business succession & estate planning · august 31, 2018 table of experts: business succession...

AUGUST 31, 2018 TABLE OF EXPERTS: BUSINESS SUCCESSION & ESTATE PLANNING 17

Table of ExpertsBusiness Succession

& Estate Planning

AUGUST 31, 2018

Honaker Hayes Wealth ManagementUBS Financial Services Inc.

18 TABLE OF EXPERTS: BUSINESS SUCCESSION & ESTATE PLANNING DAYTON BUSINESS JOURNAL

Rob provides transition planning services with RSM’s Center for Business Transition. He joined the firm in 2017 and has extensive business experience. Rob is grounded in the foundational leadership principles of winning, teamwork and trust. He has a track record of developing distinctive strategies that address complex changes needed to ignite innovation, take companies from failing to succeeding, and guide them to sustainable growth. Rob has delivered results that stand out across the spectrum of Fortune 500, Venture Capital backed growth companies, Family owned, and closely held middle market companies.

Rob’s multi-dimensional experience includes over 30 years as a CEO and Trusted Advisor. He has been CEO of 5 companies, including a $650mmMM food manufacturer, a $160MM paperboard-packaging company, a $220MM telecommunications company (built from a start-up), and a strategic management consulting firm. He was a founding partner of a boutique business strategy and investment banking firm, founded a business accelerator for early stage development companies, served as a CEO in Residence for a venture development organization, and launched and led a venture backed business process management software company. His operations experience includes serving as COO for a $2.6 billion specialty retailer and manufacturer. Rob’s success has been the result of a constant focus on value creation with people at the core. Whether the challenge is reshaping strategy, overhauling the supply chain, improving quality, divesting assets, making an acquisition, or launching a new product, the only sustainable competitive advantage is achieved through people - the right people, in the right roles with a clear focus, and a culture that supports what you are asking them to do individually and collectively.

Randale joined UBS in 2014 and specializes in custom financial planning and creative problem solving for wealthy

individuals, their families, and businesses. Randale is a Certified Financial Planner™ professional, the industry standard for excellence in financial planning.

Prior to becoming a financial advisor, Randale served 10 years in the Navy as a Cryptologic Officer, giving him a unique set of skills for making sense of the complex investing landscape and helping clients navigate through some of the most difficult situations in life. Randale holds Master’s degrees in computer science and applied mathematics and received a Bachelor of Science in mathematics from Miami University with a minor in finance. He is an active member of Washington Heights Baptist Church and resides in Oakwood with his wife, Amy and their four children.

Meet The Experts

Doug Ventura is a business lawyer, operational leader and corporate development executive with more than 30 years of experience in:

• Planning and executing strategic growth initiatives and related transactions

• Solving complex business problems

• Developing long-term transition and exit strategies

• Providing comprehensive legal, strategic and operational advice and counsel to private and public companies

Doug has worked in several industries in the US and internationally, including automotive retail, advanced materials manufacturing, distribution, healthcare delivery, regenerative medicine, software,

services and emerging technologies. Doug’s corporate development and operational experience includes business strategy and planning and successfully executing domestic and cross-border acquisitions, strategic partnerships, reorganizations, capital raisings and liquidity events. He has engineered and led various organic growth strategies, including international expansion in Europe, Asia, Central America, South America and Australia while maintaining ultimate P&L responsibility for the underlying operations.

Doug’s legal work spans the full life cycle of a business from initial structuring and capital formation to exit planning and realization. Much of his legal work is concentrated on structuring, negotiating and closing transactions that often determine business success or failure - acquisitions, divestitures, debt and equity financings, joint ventures, strategic partnerships, technology licensing, sourcing and distribution. Doug particularly enjoys working with closely-held companies of all sizes as a lawyer and business advisor to help them strategize, plan and execute the steps necessary to overcome the natural growth hurdles they will encounter and to transform their businesses over time. His prior roles enable him to bring a unique strategy-driven and outcomes-oriented perspective to legal and business counseling, and the shared experience of having to meet a P&L.

Sam Warwar is a shareholder in the firm’s Tax department. He has over 30 years’ experience assisting clients with IRS controversies (examinations, appeals, litigation, and criminal tax matters) as well as advising and representing buyers, sellers and investors with business

transactions and acting as general counsel to businesses, nonprofit organizations and families.

Sam represents public and privately-held businesses, partnerships, nonprofit organizations, hospitals and other health care organizations on issues related to corporate organization, corporate structure, corporate governance and contract negotiations.

Sam’s accomplishments include recognition in Best Lawyers in America® (1993-2017), and receiving the honors of Ohio Super Lawyer (2004-2016), Best of the Dayton Bar, Top 50 Dayton/Cincinnati Lawyer and Top 100 Ohio Lawyer. Sam also received the special recognitions of Best Lawyers® 2011 Dayton Tax “Lawyer of the Year” and Best Lawyers® 2014 Dayton Litigation & Controversy - Tax “Lawyer of the Year.”

Rob Daly, RSM US

Doug Ventura, Coolidge Strategic | Advisory Services (CSAS)

Randale Honaker, The Honaker Hayes Wealth Management Group, UBS Financial Services Inc.

Sam Warwar, Coolidge Wall Co., L.P.A.


