The privately held business: pre-liquidity planning

For the first episode in our four-part series on transition planning for your privately held business, we begin at the end; laying the groundwork for selling your business. Brian Greenblatt, who leads commercial middle market banking for CIBC US, and Art Graper, managing director and senior relationship manager here at CIBC, touch on identifying potential purchasers, family wealth plans and consider what life after the sale may look like.

What is Conversations in Commercial Banking?

CIBC’s Commercial Banking podcast series, Conversations in Commercial Banking, understands that your business is a living, breathing entity in need of nurturing to continue to grow. Whether you’re looking to navigate a tough economy, tap into current industry trends or identify key tools to take you to the next level, our team of experts are here to equip you with the information you need to make your vision a reality.

Announcer (00:04):
Welcome to Conversations in Commercial Banking, a podcast series dedicated to the pressing financial topics facing middle market business leaders today.

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We bring in experts from all facets of our North American institution to provide actionable insights that help you navigate today's environment. Our discussions include industry trends, strategies to identify and manage risk, and unlocking opportunities for growth, all with the purpose of helping you realize your ambitions.

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And now, for this week's episode.

Brian Greenblatt (00:32):
Hello. And welcome to the inaugural episode of CIBC's commercial banking's new podcast called, Conversations in Commercial Banking. I'm Brian Greenblatt, and I lead the Illinois commercial middle market banking for CIBC US. And I'm pleased to be your host today.

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We're kicking off our new podcast with a series based on CIBC's upcoming White Paper titled, Privately Held Business, that our commercial banking team is launching. Each episode will bring high-level details that correspond to each chapter of the White Paper. You can find that White Paper on our website, us.cibc.com.

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For the first episode of this series, pre-liquidity planning. Before you sell that business, we begin at the end, laying the groundwork for selling your business. We'll touch on identifying potential purchasers, family wealth plans, and consider what life after the sale may look like.

(01:27):
Joining me today is, Art Graper, managing director and senior relationship manager here at CIBC. Art, hey, welcome and thank you for joining us today. This is a pretty broad topic and there's many considerations to think about when you're contemplating a sale. I'm kind of curious, how often do you actually see families plan for a sale event?

Art Graper (01:55):
Well, thank you first of all, for having me today.

(01:58):
That's a great question. The families that I see that have the best success in transitioning family businesses, it's not just a single event. It doesn't happen at the time that the senior generation is looking to sell the business and monetize it. It's a process that begins early on, when the generation may have the opportunity of being part of the organization. A plan is put in place to really start to look at how best the family business would like to transition.

(02:36):
As the children grow and mature, there's going to be either a natural delineation of those that want to continue to participate within the business, or those that have no affinity to do so and pursue their own interests. I've seen family businesses that really support both ventures, that it's not a pure requirement that the prodigal son or daughter were to assume the leadership role in the business. That there's actually opportunities for the, quote-unquote, family business to be able to support those individuals who decide not to pursue the family business.

(03:16):
So I think the bottom line answer to your question is, it's not a single event, but it's really more of a philosophy of wealth planning that begins early on in the business life cycle.

Brian Greenblatt (03:32):
So who do you see, typically, looking to purchase family owned businesses? Obviously, there's a lot of different opportunities in where to go to sell a business. But, who's the typical buyer of a family owned business?

Art Graper (03:57):
Yeah. Great question as well.

(03:59):
There are multiple potential acquirers of the business. First and foremost, I think the family is looked at as the primary acquirer of a business. And that brings up, really, a multitude of different questions and policies, maybe even governance on how that works best. As I mentioned a moment ago, there are maybe some family members that want to be part of the business and others that don't, and how do you equate that? And it may also require some planning as it relates to spouses of family members that are involved in the business. And how do you protect those claims of potential spousal claims from the business interest?

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The other potential acquirer would be key employees. You may have a senior management team that has been groomed over a period of time. They have worked, basically, their entire lives of the opportunity at someday taking on the leadership role and moving the company forward.

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And then, there's the opportunity of selling to a third party and allow the opportunity of the monetization to occur. And allow a complete new leadership team to take over the control of the company.

Brian Greenblatt (05:15):
I'm curious, is there a process that you've seen work for a family to help evaluate all three of those potential options?

Art Graper (05:31):
I think that the big piece really kind of goes to your first question, and that is the opportunity of not having it become a single event. Where you wake up one morning and you decide that I would rather be able to enjoy my time either with grandchildren or pursuing recreational activities, and you want to just sell the business. I think that it becomes a part of an overall plan that could be years, if not a decade, in the making.

