Trust Estate

A Master Exit Plan Protects Family Wealth For Generations

Chris Vanderzyden, May 27, 2022

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What sort of considerations apply when a business owner chooses to hand over the reins, either by selling or transferring to others. With many Boomers and even younger owners moving on, there's never been a more important time to explore such issues.

How to hand on a business successfully is a major question for many high net worth individuals. This publication regularly looks at business transfers and the issues that owners must confront. A US wealth management expert, Chris Vanderzyden, has recently published a book, Master Your Exit Plan: Sell Your Business, Preserve Your Legacy. And in this article, she gives a flavor of her book’s message.

The editors of this news service are pleased to share these insights and invite responses. The usual editorial disclaimers apply to the views of guest writers. Jump into the conversation! Email tom.burroughes@wealthbriefing.com

 
Will your client’s family wealth follow the prosperous path of the Rothschilds – or the desolate route of the Vanderbilts?
 
These two famous families represent the markedly different outcomes privately held business owners face when selling their businesses: they either grow or lose their wealth. The Rothschilds succeeded in preserving their wealth from generation to generation because they engaged in proper planning, while the Vanderbilts lost the majority of their fortune by the fourth generation.
 
Proactive exit planning is the secret sauce for retaining generational wealth, and it’s critical when a business owner is preparing to transition out of his or her business.
 
The reality is that most family businesses have invested the majority of their personal net worth in a micro-cap stock: their business. This illiquid asset will ultimately require diversification in order to rebalance their portfolio and protect the family wealth for future generations.
 
While selling a business to a third party is the most sought-after exit strategy, the vast majority of businesses brought to market fail to sell or sell below value, never realizing the liquidity they deserve. There are many reasons why this occurs, but they all point to one massive failure: failing to plan – and mirroring the fate of the Vanderbilts.
 
Exit planning is a confusing process for business owners 
A stunning 83 per cent of business owners have no written exit plan, according to the Exit Planning Institute, and the wave of Baby Boomers retiring is accelerating at a rapid clip, so this statistic is alarming.
 
Business owners invest their capital, expertise, and sweat equity over the course of many years, sometimes decades, into growing their businesses. They deserve a lucrative exit that will create great wealth at the end of their journey, but this requires extensive planning with the right experts. It’s critical that wealth managers point their clients to an exit-planning advisor who specializes in mergers and acquisitions and is able to create and execute a strategy to harvest this wealth so that it can be properly invested.
 
As a business owner contemplates his or her exit via a sale to a third party, confusion often sets in because there are many unanswered questions:
 
-- What steps in the mergers and acquisitions process should I follow to successfully sell my business?
-- How do I ensure that my company will attract buyers when I’m ready to sell?
-- What’s the value of my business?
-- Will the net proceeds be enough money to sustain the lifestyle I currently enjoy as a business owner? 
-- When should I sell my business?
-- Who can help me reach buyers and guide me through the process?
-- What will I do after I sell my business?
-- How do I protect my wealth once I’ve sold my business?
 
These are complicated and unnerving questions that often push clients into a state of inertia. Business owners have many advisors who guide them through their journey as entrepreneurs: CPAs ensure tax compliance, attorneys oversee all legal concerns, insurance professionals mitigate risk, and wealth managers ensure that their money continues to grow and is protected. But who will help with their exit?
 
The one professional many business owners fail to engage with is an exit planning advisor who will collaborate with the owner’s existing experts to develop a Master Exit Plan.
 
A Master Exit Plan protects a client’s future 
A Master Exit Plan is a comprehensive document that provides critical, in-depth information that helps business owners make the right decisions as they exit the business. It aligns an owner’s business, financial, and personal objectives and serves as a guide as the owner transitions from an equity to liquidity position.
 
Importantly, a business owner’s wealth manager must be involved in three pivotal points during the exit process to ensure that funds are invested properly and they remain a key advisor to the family for generations to come:
 
1. Valuation: The first step in developing a business owner’s Master Exit Plan is a valuation for mergers and acquisitions purposes. Once the business value has been calculated, a tax impact analysis is performed, and the potential proceeds from the sale, net of fees, are integrated into the client’s personal financial plan.

This step in the process can be a make-or-break moment for business owners as they make the most important decision in the life cycle of their business: Do I go to market now, or do I hold and grow?
 
The wealth manager is an invaluable member of the exit planning team as they explore the timing to execute the sale of an owner’s business as it relates to the owner’s personal financial plan.
 
2. Negotiation: Once a client decides to sell, the wealth manager will be called upon during the negotiation phase of the sale to advise on the wealth impacts of different deal structures.

For example, if the owner is considering retaining equity in the new entity, the financial plan and wealth management strategy will be revised to reflect two sale transactions – or what we call the primary and secondary bite of the apple. The investment strategy and forecasted results will guide an owner in understanding the financial impact of accepting a particular offer over another.
 
3. Closing: Wealth management and tax efficiency strategies are established in advance of closing so that a predesigned investment strategy can be executed immediately after the sale funds are distributed. Upon close, the wealth manager becomes the main advisor who will guide the family’s generational financial success.
 
A strong collaboration generates wealth
Great wealth can be created by smart exit planning and a strong collaboration between wealth managers and mergers and acquisitions exit planners. This team effort ensures that clients are served in a comprehensive fashion, one that results in protecting family wealth for generations to come.
  
About the author
Chris Vanderzyden is an author, speaker, and leading educator on exit planning and mergers and acquisitions. She is a founding partner of Legacy Partners, a mergers and acquisitions advisory firm dedicated to serving privately held middle-market business owners to create and execute successful exit strategies resulting in the harvesting and preservation of wealth. She’s the author of Master Your Exit Plan: Sell Your Business, Preserve Your Legacy and the bestseller 7 Steps to Entrepreneurial Victory. Learn more at legacypartnersllp.com.

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