The Dayton Business Journal recently hosted a roundtable discussion, featuring four Dayton-area experts exploring topics related to business succession, transition and estate planning. The following is a record of that discussion, as moderated by Don Baker, market president and publisher of the DBJ. Don Baker: Do you think most business owners have a realistic view about the value of their business and how the marketplace will likely assign a value to that business?

Doug Ventura: The simple answer is no. In fact, my experience is that is one of the most common mistakes that sellers make. Sellers come into this process with an unrealistic assessment of valuation overall, and importantly to the second part of this question, how other people will look at elements of their business - an academic valuation rather than a real, practical valuation.

Rob Daly: I would agree totally. Most of them have an unrealistic view. They haven’t done a valuation in recent history, or, in many cases ever. They don’t understand that acquirers and other people who invest don’t invest based on what the business has done, they invest primarily in what the business is likely to do going forward. So revenues aren’t just revenues; and the Quality of (not just the Quantity) earnings is important. It’s a whole host of factors that project somebody to get a return on their investment. Too often owners are surprised when they start to get that dose of reality around valuation.

Randale Honaker: We see the other end of it. Most often after the transaction is

complete, and very few business owners are surprised to the upside with the results. What that also means is if they didn’t start the planning process for transitioning the business early, they’re surprised and sometimes disappointed at what that means for their lifestyle going forward, how much the proceeds are going to able to support in terms of their retirement lifestyle.

Sam Warwar: And that’s usually because the cash flow from the business is much higher than the cash flow from investing the after-tax proceeds of the sale.

Don Baker: What are some of the key differences in terms of what a business owner should think about when it comes to leadership succession versus leadership transition?

Rob Daly: Well I think the issue for most owners is how do they get their value out of the business. Figuring out leadership succession, transitioning ownership, and actually getting your equity/cash out has to be resolved in tandem. Most of the time the people who are able to lead and run the business, don’t have the capacity to buy their way into the business. So there needs to be some lubrication, some third party involved: Banks, Private Equity etc and how does that occur? And whats-more, how do you prepare for it? That’s very different than who’s going to run it next.

Sam Warwar: And the succession piece is really part of what a buyer wants to buy … a good succession plan demonstrates depth in the management team. So, if a seller does not have any succession in terms of people who could support the business if the seller is no longer around,

a buyer will discount the value of the business or may simply not be interested. In that case, there’s less for a buyer to buy. Because it’s the management team in many respects that the buyer is depending on to successfully run the business after the acquisition.

Don Baker: Is there a particular age at which a business owner should start working on their succession or ownership transition plan or their estate plan? Or does it have more to do with stage of life? Their children, marriage, business side, amount of wealth, that sort of thing.

Doug Ventura: I’ll start with that one. There isn’t a particular age. I think they need to start this the minute they own the business. This kind of planning is really holistic and needs to be an element of their overall strategic plan for the business. If you are not thinking about how you might ultimately transition, how that relates to your estate plan, how that relates to your wealth and spending plan, then you have an incomplete strategic plan for the business as a private owner. And that’s also what ultimately manifests itself, just like in Randale’s comment a little bit ago, in disappointment when there’s an exit. So often people will plan for infinite detail about the commercial elements of the business, but not do this holistic planning that really should have been started the minute they owned the business.

Sam Warwar: I’ll pick up on the strategic plan point and tie to what Rob said earlier. The buyer is interested in what the business is going to do. And a strategic plan will be the first signal of what the business owner thinks the business is going to do. So the absence of a strategic

plan can actually hurt in terms of going to market and selling the business. In terms of succession and when to start, I agree with Doug. It should be part of the first phase of ownership of a business. That’s true whether it’s a one-person business or a much larger business. A succession plan addresses what happens if the owner isn’t there. That can happen at any point in time regardless of age, regardless of stage of life, and regardless of size of business. The estate plan itself can have in it elements of a succession plan -- who to turn to, what advisors to turn to, what key people to turn to to help with the business, and what to do with the business afterwards. That can all be part of the estate plan and should be for every business.

Randale Honaker: Where that gets very tricky is with family-owned businesses in particular. Where the business itself is the bulk of the inheritance that they’re trying to pass on to their kids. Often we’ll see maybe two or three kids, but only one is in the business. So how do you equitably divide up the estate, allowing the one child who’s working in the business to continue working and buy it out but then still take care of the other children? That takes some real thought and planning. The other thing regarding timing that we see is there’s often a quick decision. “Okay I’m ready to sell the business now, let’s go shop for buyers.” And now the owner has two full time jobs. It is hard work preparing all of the tax and legal documents for the sale that the buyer’s going to want to see with five years of records and still continuing to run the business so that they continue making their net revenue numbers that the buyer also wants to see.

Rob Daly: Those are great points. The thing

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I would add is to almost think about it like somebody getting ready to sell a house. What do they do when they get ready to sell a house? They bring a real estate agent in and they start to look at staging it. And what does a real estate agent say? Well your countertops are outdated, you don’t have an en suite Master, you don’t have things that buyers want. You won’t get the price you are looking for. You end up spending, updating, trying to force value into the house in the 11th hour. So when you think about timing, the most effective thing you can do is run a business to build enterprise value from day one, then you can transition at any time. You don’t just start thinking about the end game and as you age…and start thinking about the next chapter.

