Featuring:

Host: Todd Carlton, President, U.S. Markets West, BNY Wealth

Guest: Ryan Szczepanik, Senior Wealth Strategist, BNY Wealth

[00:00:00] VO: What do you want your wealth to do for you? Welcome to Your Active Wealth from BNY Wealth, where we offer insights that can help support the life you want to live and the legacy you wish to create. We tackle timely topics through the lens of the five strategies that comprise our Active Wealth framework: Invest, Protect, Manage, Borrow and Spend, and provide guidance on navigating the unpredictable to help you build and sustain wealth.

[00:00:29] Todd: Hi, I'm Todd Carlton, president, U.S. markets west at BNY Wealth, and the host of today's episode. Welcome back to Your Active Wealth. Selling a business is a significant undertaking, often requiring the expertise of several highly specialized professionals. Because a sale can have notable implications, it's no surprise that carefully executed planning should be carried out sufficiently in advance of the transaction if the ultimate goal is achieving a positive outcome. Today we're speaking with Ryan Szczepanik, senior wealth strategist at BNY Wealth, who will share valuable insights for business owners who are contemplating their exit strategy. With ample experience in sales of this nature, Ryan will reveal who business owners should be partnering with prior to the transaction, as well as how to manage life both financially and personally after the sale. He'll provide tips for identifying the right buyer who will hopefully take care of what the business owner has spent many years building. In addition to key considerations as they pertain to gifting assets to children and subsequent generations. It's my pleasure to welcome Ryan, who will shed light on the most important factors when it comes to selling a business. Welcome, Ryan. To begin, can you tell us a little bit about why pre-sale planning is so important to business owners?

[00:01:45] Ryan: Thank you, Todd. I'm excited to talk with you about this topic. Selling a business is an emotional process. The business is the owner's baby. They brought it into the world. They nurtured and guided it to success. They're proud of it, as they should be. And the analogy is they want to ensure that it will be accepted into the best school and be well taken care of into the future. You know, arriving at the decision to sell the business was no doubt difficult for owners and there are a myriad of reasons for selling the business. It could be that the motivation to run the company is no longer the same. It could be that they want to start a new company. Perhaps they want to spend more time with their family. It could health concerns. But whatever those reasons are, selling that business involves a lot of moving parts. You have to get the company's books and records in order, like selling a house, right? You want to really maximize the curb appeal. You have to find the right buyer. And that's really a process that I think is oftentimes underappreciated. And selling involves that dreaded word, tax. And there are very specific timing rules if you want to mitigate income tax. Perhaps most importantly, it takes time to find the right deal team. And by deal team, I'm talking about both internal and external advisors. I've found that oftentimes it's difficult for entrepreneurs to admit their limitations and that they need all the members of this deal team and they really may underappreciate how time-consuming establishing that deal team can be.

[00:03:26] Todd: Thanks, Ryan, that's great. So just to go a little more in depth, can you be a little bit more specific on who should comprise this internal and external deal?

[00:03:36] Ryan: The business owner really needs both an internal team and an external team. For the internal team, they really shouldn't be going it alone. I've seen a lot of entrepreneurs try to go it alone and it's a mistake. Oftentimes, the internal deal team would include the most senior financial officers such as the CFO, as well as other key senior managers who can help with the due diligence. I think the keys to choosing who are the best members of this internal deal team are the people that the business owner trusts the most, who are able to work as team players and work collaboratively with the other internal advisors and the outside advisors. Who are the advisors who are most competent to steer the company through to a sale. And by competency, I mean the necessary organizational and leadership skills as well as financial skills. And a word of caution, because I've seen this quite a bit, do not involve too many internal advisors. It can make arriving at decisions difficult. As for the external deal team, on the corporate side, the business owner will need an investment banker. That's the person who's going to have the primary responsibility for finding the right buyer and valuing the company. The business owner is going to need a mergers and acquisitions lawyer, we use the acronym M&A, and that person is typically responsible for advising and addressing the legal steps necessary to consummate the sale. And on the personal side, the key members of the external team include the wealth management advisor, and that's the person who would help with personal financial and estate planning. For example, they will prepare projections on the sale proceeds and wealth transfer strategies, an estate planning lawyer will be necessary to advise and prepare the appropriate trust and entity structures. A CPA of course is also necessary, and that's the person who would advise on the impact and mitigation of the tax impact of the sale. And there also may need to be other advisors depending on the circumstances. For example, an employment lawyer, perhaps somebody who specializes in ERISA. I have seen deals where it's necessary to involve a litigator because they're outstanding claims.

