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The biggest mistake Martyn Babitz sees from owners who are selling their business is the tendency to get laser focused only on the transaction.

“Once the decision has been made, ‘Hey, I’d like to perhaps sell this business,’ it starts going down that track of, ‘Let’s prepare the business and get the team in place and get the maximum price tag we can get for this business,’” says Babitz, vice president of BNY Mellon Wealth Management. “They often neglect the second track that they can be running down, which is a very narrow window of opportunity to do some tremendous planning ahead of the sale.”

Business owners who plan well in advance of a transaction have the opportunity to separate their deal earnings into two basic buckets: a lifestyle bucket — what the business owner and perhaps a spouse can enjoy and live on for the rest of their lives — and a legacy bucket — what the owner can do with that wealth that might impact his or her family, community and/or causes for generations to come.

“If that decision is made and that separation is done well ahead of the sale of the business, with proper prior planning, then they can optimize whatever they get for that business, not just for themselves, but for many, many generations to come in a very tax-efficient manner,” he says.

At the Dealmakers Conference earlier this year in Philadelphia, Babitz offered tips for owners on how to get their post-deal finances in order well before a transaction begins.

Two teams

Babitz says business owners typically don’t understand what planning opportunities may exist ahead of the sale of their business, so they often don’t spend much, if any, time considering them.

“They haven’t put the right advisory team in place,” he says. “They may have constructed a great team to help sell the business but not one to advise on the planning that can be done prior to the sale. And sometimes they just don’t plan far enough ahead.”

Once the sale of the business is under way, the transaction date can quickly be upon them, and suddenly the time to plan has run out. So it’s important for owners to start considering and planning for the liquidity event well ahead of a sale — at least a year to three years prior, Babitz advises. That includes thinking about estate planning, wealth transfers and philanthropic opportunities so that they can be done in a tax-efficient manner.

An important early step, he says, is to assemble a wealth or financial advisory team that works almost in parallel to the team engaged in the sale of the business. This complementary team typically includes an estate planning attorney and fiduciary advisers to help understand what might need to be done ahead of the sale to create those buckets for family and charity. They should operate with advice from the valuation firm so the value of the business can be understood and accurately calculated into the owner’s financial plan, says Babitz.

The financial or wealth advisory team can help an owner establish what his or her cash flow is going to look like, after tax, after the sale of the business, and begin to determine how that wealth will be used to benefit the seller and his or her family. They will consider the tax issues — income tax, capital gains tax, death tax — so they can be mitigated via planning and the use of fiduciary and trust capabilities that may be unfamiliar to the owner but can, with the right guidance, create a long-term, possibly multigenerational trust.

Through those financial and wealth advisers, owners should work to define what their post-exit lifestyle looks like to reverse-engineer a wealth plan — i.e. the amount that will need to be committed in terms of the after-tax proceeds. It also means looking ahead at the practical planning possibilities to maximize the life and usefulness of the wealth post-event through valuation discounts on the business interest so that they can be transferred and a much lower value out into family trusts, and taking advantage of certain charitable vehicles or charitable trusts to mitigate, avoid or defer capital gain taxes — options that will not be there once the window of opportunity is closed.

Back to work?

Without proper planning, a business owner might need to go back to work post sale because the money made through the transaction gets thin. To avoid that, owners need to build a financial portfolio that’s going to create and replace the income once generated by their business. However, some might not appreciate that there may be more risk than they imagine in equities and fixed-income vehicles.

“I’ve seen business owners who ultimately wind up having to annuitize their wealth because they’ve been all in fixed income and then, as interest rates come down, bonds get called and they wind up having to either annuitize or create other sources of income,” says Babitz.

Once owners have a letter of intent or agreement of sale in hand and they’re looking at the after-tax proceeds, opportunities that may have had a much larger impact going out for generations to come could be lost. Getting proper advice and being willing and prepared to pull the trigger requires proper planning for a sale.

“Go through that education process so that decisions can be made and implemented well ahead of when the window closes,” he says.