Don Baker: What are the three most common mistakes you see sellers of a business make?

Doug Ventura: We’ve already touched on a couple of these. The first is having an unrealistic expectation of value for the business and what that would produce in terms of income streams after the business is sold compared to lifestyle expectations and their needs going forward. Second, because there wasn’t adequate or holistic planning ahead of time, all the focus becomes “in the moment” and transactional with the result that sellers become reactive and often unable to extract full value. And the third part is what we all just talked about not having started the process years in

advance meaning there is insufficient time to make changes and improvements that could significantly impact valuation.

I love the example about the home. Every business owner knows places they could cut some costs for the short term. It’s easy to convince yourself that if need be you could make some changes and improve EBIDTA and you’ll get rewarded by the buyer’s EBITDA multiple. Academically that’s true, but any sensible buyer is going to look at that and see that was just done for window dressing and will discount that kind of improvement. If you had made those same changes earlier you would get the credit in your valuation. Beyond the commercial operations, there should also be a multi-year examination and plan to make sure your tax structure, estate plan, wealth plan and succession plan are integrated and support what you want on exit because all of those are implicated in an exit and not just gross valuation.

Rob Daly: I think the issues really run together. I think the genesis of whatever the top three mistakes are would be not knowing what the options are. And not knowing the rules that govern the particular option. Somebody might raise

their hand and say I want to do an ESOP, and you look at the business and their state of readiness, and you say you’re not going to be able to do that, you haven’t got your company in a position to optimize that option. Most folks don’t know what a recapitalization is, how it works, or how Private Equity really works. Like with anything, there are rules, and formulas. If you don’t know what they are and how they can be levered by your business, you can’t be readying your company for optimizing value at transition time. You’re in the loser’s bracket in a double elimination tournament.

Don Baker: What types of things can sellers do to increase their valuation prior to a sale?

Doug Ventura: There’s always the low hanging fruit things they can do to improve their EBITDA. One of the things we encourage people to do as part of this plan well ahead of time is go through a reverse due diligence. Bring someone in to look at your business as if they were a buyer. Where are all the places that a buyer would look at your business today and say, “I’m going to discount value”? These are things you should think about as part of your strategic plan anyway. Maybe you have customer concentration, for example. Chances are you may need to address that customer concentration anyway. Often the things that become very intense focus of valuation discussion in a sale are actually just the manifestations of broader strategic issues you should have

been considering all along and didn’t. So really challenge yourself as part of your routine strategic planning as if you were selling a business today. What are those weaknesses? Address those you can and be realistic about impact on valuation of those you cannot.

The other thing is if there are people that you respect who know your space, who can give you a good view of what likely buyers might be looking at for your business. They’ll oftentimes help you be a lot more objective about what the weaknesses are in your business – and they will understand those that others in the business may overlook due to the industry - that would otherwise come up when you’re in the middle of a negotiation and diligence.

Randale Honaker: As the owner you should work towards making yourself replaceable. If you’re the linchpin as the business owner, then the majority of the value is walking out the door every night, and you can’t get all the value out of the sale, if the bulk of the value leaves when you do. So work towards making yourself replaceable. What that also does is detangles you emotionally from the business and frees

you emotionally to sell the business.

Rob Daly: I’d add on top of that two things I’d advise owners: One is assume everything about your business is knowable and will be known by the potential buyer or investor, or banker, before any deal is done. No matter what you do with financial engineering. Somebody’s going to call somebody like RSM and say I’m looking at a company, I’d like you to go in and look at the quality of their revenues, earnings, asset utilization etc. So your performance needs to be stellar. Second, what a business is likely to do going forward is a function of people, the talent inside. Therefore, the quality of your team sitting across the table needs to represent the capacity to drive value well into the future. They’re measuring who’s sitting across the table and they’re figuring out whether you’ve got a CFO or you’ve really got a controller. Whether you’ve got a real sales leader or an account manager. They are asking themselves are they going to be able to drive value in this business going forward.

Don Baker: How do sellers manage a sale process without losing focus and harming the business?

Sam Warwar: I think Randale put it well before. Tell clients that are going through a sale that they will have two jobs from this point forward, that is the sale process and running the business. It just is going to take a lot of work, hard work and organized work. And that’s where I think bringing someone in to help them with that process and taking the burden of the sale process is very helpful. Someone coming in and helping with and giving them bite-sized pieces to work on as opposed to them having to think about the whole process. An experienced advisor can down the process into those bite-sized pieces; it makes it easier for them to handle that and run the business. I know Doug does that extremely well for sellers all the time.

Doug Ventura: Yeah and we typically see it in the companies that are the sub 50, even sub 100 million dollars in revenue. They don’t have that kind of corporate development experience on staff. They’re just not big enough to support that, but that’s the kind of experience, project management in a complex project like that, that companies need when they’re going through a sale. An exit is one of the most emotionally draining times any owner will have with their business. Now they’re in the middle of a sale transaction and a large strategic opportunity inevitably pops up. It is difficult to pursue those opportunities and make those tough decisions under any circumstance. Trying to do it when you’re stretched and you’re exhausted because you don’t have the resources to manage the demands of a sale transaction is a double mistake – both the strategic opportunity and the sale will suffer. We always encourage sellers to bring in some experienced help that can manage through the day to day of that kind of a process.