[00:05:49] Todd: Yeah, thanks, Ryan. Are there prerequisites that the business owner should consider for the type of investment banker or tax specialist who joined a deal team? In other words, can the business owner use any investment banker, or maybe even their personal CPA?

[00:06:04] Ryan: Basically no Todd, in the vast majority of cases, selecting any ordinary investment banker or CPA will not be appropriate. Really, I think of it as three key topics that need to be checked off to find that appropriate investment banker and tax specialist. First, the person really should have the industry-specific knowledge to find and assess comparison companies for evaluation and really understand the nuances in performing that valuation. They should also have an alignment with the business owner's values. Finding a right buyer who will maintain the company culture and treat employees as you wish they had been treated typically is very important to that business owner. And the third important trait in my experience is having the right networks and connections, especially for the investment banker. That investment banker really needs to cast a wide net in the sector and industry, among other advisors in that sector and in industry to find the right buyer. And that could be a time-consuming process and oftentimes the most challenging process is finding that right buyer.

[00:07:15] Todd: Ryan, what role do you or other wealth strategists play in the deal team and how do you typically interact with the other members?

[00:07:21] Ryan: Todd, my BNY colleagues and I are typically uniquely positioned, and the reason we're uniquely positioned is because we have expertise both with the personal and the corporate tax and planning sides. I personally practiced trust in estate and tax law. I was a partner at a law firm for many years, and I also practiced litigation for many years before I joined BNY. I worked in that capacity with many, many business owners going through sales of business. My BNY colleagues and I oftentimes provide a breath of fresh air to the business owner because we're not on the clock. We can talk to the owner at the business owners’ pace without the billing pressure. What I also find is that the advisors, the CPA, the estate planning lawyer, the M&A the investment banker, they typically stay in their own lanes. And we, as wealth management advisors, we help fill in those gaps. And there are oftentimes gaps between what the CPA is advising, what the estate planning lawyer is advising the investment banker and the M&A lawyer. Also, because we have experience both on the planning, the personal planning and the corporate planning side, we can help bridge the gap between the personal and the corporates. The investment banker and the M&A lawyer are typically focused on consummating the sale and moving as efficiently forward to consummate that sale. While the CPA and the estate planning lawyer are typically really focused on the personal planning side. And sometimes there can be a concern that focusing on the person planning side will slow down the process to consummate the sale. So, we can really help bridge that gap. I'll give you an anecdote. Of a recent matter that I had with a business owner who was in the process of consummating a sale. What we did is we helped that business owner find an estate planning lawyer and a CPA. The business owner wanted to invest some of the proceeds into commercial real estate, so we also helped that businessman find a real estate broker as well as a real-estate lawyer to help them acquire properties with the business sale proceeds. And the business owner also had a child who was in the process of getting married. And because they had this influx of liquidity into their personal balance sheet, the business owners really wanted their child to have a prenup going into the marriage now that they had all this wealth coming into the family. So, we helped the family find a family law lawyer and helped with the prenup. And what I did and what my colleagues did is we reviewed drafts of the estate planning documents. We reviewed the prenuptial agreement. We met with the client before the client met with the estate plan lawyer and the CPA. We helped educate the client on the concepts and the available strategies, all of which were off the clock and which the client found very helpful.

[00:10:15] Todd: Thanks, Ryan. Yeah, it’s clearly a huge value add to bring in somebody that can really sit across both sides of that transaction. So, thanks for your insight there. In your experience, what are some of the unforeseen challenges that business owners may not anticipate when approaching a sale? And do you have any recommendations for minimizing the likelihood of surprises that we see pop-up regularly?

[00:10:37] Ryan: Todd, there are many, and it really depends on the facts and circumstances. I'll name a few. The one that first comes to mind with business owners is an unrealistic estimation of the value of their company. As I previously said, the business is their baby, and they typically view the business through a glowing lens, as would a parent with their baby. And they may de-emphasize the potential vulnerabilities of that business. So, coming to a right, the correct accurate valuation is oftentimes a challenge. I would say another challenge is how long it takes to find the right buyer. Again, the business owner typically under appreciates how much they really value the culture and maintaining the right cultural fit for the employees. Taxes, again, that's dreaded word tax. Certainly, in most circumstances, there is an underappreciation of the impact of the taxes on the net proceeds of the sale, and even more importantly, the substantial time required to implement effective strategies to mitigate the tax. I would say another one is the impact on market and economic conditions. Business owners need to be flexible, right? So, if a sudden issue arises with the economy, they may have to take a pause and wait a little while before the market becomes receptive to a sale again. And I would say the other one would be preparing the family for the liquidity injection. You know, the family probably in most circumstances, if they had the wealth, it was illiquid wealth, and they haven't had the opportunity to have this huge piece of liquidity in family. And it's really the responsibility of the business owner to be transparent with the family and prepare them for the amount of liquidity that's about to come into the family, and how to structure that liquidity. So, my recommendations would be first and foremost, is plan early and plan early, and plan early. I can't emphasize enough how critical timing is. Be open and willing to listen to your trusted advisors. Be transparent with your family. And a final recommendation, which I believe is helpful, speak with other business owners who have gone through the sale process to better understand and appreciate that process.