Brian Greenblatt (06:04):
Yeah. It's interesting hearing your thoughts on this because I see it all the time with our client base. The success rate of clients who have looked at this as a long game decision, as opposed to, I wake up one morning and decide this is my time to sell my business. It happens both ways, but I really appreciate the way you think about that as the long view.

(06:35):
To switch gears a second, if you think about the things that happen after. You go through the process of evaluating, "I want to be in a sale process." The second piece is, does the family have a wealth plan? In many cases, this is generational wealth. What do you see from clients and prospects about how they think about a long view wealth plan? And how does that actually fit into the plan of sale?

Art Graper (07:11):
Yes, thank you.

(07:11):
I think this is for those families that are most successful, the plan itself is usually done well and it's done in advance. However, there are circumstances where the latter of our last discussion, where a client may wake up and decide that now's the time to start looking and evaluating that sale. In looking with or working with attorneys and other advisors, it really becomes important as far as how that messaging and the communication is done, prior to the sale itself, because it's extremely important, depending upon who the acquirer is.

(07:57):
If it's family, there's a likelihood that some family members are going to be part of the organization moving forward, where others are not. As it relates to the sale to a potential key employee or third party, it really puts the family and the planning all on the same side. There's not a natural division that may occur within the family. And the big piece there really is, how can I extract the best transfer of value by moving as much of the growth outside of potentially selling the senior generation that's selling the business, and be able to maximize the estate value to the next generation while making sure to try to minimize as much as the income tax as possible?

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And that's where having a complete advisor or team that is holistically working with the family on each of those components is critically important. And the communication level and openness between all the parties is a critical factor. Including even people from CIBC where some of the financing may be in place too. All of that team has to be working very harmoniously and collaboratively.

Brian Greenblatt (09:14):
Can you go a little deeper on who are the types of outside advisors that a business owner family should be thinking about bringing on board? You mentioned CIBC from both the commercial banking, from perhaps investment banking and the wealth side. What are the others that are involved in that, and where they should be thinking about it?

Art Graper (09:39):
Absolutely.

(09:40):
Having that advisor team is critically important. I would say that, first and foremost, you're going to have, most likely, if it's a sale to a third party and even to an extent a family member, you're going to have to understand the determination of what is, quote-unquote, fair value. What does that look like? How is that represented? And that might be different between a family sale and a sale to a third party or a group of employees.

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The next really important aspect is probably, maybe equally, legal, regulatory, making sure that you have advisors. Depending upon the industry that the business is in, there could be very specific rules and laws associated with a transfer of assets, or the business itself. It may also have critical supply line or supply chain, regular issues or concerns, where you may be a critical component within that. Either distribution or supplier where they may also have restrictions.

(10:43):
Accounting CPA is going to be important as well. The accounting aspect, prior to the sale itself, you want to make sure that the business has a very well maintained set of books and records that are very well and meticulously reviewed and will be part of probably a due diligence. Especially, if you have external third parties that are to be part of the transaction itself.

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From a tax preparation standpoint, trying to minimize not only the federal income tax that could be potentially for the sale itself, but also states as well. And how do you create or mitigate nexus in some certain states that may be income tax unfriendly? And also, understand that there also may be local rules and regulations that need to be followed as well.

(11:35):
We talked about the financing, so the bank is going to be another key aspect as far as that overall relationship. And I would say that then, moving into the wealth management, really should also be part of that. And how to make sure to plan both from a legal standpoint on the transition of the wealth itself, if there are vehicles or strategies, trusts, or other things that are in place, could be extremely important. I mentioned earlier, you may need some protection as far as restricted stock type of agreements or buy-sell agreements that may also need to be funded with some type of life insurance. So a life insurance agent may need to be part of the overall picture as well.

(12:21):
And then, really starting to prepare the family or the business owner for the next chapter. What does things look like after the sale? And then, how do you take something that somebody has done, and this is actually fairly common, where one individual may look at a business owner and say, "My goodness, you have all your wealth, it's all concentrated in a single business." That really brings on a lot of investment risks. Where the business owner, that's what they know, they understand it, they live and breathe it, they've done it for 30 years, 50 years, whatever the case may be. And that next chapter, no longer having that business and now have a pool of either cash or other financial assets, can be very disheartening to them. And working through that process could be almost as important as the preparatory work in the sale of the business.

(13:17):
So hopefully, that answered your question. There are probably other advisors that I have missed, so to that, I apologize.