Rob Daly: And hopefully the company has an advisory board, which most of the time, isn’t true. They need somebody to help get the business ready.

Sam Warwar: And it’s surprisingly an emotional time. You think about business being cold and hard and numbers. It’s a very emotional to sell your business. It becomes a surreal experience for them when they’re running the business and thinking about selling the business and dealing with the emotion of selling the business. And the emotion isn’t emotion as in sadness, it’s just anxiety. They’re anxious about what’s going to happen. And that creates a terrible environment for making

the best decisions when issues come up in the business or in the negotiation. It’s very important to have some objective and experienced advisors who can help through that process. I think in addition a board of advisors or consultants, a project manager, that Doug was talking about, is critical for something like this. Otherwise, it becomes overwhelming.

Rob Daly: To compound it a little bit more, the process is often kept confidential within the company. So they’re not only trying to get their day job done, but also plan the sale, with limited resources. It’s complicated.

Don Baker: Why do earnouts have a bad reputation?

Sam Warwar: I think they have a bad reputation because of two things. It’s very hard to create a set of rules that will deal with all possible situations that can come up in the future. It’s like trying to predict the future and having a set of rules for it. There’s just too many possibilities. I think it also has a bad reputation because it’s an easy thing to have a story to tell about it, about how it didn’t work out in this past case. I think a lot of seminars and more academic discussions will use an experience where it wasn’t well addressed and didn’t work out as a reason to never do it.

Well sure, avoid an earnout if you can get the money upfront. But many times the earnout is how you get all of the value that the seller wants, so it can’t be avoided. From an academic standpoint you’d rather avoid it, but the practical reality is you’re going to have them in many situations and they’re a very useful tool to get the seller what they want. With experience, earnouts are really not that difficult to deal with. If you have experienced advisors on both sides drafting the earnout provisions, an earnout can be managed effectively.

There are some things to avoid if possible. For example, make the earnout based on gross revenue rather than profits. That’s an easier thing to draft rules for. But if you do make it based on profits, there’s some things you can draft into the rules to make sure the buyer isn’t manipulating the profits in an unfair way.

Rob Daly: I think part of it is because the words, it is an earn out. They are essentially holding you accountable for delivering the numbers and forecasts that you put together. And in most cases, those forecasts are not achievable. So it’s stressful. I sold a business years ago and I went with it. I ended up running the combined entities that I got folded into. After I saw the business case that they used to buy my company, they had massive expectations. They thought there were a lot more synergies than I thought there were. I inherited that on the other side and it’s extraordinarily stressful.

Doug Ventura: My experience when I was on the corporate side doing M&A - often in competitive scenarios for deals – was exactly your situation. One of the keys to assess is whether the earn out is being used realistically or not, because unrealistic views of value are not limited to sellers. As you’ve just illustrated, often the buyers do and sometimes for buyers to sell that deal internally, they sign up to synergies and overly aggressive performance expectations, that then backs its way into an earn out. In other cases the buyer doesn’t believe the seller’s projections but wants the deal for strategic reasons and figures that if the seller is bold (dumb) enough to sign up to aggressive earn-out targets the buyer has no risk. The seller is indeed overly anxious to get to a number because they have an unrealistic valuation and the earn-out looks like the

TESS HOWDIESHELL/DBJ SAM WARWAR


perfect solution. In both of these common situations the earn-out it is really just a band aid over bad assumptions and destined for failure. We always encourage sellers to try to understand what’s really driving the buyer’s assumptions in any earn-out. Why did the buyer agree to an earn out in this case? If it’s just a band aid to try to bridge over your differences in valuation or to help the buyer’s deal lead sell it up the corporate ladder, don’t do that deal.

Then the other one is culture. And I know that’s a trite thing in some people’s minds. If you’re going to do an earnout you better be sure that your management system and expectorations are going to fit in that new culture very well because the buyer is going to hold you responsible to your projections. Is hitting those projections dependent on investments or market nimbleness and your decision-making. In a large company and public companies in particular, the decision systems and tolerance for risk are vastly different from most sellers’ entrepreneurial past. You better really challenge your assumptions and your decision authority - things that you might not be able to legislate in the purchase agreement or to enforce in any event. You’re going to have to make those judgments as part of your reverse due diligence as a seller in that case.

Don Baker: Do you recommend family meetings to help prepare for the transfer of a business or a family’s wealth from one generation to the next? Or is that something that the current owner or head of the family should decide for themselves?

Randale Honaker: Yes, we absolutely

recommend family meetings if there’s substantial wealth that’s going to be passed on. It’s almost always the case that the people inheriting the wealth have different life skills, needs, capabilities and are in different scenarios. Many parents will treat their children fairly but differently. Hearing the “why” and “how” of the estate plan directly from the parents, or from whoever the decision maker happens to be, gets rid of a lot of confusion. Trusts can also get especially complicated and very few of the beneficiaries are reading that two to three-inch thick document and even if they do they may never really understand what the intent is. These conversations can be difficult but helping facilitate family meetings is something we do for clients. The end goal for most families is that the wealth being left behind is a blessing to the children and grandchildren rather than being something the children fight about after the parents are gone.

