[Speaker 1] (0:00 – 26:49)
You’ve built your business over decades, and now it’s time to think about that once-in-a-lifetime exit. You’ve come to the right place. Here you will hear business exit professionals talk about what you should know before exit.
Hi, I’m Armando Roman, Family CFO at Axiom Founders Family Office, a wealth management firm in Scottsdale for founders families. Here at Axiom, we know you want to be financially confident and secure. And the problem is, there’s so much noise and just plain bad information out there to make informed choices for your family, especially when you own a valuable business.
And that can make you feel confused and frustrated, which is why the FBI asked me to train 400 FBI special agents, all of them CPAs, to train them in their own personal financial planning. So call my office today to schedule your 30-minute founders strategy call at 480-367-900. There’s no cost, no obligation.
You have nothing to lose. Enjoy this episode of the Founders Guidepost. In this episode of the Founders Guidepost, I’m going to go through the questions I’ve been hearing from people as we’ve been making invitations, extending invitations to our upcoming Scottsdale Founders Forum.
And the event is all about exit. When it comes time to think about the exit of your business, which is typically the most valuable asset your family now owns, it’s got to be done in the right steps, the right process, the right time so that the outcome is best for you. So as we’ve been calling to invite people to our private invitation-only event, the Scottsdale Founders Forum, we’ve had some interesting conversations with people.
And I’m going to go through the 10 questions or comments I’ve been hearing from people as we’ve had conversation about their business, that most valuable asset, and what they think they will or will not do when it comes time for them to exit from the business. First question was, and I heard it a few times, the question is, what is my number? And what they were saying is they’re not sure what their number is.
Meaning when it comes time to sell, how much would they sell the company for where they feel that’s the right number for them? Now, the reality is, there’s always a market value on everything. And what the market will pay is not always what the owner wants to get.
Those are two different numbers. It’s the same thing when it comes to your house. You might want to get a big fat number if you sell your house, but the market has a certain price, and that’s where you are.
Now, the difference in a business is, it is not completely unusual that a strategic buyer can come in and pay much more than the numbers might otherwise say the company is worth. So you do have an advantage there if you find that right buyer, and you are just the right company for them. So for you, what is your number?
Do you know what that number is? And when you think about that number, think about the after-tax effect. So if you sell the company for say $20 million after tax, what does that really mean?
Because what really matters to you is after-tax money. So again, what is your number? Second question, entity structure.
Does the entity structure matter on your business? Yes. And quite simply, they’re in the tax code, the federal tax code.
If you are a certain type of entity and you go through an exit a certain way, you can literally pay zero capital gains on the sale of your company. Many people don’t know that. Many people have never heard about that.
And I’m sharing that with you because it’s a very valid question. Does your entity structure matter? And what I would also say is when you think about your business and the different value drivers in your company, it’s a very common structure to have the operating business in one entity, the assets in another entity, and a management company overseeing and being part of that as well.
So it’s really understanding what your value drivers are and where is the value. And that should get to answer the question by entity structure as well, because the different entities that are part of your company need to be holding the different parts of value, depending on your business, of course. The third thing, taxes.
How do you reduce the taxes on your sale? Well, it all begins with 4:49 – 7:00 family relationships that are so important to you. How do you navigate all those?
And the easier part of that is probably the structuring with the taxes and the entities and that. The more difficult part is making sure that all the people in that second generation are understanding what is happening, why it’s happening, why is it being structured a certain way, and communication is key. I’ll repeat that.
Communication is key from generation one to generation two, and making sure that generation two understands what’s really happening and why. And just because, say, you have four kids, it doesn’t mean that each kid needs to get 25% of your business. That’s simple math, and yeah, that kind of makes sense and seems equitable.
But when you’ve got some in the business and some out, some who care about the company, some who don’t, well, there are other ways to be fair to the four kids than just giving them all an equal ownership of the company. And so when it comes to you passing that on to the next generation, communication is key. Looking at the best way to do this really makes sense for or really has to be mindful of who is in that second generation.
And you know your kids. You know which ones are kind of hotheaded, which ones are short-tempered, and which ones run purely on emotions, which ones run on logic. You’ve got to understand the personality types and make sure you put mechanisms in place, structure in place, and all of that so that you maintain the family relationships, which, of course, are incredibly important as well.
