Business owners often overlook the importance of discussing the impact the sale of the company will have on their family, says Ron Ambrogio, Ohio’s regional president for BNY Mellon Wealth Management.
“It can’t be stressed enough that a business owner should begin discussing his or her intentions to sell a business with the family at the very beginning of the process,” Ambrogio says. “This communication is even more critical if the owner’s children have been involved with the business. Candid discussions about what the family members’ lives will be like after the sale will make a world of difference in the strength of family relationships, as well as that of the family financial picture.”
In this Q&A, Ambrogio explores the conversations that need to take place before a company goes on the market and common oversights that can make it harder to close a deal.
Are most entrepreneurs ready to face life after their business?
Entrepreneurs are often much better at making money than managing it, so this is where assembling a team of experienced wealth advisers can be critical. They can help make realistic assessments of all future expenses and develop a clear plan for constructing an investment portfolio that will support the seller’s future lifestyle and goals.
Ideally, the business owner will have developed some idea of what life will be like after the sale. The more defined this plan is, the easier it will be for advisers to help map out a financial plan that maintains his or her lifestyle while also helping to preserve wealth for future generations.
And finally, there’s the estate plan. Over the years, the business owner should have discussed what his or her legacy will look like and how the wealth will pass on to the family and/or philanthropic organizations. Again, this is where advisers can help families discuss these matters and resolve any potential disagreements before the business owner passes on. It will save the family a great deal of difficulty and legal expenses in the long run.
What financial or operational factors are most important to determining a company’s valuation?
The first aspect is the numbers. The ratios should be line with — if not better — than industry average. The business needs adequate liquidity and needs to be able to show its financials have been carefully audited by independent and credible accounting specialists. A business that can disclose clean, meticulously kept records projects sound management and inspires confidence in potential buyers when they perform due diligence.
Second is the people. The company’s management team needs to be strong and stable. Employees should be highly engaged and well-trained. And the company should have a well-formulated continuity and operational plan.
In addition, the company needs to exhibit a diversified customer base, offer a product line that is expected to remain in demand for the long term, and have relatively little competition. The company’s products should be patent or copyright protected, or otherwise differentiated enough that the company enjoys strong market share in its industry.
What are some common oversights that can make it more difficult for the seller to ultimately close a deal?
- Overestimating sale proceeds and what they yield.
- Failure to accurately assess market conditions and business’ true value.
- Failure to consider immediate (tax) and future (lifestyle and legacy) cash needs.
- Loss of key employees or employee sabotage.