Don Baker: What about selling a business that’s a family run business, is it just the parent or do you encourage them to get everyone involved?

Sam Warwar: I would add that it is very important for the owner to think about that and understand maybe what isn’t obvious and that is sometimes children, whether they’re in business or not, can be affected by a sale of a business. The business many times becomes the family identity. Maybe they think of themselves as the business. The business may have a place in the community. It could be the broader community, it could be a smaller community like friends and acquaintances that the family identifies themselves with. Also, some family members may

also have expectations that they may be inheriting the business. Sometimes these are unrealistic expectations, but an owner doesn’t want to find out about that after they’ve made the decision to sell and they announce it and the children or in-laws now are very disappointed. So, it’s important for the owner to think about discussing it with the family beforehand. It’s a balancing act because you don’t want to broaden the base of people who know what your plans are because you want to be sensitive to confidentiality even before you enter in to discussions with someone. But you have to live with your children afterwards, and they can be very disappointed and that can create problems after the fact. So, I think it is very important to talk beforehand.

Rob Daly: And the way we approach the whole transition process really starts there. It starts with the owners, and all the influences on the owner. And part of what you discover is that part of the reason they are starting this process late is there is a whole host of those conversations and family issues they don’t want to deal with. Like, when the spouse of the owner doesn’t like how the transition treats the children. Or how the children are engaging their father. My encouragement to folks would be if you have complicated family dynamics, or multiple generations then you should have a family counsel (in addition to a board). The family has a structure to it, where they’re trained over time in the decisions related to the business and ultimately how it will treat them. Absent some communication and business rationale, people will ultimately feel that they have been treated unfairly.

Randale Honaker: Yes, we have a scenario

actually right now where the father has run the business for a long, long time, has three kids, a while back he gifted shares equally to all three kids when none of them were working there. Now, years later one of the kids has come into the business and is the heir apparent. They are the day-to-day manager and running everything, but they are an equal owner with the other two siblings who are not participating in the business at all. Now we have the inheritance issue; one child is building and driving the value of the business and ultimately the estate, and the challenge is how do you treat the kids in a way that doesn’t harm the long-term sibling relationship but treats everybody in a fair way.

Rob Daly: We did a transition plan about year and a half ago that had 14 family members in it. Nine siblings from Generation 2 in the business and then a whole new generation coming up. They had a family counsel in place. The transition recommendation was not to sell the business but to grow it and grow it aggressively. They had substantial opportunity for growth. So you have a generation of folks that have to get paid out at some point in time. The business has to have capital to invest. In addition, generation three needs to gain some ownership at some point. So without the council to build trust and family rules, and policies it would have been impossible to navigate the complexities of their transition.

Sam Warwar: The wealth planning that Randale mentioned earlier is critical in any situation where the business has substantial value. Liquid wealth is much different than property wealth. A business

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may be worth a lot of money but when it converts to cash people start to look at it differently. You can measure liquid wealth so easily and it can translate into an expectation of the lifestyle that those dollars can represent. Liquid wealth is first a burden for the owner, especially if he has children who are going to inherit the wealth. He’s been trained to run his business or experience in running his business, and now he’s going to have to figure out how to invest it or turn it over to somebody else to invest it. That creates its own set of anxieties and burdens. But there’s also worry about what it will do to children. What it will do to their ambition. What will it do to sibling relationships that Randale mentioned earlier, if it’s disproportionate among the children because one or more of the children may have been working for the business and had received part ownership.

With proper planning, the burden can move to becoming a responsibility. Much like owning the business, the owner should start to think about their wealth as a responsibility. And they manage it the same way they manage their business, responsibly. And with that they should start educating the next generation. If the owner can successfully treat the wealth as a responsibility, then the next phase is to turn wealth into something that becomes an opportunity, where they can actually enjoy it. With proper planning everyone is educated on what wealth means and that it doesn’t necessarily mean an easy road ahead; and working it responsibly can become an opportunity. That takes a lot of planning with wealth advisors who have been through it with a lot of families.

Don Baker: Are there special considerations for particular types of assets that people should consider in their estate planning essentially?

Sam Warwar: I think we’ve talked about the one most unusual asset that would be in somebody’s estate plan and that’s a business. Because so many other assets are static, or they’re care free or relatively easy to care for, property, cars, boats, even lake house or vacation homes, they’re easily managed. The business is a liability in many respects. Somebody has to take care of it. And so a business that is part

of an estate requires a lot of forethought and a lot of the transition planning and succession planning that Rob mentioned. It has to be done to put the family in the best position possible through the estate plan to inherit that responsibility and that liability of running a business.

Don Baker: Are there tricky things like art collections or even very valuable wine collections or something like that, those types of assets that might survive to the next generation?

Randale Honaker: Anything that’s either difficult to sell or has a strong emotional attachment to it, both need to be treated carefully. Difficult to sell things can be lots of investments, right? It can be the family business. Those are difficult to sell without proper planning. We recently had a client, the husband passed away and had a substantial stamp collection. He knew the value of everything, but it wasn’t very liquid. Each of those stamps was hard to sell and you had to have the right buyer. When the spouse inherited everything, she didn’t know any of that so when she sold it she got a lot less than what he had known it was worth.