The second part of not wanting to sell that I heard from another business owner is we want to keep the business until we die. And they were pretty darn adamant they were going to keep that company until they die, which meant maybe another 20 to 30 years or so. And that’s great.
That certainly is a way to go. My immediate thought when I hear that, though, is, well, what could change in the marketplace that could decrease the value of your business? What if you suddenly have a health issue that requires you to step away from the company?
What if, what if, what if always comes to mind? For them, unfortunately for them, they had an investment banker they were talking with who, when they said to that investment banker, we don’t want to sell, we want to keep it until we die, the investment banker very thoughtfully asked questions, which are basically a SWOT analysis. What are your strengths?
What are your weaknesses? What are the opportunities? And what are the threats?
And as he drilled down on some of those with them, and this is what they came up with from their own opportunities, threats, et cetera. But when he asked more questions about each of these areas, it became apparent to the owners of the business that for them, maybe keeping it the next 30 years, maybe that wasn’t the best thing that they should do. Maybe they should instead explore if they took the business to market in the next 12 months or so, what might that look like?
And he also gave them a range of value between X and Y. That’s what the range of value will probably be once it’s ready to go to market. So again, if you don’t want to sell your company, don’t sell it.
But it is important to understand what the options are and what that landscape looks like and thoroughly understand it so that when you have made that decision, it is in fact the right decision for you at that time for your family and your company. The next question I’ve been hearing is, I can’t make any mistakes. This is a one and done, meaning that when this exit happens, and now that money goes from the owner’s business to their personal pockets, there cannot be any mistakes.
It is that critical. It is that important to the family that it be done correctly or correct, that it be done right. So one and done means this is once in a lifetime chance to have that exit.
Got to be done right. Well, how do you get things done right? You take all the appropriate steps.
You get all the appropriate counsel from your tax CPA, your business attorney, your investment banker, your family CFO, wealth advisor, from all those people that need to be part of that picture so that when it is all done, there’s no question you took all the appropriate steps. So again, if this is a one and done, and this is your golden goose that is going to now take care of the family for the next generation and beyond, it has to be done right. The next question I heard was about trusts, having trusts that are domiciled in Arizona, in Tennessee, in Delaware, where should your trusts be domiciled?
And that question comes down to what does the state law look like in each of those respective states? Because every state has its own state laws. And it’s important to understand in the context of you and your family and your company where you might want to have those trusts established and why might you want to have those there?
Some of the different states offer anonymity, meaning when you set up a trust, nobody can see who owns this trust and who is the beneficiary. That’s what anonymity means. So if you are in some kind of a lawsuit, that means that the other side who maybe is potentially going to sue you, they can’t see that you own that trust.
That’s what anonymity means. It might also mean favoring beneficiaries, favoring trustees, favoring laws that are just different from state to state. So obviously with 50 US states, each state has its own laws.
It’s important to get an attorney who really understands what you’re trying to accomplish and that he or she understands the different states that the entities can be created in to accomplish the goals that you are trying to accomplish. The next question I heard was, how do I increase the value in my company now? So you have to understand what are your value drivers.
And you might have, say, three product lines and maybe you’re going to sell one next year and the other one the year after and the other one the year after that. Well, the value drivers are what creates value in your company. So if your company is worth, say, $20 million, what is really that $20 million consisting of?
What is driving the value to get to that $20 million? And if you’re not sure what those are, that’s when an investment banker can be really helpful. That’s when maybe an appraisal company or valuation company can also be helpful because they can look at the market and look at that as well, or maybe even a business consultant.
But what are the value drivers in your company? Are you wondering if you’ve missed anything in your financial planning? We hear that a lot from very smart, very successful people.
Stop wondering. Offload that responsibility to professionals who do this for a living. Start by scheduling your founder strategy call at axiomcorp.com.
And that gets to the question of how do I increase value now? It’s quite possible. I spoke with the CEO recently and he mentioned this for one of his clients.
It’s quite possible that your product lines have different value and one of them might be bringing down the value of the other. So separate those two, maybe sell off one product line. But the CEO told me he did exactly that because in the company that he was working, that hired him to help look at all this, he understood that in the healthcare field, that that one product had much more value than the other products.
And so to separate that and really maximize that value, what he did is he sold off the one into a separate company or sold it off or something, but he sold it off by itself because it had a higher value and a higher multiple. And then that allowed him to look at the other ones differently and then market those differently for maximum value on the remaining products. So it’s really important to understand what is the value driver.
