By Scott J. Storey and Mark Grunder, CFP®

Looking Ahead Business Transition Planning page

Over the years, when I have met with business owners to discuss personal financial planning, I have asked two inevitable and unavoidable questions: “When will you retire?” and “What will you do with your business?” The typical answer has been, “I don’t know…I haven’t thought about it.” If you responded the same way, you’re not alone.

The answer to “When will you retire?” is the calculus of Resources (assets), Income Requirements (future expenses), Rate of Return (future growth of assets), Retirement Duration (years of retirement), and Willingness to Retire (likelihood to leave the workforce); empirical number crunching for a theoretical future event. Planners have fancy tools to test the bounds of the question, and through a series of possible scenarios, can give business owners data points to deliberate.

For most business owners, however, the more difficult question to answer is, “What will you do with your business?” The irony of the question is that the preponderance of the business owner’s net worth is typically tied up in their business, and yet its disposition has not been contemplated. Ostensibly, there are three possible answers to the question: Give it (or sell it) to my kids, or sell it (or give it) to my employees, and sell it to a third party. Or, maybe a combination of all three.

The aforementioned possibilities take time to develop, particularly a sale to a third party. As such, we advocate prospective planning to discover the financial and emotional viability of each business transition option, and align them with the owner’s objectives to form a “Plan A.” We also urge our client to develop a “Plan B,” should their circumstances change. A myriad of life events could alter “Plan A”: death, disability, dispute, and divorce. “Plan B” ensures there is a plan to address those possibilities.

In working with business owners, it is surprising how few understand the range of liquidity and exit options available to them in today’s marketplace. The capital markets have evolved dramatically to serve the varying needs of owners of closely held businesses. Until recently, when a sale to a third party was contemplated, most were limited to one option: sell to a larger competitor. While this path works well for some and typically satisfies any liquidity desires, it often doesn’t address other, non-monetary concerns of the owner, most notably the future of the company, remaining family members and employees under the new owner.

The proliferation of financial investors during the past 10 years has changed the mergers and acquisitions (M&A) landscape and resulted in business owners having immense flexibility in how a liquidity event can be structured. Today, owners are able to effect transactions that allow them to create significant liquidity while still achieving other priorities which can often include keeping the company intact, protecting the interests of key employees and family members, or positioning the company for growth. Each owner’s situation is unique and so we advocate working with a team of advisors including financial planners, investment bankers, attorneys and CPAs to help you define your goals and understand the possible alternatives to achieve a specific set of objectives.

Well before the decision is made to execute any type of transaction, it is important that business owners understand how investors attribute value to a company so that owners can begin preparing early on for the eventual liquidity event. Even if an owner believes that a transaction is far off in the future, planning now can ensure that you take full advantage of future opportunities. Many would-be future sellers accelerate the decision to sell for a number of reasons, including changing personal dynamics and higher prices than previously thought achievable. (For example, today’s M&A market is incredibly robust and acquirers are paying more than ever for quality assets. This has pushed up the liquidity timetable of many business owners with whom we have talked). Therefore, we would suggest that it is never too early to think about how to properly position your company.

While every company is different and a conversation with an advisor will help flush out specific issues, there are a number of common value enhancers that every business owner should think about well in advance of a transaction. These include filling vacancies in the management team, institutionalizing a robust financial reporting system, investing in professional financial statements, limiting customer and vendor concentration, and mitigating litigation or environmental issues. If a business owner wants to cleanly exit from the operation soon after a transaction, building a solid management team is essential so that the company is not too dependent on one person. Furthermore, buyers are reluctant to acquire companies that have management deficiencies or invest in businesses that are too reliant on one or two key managers. Transparency is also an important value driver and there is no easier way to demonstrate that than by having an audit and strong financial controls in place. Financial reporting is one of the easiest issues to address that will immediately enhance future value.

The decision to sell all or part of your business is a major life event that should be given careful consideration and undertaken only when the time is right for you. One common thread in all successful transactions is preparation well in advance of the liquidity event. BB&T Capital Markets, the full service investment banking division of BB&T, is a leading middle market M&A advisor and a resource for business owners to assist in the preparation and execution of a sale transaction.

About the Authors

Scott J. Storey

Scott J. Storey

Senior Vice President, Investment Banking Group, BB&T Capital Markets

Scott has extensive experience advising companies in M&A, capital raising, operational, restructuring, and global capacities. His career focus is in investment banking, mergers and acquisitions and equity and debt capital raise transactions for middle market companies. Scott received a B.S. from the University of Virginia and an M.B.A. from the University of North Carolina at Chapel Hill.

Mark Grunder, CFP®

Mark Grunder, CFP®

Senior Vice President and BB&T Wealth Regional Director

Mark is a BB&T Wealth Regional Director. He has more than 25 years of financial planning experience, has published articles on financial planning and is an active member of the Financial Planning Association. Mark has been with BB&T since 2005.