Wine collections are the same way. If you’re part of a niche community and you know what the value is, but it maybe only has that value to a handful of other people, that could be hard to sell at a moments notice. And so curated collections are difficult to liquidate. The other category is things with a strong emotional attachment. Most real estate if fine, but sometimes you end up with a vacation home that for one sibling versus another really means a lot to them. That’s where their son learned how to swim jumping off the dock and that’s where he taught his daughter to ride a bike, and so there’s real strong emotional ties to that property for one family member versus another. And so I’d say those are broad categories of things that need special treatment.

Rob Daly: And to your point about emotional attachment, they all have emotional attachment. I’ve dealt with car fanatics, vintage automobiles. Where do you think those automobiles sit? If you guessed the Company warehouse, you would be right. Add expense burden to the company, right again. And often the next

generation wants no part of it.

Randale Honaker: Yes, it kind of circles back to where we started - are people overly optimistic with their sale’s price? They’re overly optimistic of what they think they can net and they’re overly optimistic with what the lifestyle they think that can provide. I think a best practice if you will, for beginning the transition process, would be just sitting down with someone like myself along with these other gentlemen, and asking “How feasible is it that I’m going to be able to sell my business five years from now?” and “I’d like to spend X dollars a month, what do I need to net on the sale in order to sustain that lifestyle?” And then those numbers really drive you to what you need to do from a valuation, business growth, and development standpoint.

Doug Ventura: That’s why it has to weave all the way back up into the company’s strategy. Like your example before about the company with a great growth profile. It may be it is best to go seize that growth potential but to do so requires keeping capital in the business. On the other hand, the best approach may be to take some chips off the table over the course of a few years while optimizing EBITDA and lowering risk in places. If you aren’t thinking about all those other things on the personal side at the same time, what otherwise looks like academically a very pure and appropriate strategy may actually be the wrong strategy for your long-term objectives - you’ll still get to having an exit transaction, it just won’t be the one that you really need.

Don Baker: When should a seller engage a banker or broker to market the business?

Rob Daly: I think somebody should engage whether it’s a business broker or an investment banker fairly early on.... understand how they work, what their rules are. If they’ve decided to sell they need to have structured advisors that are helping them bring their business forward. You always want a talented team of advisors who do every day, what you the owner will most likely, only do once.

Doug Ventura: It all ties into that notion of this comprehensive long-term plan. One of the folks on your core team of advisors should be someone who has that experience in selling businesses. You need realistic input for your wealth planning and your estate planning advisors so they can do their jobs. I always encourage folks if you can be planning that at least 36 months ahead of when you might actually want to complete a sale, you should have that whole team in place and be planning. Now actually engaging the banker or broker to start their sale process, that is probably at least 12 months before you would hope to close.

Don Baker: How early should a seller start thinking about structuring and tax issues with a potential sale?

Sam Warwar: The single largest expense an owner is going to incur in selling a business is taxes. And so he needs to be thinking about that at the earliest stage possible. Actually, when the business is being set up, it should be structured with a mindset of what will the best tax structure be, not for today, not for 10 years from now but rather over the life of the business, including the sale. And that should be continually revisited over the life of the business. So, the earliest possible time is when the owner should be thinking about taxes because you can usually save significant taxes in a sale depending upon the structure of the business.

And in the sale negotiation itself, again as part of the preparation of going to market, there should be a tax analysis done of the optimal structure for the seller’s benefit. Because, depending upon their tax situation, there could be a 20% to 30% difference in tax cost and so by identifying the ideal structure before an owner goes to market, at the earliest stage

they can shape the negotiations to achieve the ideal tax outcome. The mistake, going back to one of the questions earlier, what’s a mistake that sellers make sometimes? They only think about the sale price as opposed to the net after-tax proceeds. To Randale’s point earlier, it’s the net after-tax proceeds that they’re going to have to live off of. They need to understand not what the purchase price offer is, but what’s the net after-tax proceeds. You shouldn’t start negotiating that after the letter of intent is done. You’ve got to negotiate that at the earliest state before the letter of intent is done in the sale process. And usually that’s when the seller has the most leverage anyway. That’s the latest time you can start thinking about tax is before you start negotiating the sale price because you’re really negotiating the net after-tax proceeds.

Don Baker: How important is the early negotiation and letter of intent in the overall structuring of any transaction?

Sam Warwar: It’s critical that you negotiate that up front. Think about the sale process. When the buyer makes an offer to buy at a certain price, he’s really buying multiple things. If the seller thinks they are only selling one thing, you’re probably going to under represent your best interest. The buyer is buying the hard, tangible assets. The buyer is buying the right to run the business and the customers and all those intangibles and controlling the business.