And one thing I’ve heard different investment bankers say over and over and over again is buyers want to buy a cash printing machine. They don’t want to come in and start running your business typically. They just want to buy a company that is printing money.
So think about it like this, the less you, the owner, the less you are involved in that company, the more like a cash printing machine it is. And that means you’ve got your C-suite in there, you’ve got your management company in place. They all know what they’re doing.
They all have assigned responsibilities and job descriptions, and they all work together as a team whether you, the owner, are there or not. That’s that monkey with the tambourines just printing money. That’s what people want to buy, the cash baking machine.
So how do I increase value? Understand what your value drivers are and pull yourself out of the business so that it runs without you. Next question we heard also is about the buyer.
Does the buyer matter? Well, to some people, the buyer of the company is extremely important. I spoke with one today who had said that his employees have been with them for about 25 years.
They’re great. They function completely independent of him. They don’t need him there at all.
They really don’t. And he wants to make sure that when that buyer comes in, they take care of his people. So for him, the buyer was critically important.
I also spoke with another business owner just a couple days ago who said for different reasons that his buyer was very important to him. And the reason it was important is he felt that he had to sell to a private equity firm that really understood the value of the founder and really relied on that founder to continue guiding that company going forward. And so the buyer, does it matter to you?
Well, it may or it may not. It depends what you are trying to get to. Again, if you’ve got employees you’re trying to take care of, well, maybe that buyer really does matter a lot.
And maybe that is your number one thing that’s super important to you, but understand what is important to you. And as you start going into that exit mode, that you get focused and clear on what you’re trying to accomplish with this exit of your business. For many people, the exit is a once in a lifetime transaction.
And you don’t just flip a switch and you’re done. It takes coordinating, it takes planning, it takes a lot of strategizing with the right people so that you can feel good about that exit when it is done and have that exit that makes the most sense for you, your family, your company, your employees, all those in this exit picture. The next item I heard is, is it the right time?
That’s a good question. Are you mentally, emotionally in the right place that you can step out of your business without later having regrets? Did you do what you wanted to do?
Did you accomplish what you wanted to accomplish? But sometimes our health forces us to make decisions that we never thought we would have to make. And is now the right time because you have a health issue that is suddenly creeping up?
Or is it a health issue with your spouse or somebody else in the family? And now it’s more important for you. And I spoke with a company about this about three weeks ago, because of a family situation that needed a lot of attention, this couple decided it was time to begin that exit process.
Now, before this health issue, that exit was probably five or 10 years down the road. But because of the severity of this problem, this health, a medical problem with a member of the family, it changed everything. And hopefully that doesn’t happen to you.
But it does happen to some. And the last item I’ve been hearing is, and this is a very important one. I’ll be trading my income for a one-time payment.
How do I know it’s enough? So if the company has been producing 3 million of profit a year, and you’re offered one big fat check net of taxes, how do you evaluate, is this really the right amount of money to exchange that income for? Once your company begins to produce a good, steady profit, well, it’s hard to give up that income.
And you’ve got to be absolutely certain that when you accept that deal, and you accept that payment, and you’ve got to feel good about it. It’s got to be the right decision for you at the time. And the way we can help in that process is by financial modeling out numbers.
And what we’ll do is take you and your family now, or you and your spouse now, fast forward 10, 15, 20, 30, 40 years, and net of taxes today, what do you end up with if you sell at a certain price? What is that going to look like for your family? And of course, you have to factor in inflation.
You must factor in rising healthcare costs. You must factor in Medicare potential long-term care. You’ve got to factor in the grandkids, how you want to take care of them, take care of the education needs of any other family members.
And all those things that to you are important, that’s what has to go into that equation. So that when you trade that income for a one-time payment, well, now that one-time payment is what is required, net of taxes required to support your lifestyle for the rest of your life and provide that chunk of money that you want to leave behind for whatever purpose is important to you. Now, often the wealth creator, the first-generation wealth creator wants to set up a big nest egg to help the family going forward for two or three or more generations beyond themselves.
Great, very admirable. What is that going to cost? And what is that nest egg going to be spent on?
I spoke with a founder just recently who decided they were going to keep their company. And great, well, the company is very, very profitable and they’re going to, in effect, just hand that over. And we’ll put a lot of restrictions on that, of course.
