Not all exits are quick. And when a business owner needs time to make an exit from their company, it adds another layer to the negotiation.
Ken Fruehauf has a client in the hospitality industry who sold his business, but will not fully transition out for three years. The planning it took to coordinate such an extended transition is already providing benefits.
“He was able to involve his advisors early on in the process and many of the personal items such as taxes, estate planning and investment portfolio allocations were already finalized prior to the sale,” says Fruehauf, managing director of investments and senior institutional consultant at Wells Fargo Advisors. “This helped set a foundation for a smoother transition as proceeds from the sale were received so the family did not have to deal with these issues after the sale.
"We have also experienced situations where no pre-planning existed and clients have experienced additional tax burdens, missed investment opportunities and more importantly, additional stress.”
Smart Business Dealmakers spoke with Fruehauf and his colleague, Senior Vice President of Investments Tom Buhl, about key components to crafting an effective exit strategy.
What are the most common mistakes that you see individuals make who have just sold their business?
Fruehauf: As advisors, we believe in planning and think that a well thought out plan often times leads to better results. The mistake we see individuals make quite often is not involving their trusted advisors sooner in the process rather than later, whether that be CPAs, attorneys, or their financial advisors. For example, discussions with your trusted tax or legal advisors can sometimes lead to structuring the sale to better take advantage of estate planning techniques that may be more advantageous if they are implemented prior to the sale rather than after the sale. There are multiple steps to take in these transactions and skipping over one step could make your next step more difficult. Selling the business is not the first step or the last step in the process — it is somewhere in between.
What are some effective strategies to help identify the best path forward after the deal has closed?
Buhl: From an advisor’s perspective, we try to sit down with our clients and really ascertain their goals and objectives moving forward. This is rarely accomplished in one meeting and often times, it takes multiple meetings to help ensure that no stone is left unturned. The discussions often center around topics such as identifying new business opportunities, portfolio planning, creating family foundations, or next generation financial counseling to name a few. By having these discussions, we are better able to put a plan in place to hopefully avoid some missteps along the way.
How do you find counsel that can best inform your decision and enable you to realize your vision?
Fruehauf: We really encourage our clients when searching for trusted advisors to seek input from people they trust. A client may have a peer who has been through the process of selling their business and you can lean on them for introductions to their trusted advisors. We have great relationships with CPAs and attorneys whom we can refer to our clients for them to meet and ascertain if they would be a good fit as well. As someone who is going through the sale of a business, and quite possibly a life-altering experience, you need to make sure to surround yourself with people you trust and can have a relationship with moving forward. As we mentioned prior, the sale of the business is not the last step in the process and you will be working with your advisors for a long time moving forward.
What other issues or concerns need to be addressed?
Buhl: One of the bigger concerns we see our clients face is transitioning from a business that provides their income to having a portfolio of investments that is designed to help provide for their income needs. I believe the best approach to addressing these concerns once again comes down to planning and discussing goals and objectives. Once this is accomplished, we talk about risk and developing a portfolio to help meet their needs. In larger liquidity events, we also see a great concern for next-generation financial education. When an event happens that creates multi-generational liquidity, the need for education becomes very important. We welcome that opportunity and work with a number of resources to accomplish this.