He’s also buying an insurance policy that the seller will issue to the buyer in the form of a definitive agreement that has representations, warranties and indemnification in it. All three of those have to be negotiated up front during the letter of intent phase to put the seller in the best position possible. Because if the seller only negotiates thinking about the price, he may not recognize that in the later stages of the negotiation, there’s going to be another negotiation over the assets. The buyer is going to ask how many assets am I going to get on the day of closing in the form of net working capital? Now the buyer wants to negotiate that before the deal is done obviously, and he may negotiate in a much stronger position later. After that, then the indemnification has to be negotiated. Likewise, on the structure of the deal. If the seller is only thinking purchase price, he may miss the opportunity to save significant taxes by structuring the sale in the best way possible to save taxes. If you agree on the price before you agree on what you’re delivering and before you know the structure, and you now can’t negotiate with anyone else because the letter of intent has an exclusivity provision in it, the buyer is in control because he’s already set the price. And now he’s going to negotiate what he’s going to get for that

TESS HOWDIESHELL/DBJ

TESS HOWDIESHELL/DBJ

DOUG VENTURA

RANDALE HONAKER


price. So it’s very important to think about structure, indemnification, all those things up front in the letter of intent phase.

Don Baker: What are the top tax pitfalls for sellers to be aware of when selling their business?

Sam Warwar: Usually, what is the tax? Not understanding what the tax is going to be is the biggest pitfall. Going backwards from there, getting the right structure in place. Is it a stock sale? Is it an asset sale? Is it something else? Those are the kind of things if a seller doesn’t think about those early and negotiate those early, it usually ends up being to the seller’s detriment. Because the buyer will be able to negotiate a better deal after the letter of intent to their advantage rather than the seller’s advantage. Again, because they’re the exclusive buyer at that point in time. The seller doesn’t have anybody else they can negotiate with. So early on, understand what the tax structure is. Doug mentioned earlier reverse due diligence. A lot of times we find that tax problems come up in the due diligence phase. The seller thought he was a qualified S-corporation, but when the buyer starts doing the due diligence, bringing in RSM and others who do due diligence, they may discover the seller is not a qualified S-corporation. There may have been a big problem with the S election that was filed. That’s a common mistake because it’s very easy to make mistakes in an S election. So discovering those during the phase where you’re getting ready to close puts you at a significant disadvantage.

Rob Daly: The buyer has a tax strategy too. He’s working on how he’s going to be treated on his side. Make sure you know what that is. Secondly, there needs to be a tax strategy, not just tax decisions at the time of sale.

Don Baker: So how can a seller share sale proceeds with key employees, and how is this best addressed?

Sam Warwar: It’s best addressed earlier, before you go to sale, because you can actually start to align your key employee’s objectives and interests with the owner’s interests so when they get in the sale process, they have the same outcome they want to achieve. The management team is many times interacting with the potential buyer as their future employer. There’s a bit of a conflict of interest. Who did they want to satisfy most at that point in time? Their future employer or their past employer? So, if you can align the management team’s interest by giving them a piece of the outcome, then you increase the likelihood they’re going to be aligning with the owner’s interest. And you can’t do that after the fact, obviously. You have to do that before the fact.

It goes back to the strategy part Doug was

talking about. You can set that in place years in advance. Saying my outcome as an owner is to achieve this future vision. Here’s how I’m going to share success of that future vision with the management team. Well, it increases the likelihood you’ll achieve that outcome. And then in the sale process, the management team is desirous of getting the transaction done on the best basis possible because they are getting a part of the sale price. That’s, I think, the best way to do it. Sometimes owners will say I’m going to give them a bonus after the fact, and I’ll decide how much near the end of it. They’re giving something, but they’re not getting anything in exchange for it. By identifying this incentive opportunity up front and structuring up front, now the owner gets something in exchange for it, which is hopefully better effort, more focused effort towards the strategic outcome. They’re also getting the management team’s support during the transaction where they’re supporting what the seller wants more so than maybe what they’re interested in as a future employee.

Don Baker: Looking at the negotiation process again, how can a seller best negotiate the indemnification, escrows, holdbacks, and seller financing terms?

Doug Ventura: Make it part of the discussion from the very beginning. Negotiate all this into the letter of intent. The rule of thumb - and it’s what happens in the real world - is the seller’s leverage drops off the table when the letter of intent is signed. It’s not when the definitive agreement is signed because the seller emotionally becomes attached to a transaction at the letter of intent. To Sam’s earlier point, they’re signing up almost always to an exclusivity commitment for a period of time at the letter of intent and in their strongest position on negotiating any of these terms - that’s why it’s critical to have your tax profile nailed and negotiate any holdbacks, escrows, financing upfront in the letter of intent. Buyers intentionally will try to get a very thin letter of intent because they really just want the exclusivity and they know once you’re signed up to that, all the leverage has switched to them. And they’re counting on emotion playing on the seller’s mind. Most sellers will not want to walk away from a transaction after passing over the emotional hurdle of the letter of intent.

Don Baker: How do you see the world of planning changing in the years to come — particularly when it comes to Generation X and Millennials?

Randale Honaker: One change that we’re seeing, not necessarily in planning, but what we are seeing as it relates to Gen X and more so even with Millennials is they’re much more interested in what they are investing in than older generations. That’s an interesting trend that we’re

seeing. It’s what we are starting to call Socially Responsible Investing. It’s a way of measuring companies. How many female board members do you have? What’s your environmental footprint? All these different things. The Millennials are becoming more interested in how they

are investing and looking at how they use wealth to influence the world, rather than how do I use wealth to secure my lifestyle.