But when they hand that over, they’re doing it from the mode of helping to take care of the family, giving them a vehicle that will provide for them for the rest of their lives. And when I said, well, how do we keep the next generation from going out and buying a Lamborghini because now they can afford to? Oh, no, no, no, we don’t want them doing that.
Well, right. So let’s make sure we put some guardrails up, put some restrictions up so that you don’t all of a sudden spoil the kids and or worse, ruin the kids. And obviously, these are not kids, these are young adults at this point.
But how do you not ruin them or ruin future generations because they were not mature enough or responsible enough to be good fiduciaries, good stewards of what you actually gave them? And the way you do that is you communicate and you communicate often. And even if you communicate for a very long time, it doesn’t mean that that generation too is going to listen.
And at some point, you just got to make a judgment call. Is it going to work or is it not? But anyhow, those are the different questions that we’ve been hearing as we’ve reached out to people about our upcoming Scott Steele Founders Forum.
And these are the concerns that have come to mind for people. So that’s why I’m so excited that we are hosting our next our fall 2024 Scott Steele Founders Forum event, because that event is all about these questions that I just voiced to you. And if you are thinking about some of those questions, how they pertain to you and why they matter and how you might act on some of these questions and or thoughts, well, you should.
Because when you have that business and you’re in the driver’s seat, it is completely up to you what you want to do with this business. And it can be overwhelming, it can be daunting, it can be so much that you might not make any decision and just delay it. But I’ll say to you that delaying it doesn’t solve the problem.
And you know that, obviously, it needs to be addressed. And if now is the time to address it, then it’s probably worth addressing. And if you’re thinking that our Scott Steele Founders Forum event would be beneficial to you, reach out to me.
Happy to give more information about it. And we will record this event. We will post this as a future podcast.
So you will get to hear our professional panel of experts talk about many, if not all of these things that I just mentioned. At our upcoming Scott Steele Founders Forum, we will have an estate attorney who is also heavily in the tax side of things. And he will talk about why estate planning and gifting and trusts and spousal lifetime access trusts and all that, why that matters and why it needs to be considered when you think about that exit.
We’ll have a merger and acquisition attorney talk about the purchase sale agreement and how he puts protections in there to protect during that sale and after the sale. He’ll talk about the letter of intent, the letter of interest. And he will say, do not sign that until you have your attorney review it.
Because some of those items, even though not intended to be binding, they influence the ending purchase sale agreement quite heavily. And they might even be binding if you’re not careful. And we’ll also have a tax CTA at our Scott Steele Founders Forum.
He will talk about the working capital requirements. He would talk about the quality of earnings report. And very importantly, he will talk about the taxes, the tax ramifications of how that sale looks and netta taxes.
How can you reduce that tax burden now and maybe later for estate tax purposes as well. And we’ll also have an investment banker. He will talk about the value drivers in the company.
What are buyers looking for? What do they pay a premium for? What do they want to see when they look at your company as a potential target for them to acquire?
And that’s what investment bankers do. They look at all those things for you. And then once they have packaged you up and made you look nice and pretty, they take you to market and look for a multiple of buyers so they can begin to bid on you and bid that price, your value of your company higher and higher and get the best deal for you.
That’s part of what they’re tasked to do. And I will also be on the panel myself as a family CFO, as a wealth manager, I will talk about the things I’ve just talked about now. And really it’s focused on the family, on the wellbeing of the family and making sure that for your family, as you created this wealth, that it is nice and neat and protected.
It’s producing what it needs to at this point, going forward for the rest of your life and beyond your life, what will it do for your family and for the community, for the charitable organizations and the charitable impact and the life of significance that you want to have. If you have any questions on this, please do reach out to me. Happy to answer any questions.
Best way to reach me is telephone 480-367-9000, or reach out through our website, axiomcorp.com. Hope you enjoyed this episode of the Founder’s Guidepost. When you think about exiting your business, that’s often a once in a lifetime event with no do-overs and the stakes can be very high for your family.
Before making that leap, ask for your free copy of our Scottsdale Founder’s Forum white paper, packed full with information that first-time sellers should know before exit. And schedule your 30-minute Founder’s Strategy Call at axiomcorp.com. Your exit can be amazing, everything you dreamed of, when you plan ahead and take all the appropriate and necessary steps.
That’s what’s possible. Until next time, I’m your host, Armando Román.
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