your business.”