Sam Warwar: You see it a lot with the corporate environment or institutional investing. You’re seeing it more. And I’m not surprised you’re seeing it in the Millennials. I think what we’re seeing in the Millennials that are starting their business, they seem to be more strategic. They’re thinking more about their strategy and their planning and their exit. They’re not living just in the moment which is interesting. I hate to use the term ... they’re approaching it smarter. They’re bringing more thought to what they’re doing. I think the other thing is they’re focused more on exit. They’ve seen so many businesses in the technology world become successful very early on in the company’s life cycle and they’re exiting very successfully. I think that’s influencing how they’re thinking about their businesses.

Don Baker: What would you say is the most important consideration for any business owner when looking at any of these issues?

Sam Warwar: Plan. Plan for all the possibilities and be prepared for all the possibilities the best you can. I said earlier, you can’t predict the future. It’s hard to have rules for the future. But, if you’re making planning a continual part of your business operation, you’ll be in the best position possible to deal with whatever comes up. Whether it’s selling a business or not selling a business, it’s the same thing. Plan. Plan for what you want the future to look like. And I think that increases the likelihood you’ll be able to achieve what you want. And I’d encourage Doug and Rob to weigh in because it’s what they do every day.

Doug Ventura: I would say add the word integration to your planning. Don’t just do your strategic planning for the business completely separate from your personal planning and your intergenerational planning. All those things need to be integrated. Bring your experts together. Leverage them working off of each other.

Rob Daly: I don’t know if you guys ever watched any of the home channel, the housing stuff. There’s a program called “Love it or List it.” It is based around a couple where there’s a little fatigue around their house or their family is growing or they’re considering a shift. So somebody comes in to find out what they don’t like about it, then they take a budget and updates the house to fix the problems. And a real estate agent comes along to go find what they’re looking for. At the end they decide whether they’re going to stay where they are or whether they’re going to list it and buy the house found by the agent. The advice I would give anybody is the love it or list it advice. Which is do everything you need to do to love the business, hire talent, improve the process, innovate the products, invest the capital to modernize, etc., and you can maximize transition on your terms during good market times. Readiness has been taken care of.

Randale Honaker: To Doug’s point. If you were part of an ultra-high net worth family, you would likely have a private family office. Staff would include your family attorney, your family accountant, and your family financial advisor. And they would probably all be sitting in a room together, thinking and talking about just your family. But you don’t need $50 million to get your attorney, your accountant, and your financial advisor to go out to lunch and talk about your scenario from all the different perspectives. That’s something we do regularly for clients, and having a more complete picture helps us give

better advice.

Don Baker: Are there some often overlooked components of an estate plan that we haven’t touched on?

Randale Honaker: You know something that we’re seeing become more important is digital assets. It is a relatively new area to think about with estate planning. Passwords and their location are important. Things like the password to your Facebook account so your heirs can go in and shut it down. Passwords to pure Online banking where you may have a side checking account. Passwords to your computer where all the family photos are stored and your passwords may be stored in your head. All of these digital assets are becoming more and more critical as the digital world is becoming more integrated into our lives, so being able to unlock those assets post-death is a big deal.

Don Baker: Do you have any last bit of advice to business owners?

Randale Honaker: What keeps running through my mind is a maxim from the Stephen Covey book The 7 Habits of Highly Effective People. “Begin with the end in mind.” That’s true across the board. It’s particularly true with all the complexities we’ve been talking about today. It’s really thinking through where you want to be when you are no longer running your business and finding the best way to get there.

Rob Daly: That would be my first choice. My second choice would be do some kind of assessment or some kind of benchmarking activity that allows you to have some perspective. By way of a short story: Every year in Cincinnati they have a citywide amateur tennis tournament, and it ends up, the winner, the best player in Cincinnati, gets the 150th seed in the ATP professional tournament one month later. If all you saw was the best player in Cincinnati, you’re looking at a very good player. That player has never taken a set off of the tournament professional. You would never know how good the pros are or the amateurs aren’t until you see them play each other. Most owners are heads down in their business and living in that world. They could benefit from some sunlight, or benchmarking activity to see where they stack up and what can they do to improve value.

Sam Warwar: I’d agree with that. Bringing somebody in who’s objective, who can bring the business owner some objective industry data so they can benchmark themselves and where they’re performing well and not performing well. And then using that analysis to really determine is there more upside in their business or is the cost benefit of trying to achieve that upside worth the effort? Both in terms of dollars and physical effort and the work it’ll take to get there. Or should they just go to market now? That’s something you have to do at least a year or two in advance. If it’s a decision to hold on to the business for a while, it may be multiple years before you can achieve the benefits. I think bringing that external data is critical to a business because business owners do have their heads down. They’re running their business, which is full time. It’s hard to step out of their business and look at it objectively. Disclaimer UBS Financial Service Inc., it’s affiliates and its employees are not in the business of providing tax or legal advice. Clients should seek advice based on their particular circumstances from an independent tax or legal advisor.

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business succession & estate planning · august 31, 2018 table of experts: business succession...

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