Brian Greenblatt (13:25):
No, I think there, at some level, the list could be endless and the timeline here is the number of people involved in a transaction. A complex transaction like that, is sometimes daunting.

(13:41):
Something you said in your last statement about, what does life look like after a sale? And something you mentioned about the emotional aspect of that, whether it's selling outright to a strategic or private equity, or to another family member or key employees, the business owner's going through a lot. Is there something that you see families do that have helped them transition more effectively, and push past the emotional into a new stage of life?

Art Graper (14:17):
Yeah, it's really the key aspect. And that's making sure that the business owner has the opportunity of feeling good, that they made the right decision. And many times they look back and say, "Well, gosh. If we could have done these next couple of things differently, maybe the result of the sale itself might be have been better."

(14:39):
It's really having them have a plan, similar to the next generation of the family. If they're the ones acquiring it or it's key employees, or even third party, again, it's a process. It's a plan that is developed and then executed. I would say that, part of that overall plan also needs to be the focus of that next generation of, well before the sale actually occurs. Allowing them to have an opportunity to look at, what will life look like past this? If it's a family that is acquiring it, is there a governance board where the prior generation that was involved in the family business, are they still there in a supervisory role or a consulting role, or are they gone?

(15:23):
Understanding some of those family dynamics is extremely important. The generation that bought the family business may really value the experience and leadership that they may have to offer. Or they may resent it, and they may feel that it's their time to be able to run the business how they feel is most appropriate. So that's part of that emotional piece. And to the extent that the family has kind of operationally [inaudible 00:15:49] through a plan on how that looks like, then it's going to allow really a more clean opportunity for that next generation to move forward. And the expectations for the selling generation are going to be in line.

(16:03):
The other piece I think is really helpful is, allowing the ability for an accumulation of wealth outside of the family business. And what I mean by that is, it's almost kind of like a mattress fund. And earlier I mentioned the concentration of a family business, it usually is their most concentrated asset on their balance sheet, it makes up nearly all their wealth. Over time, however, I would recommend that family owners begin to develop a nest egg that's of financial assets that are not the business outside of that. And that could be into real estate, it could be in a traditional portfolio, there are many different ways of being able to do it.

(16:46):
But it allows the opportunity for exposure to life and the financial assets outside of the business, and get an understanding of what it feels like to go through an economic cycle, the boom and the bust that over time, history has proven that risk assets, such as the equity markets, can be very, very valuable and provide great wealth. Where municipal bonds from an affluent individual provide a lot of stability, and a source of funds and liquidity in times that are more economically distressed. So having that understanding and going through that, maybe while still running a business, can be very insightful.

(17:32):
And I think the biggest piece is really the financial assurance from a cashflow standpoint that, that senior generation is not going to have to worry about over-transferring. So when we talked earlier about establishing a plan in transferring asset value from one generation to the next. And really, one of the potential objectives is maximizing after estate tax wealth for the family. The selling generation, the last thing they want to do is to do that job too well where they have to go now back to the second generation and ask for funds to support their lifestyle. They need to make sure that they maintain that financial independence and that financial security that they'll never have to do that.

(18:16):
And that, I think, allows the opportunity for that transition to move forward where they're not looking back in the rearview mirror or getting involved where they're really not asked to be so. Or finally, where equity markets are volatile and providing stress from a financial standpoint in that insecurity of that financial independence.

Brian Greenblatt (18:42):
Yeah. Thank you very much, Art. Because I think people forget that a sale of a family owned business, while it is an asset, it creates wealth, is a family's life and likely has been for quite a while. And that just like you might think about retirement as a normal job, it being a... that it's a financial, I want to be financially secure. You also have to think about the financial, you think about the cashflow, you think about the emotional aspect of, "My business is gone." And so, it's taking all of that into a holistic approach, finding the right advisors, putting a plan together, make it a long-term view. And you do all that, you really do set the stage for a successful outcome.

(19:41):
And so, Art, I really want to thank you for walking us through all of these really critical considerations. I want to thank all of you for joining us on our podcast today, with a focus on laying the groundwork for selling your business.

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If you have any additional questions, please feel free to reach out to me or your relationship manager at CIBC to assist. A well-executed transition is made possible through collaboration with your banker and other business advisors by communicating early on, asking questions, and sharing your ambitions for the future.

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In our next episode, we'll discuss the emotions and hard decisions at play between relatives when looking toward the next step for a family business.

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In the meantime, check us out at us.cibc.com or across several social media platforms by searching @CIBC_US.

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Thank you for listening, and we look forward to catching up again with you soon.

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