[00:13:01] Todd: That's great. Thank you, Ryan. Can you give us an idea of some of the criteria business owners should have when identifying an appropriate buyer to succeed them in running their business?

[00:13:11] Ryan: Todd, I would say a few things first. What are the seller's plans post-sale? Do they plan to stay on for a period of time, for example, on the board of the company, the successor company, or in management, or as an employee, or as a consultant? Do they instead plan to walk away from the business when the business sale is consummated? And is the buyer amenable to that plan of the seller? That's a big one. I would say the next would be, is the buyer committed to maintaining the goodwill of the brand? Most sellers are really focused on maintaining that goodwill, right? Their baby, they brought it up, they don't want to see that good will compromised. So, for example, the seller would want to avoid having the company, the successor company injecting itself into controversial social issues or politics. And related to that topic is maintaining the company culture. How the buyer will treat the employees and customers. That is very important. I think it's very underappreciated by most sellers as they're going through this process, just how much they value the employees. I have seen many business owners refer to their employees as family as they are going through the process and come to really appreciate. How much they really value those folks who they've, many of whom they've worked with for decades and they feel an obligation to see to it that they, their security is provided into the future. You know, some business owners may sell a family business to a private equity firm and that firm may be focused primarily on an investment return on the ultimate sale of the business in the not-too-distant future after acquiring it. It may also come up with the acquisition of a family business by a large corporate strategic buyer. Both of these circumstances, the culture may drastically change, right? We're going from a family to a company acquired by a private equity firm that's looking to turn it around or the acquisition of a smaller family business by a much larger corporation. And there's going to be some adjustments for that cultural fit. And most business owners want to ensure that the employees will be taken care of.

[00:15:27] Todd: Ryan, you've mentioned taxes as a consideration a number of times during our conversation. What do you think are the most important considerations from a tax perspective for business owners exploring a sale?

[00:15:40] Ryan: Todd, you know, I'm going to sound like a broken record, but it's plan early, plan early, plan early. Typically, most business owners are looking at a significant income tax burden when they sell their business, a large capital gain, perhaps some ordinary income tax as well. But there are many ways to potentially minimize that income tax impact. But importantly, there are very, very strict rules out there that require the implementation of the strategies before the seller is too far down the road to a sale of their business. Here I think it's really important to distinguish federal income tax from state income tax. On the federal side, for example, we have some strategies. For example, the qualified small business stock known by its acronym, QSBS. Family business owners who have C-corps, C-Corporations, they can qualify for QSBS treatment if they are working in a qualified trader business, which are specified by General Revenue Code 1202. And if you qualify for a QSBS treatment, and this is big, you may be able to exclude federal capital gains in the amount of the greater of 10 million per stock issuer or 10 times the adjusted cost basis of the stock. And what's more, the business owner could potentially multiply that federal capital gain exclusion through a strategy called stacking. And what is stacking? Basically, it's establishing irrevocable trusts for family members and transferring a portion of the shares into those trusts. And each of those trusts potentially can have their own 10 million- or 10-times adjusted cost basis exclusion. Even if the company is an LLC, the LLC may be able to convert to a C corporation and then take advantage of the QSBS federal capital gain exclusion, provided that the seller satisfies the holding period requirement for QSBS. There are also many strategies that are interesting, and which can be used to minimize income tax involving a charitable component, such as a strategy called the Charitable Remainder Trust. On the state income tax side, you know, many business owners reside in high income tax states, such as California, or New York, or Massachusetts, or Hawaii. So, for state income taxes, where we have a business owner who resides in one of these states or another state with a high state income, tax. The seller can establish an irrevocable trust in a jurisdiction with low or no state income tax and potentially shift interest in the company to that trust and potentially mitigate the state income-tax burden. But again, I cannot emphasize it enough, timing is critical. You need to plan early.

[00:18:44] Todd: Ryan, this is probably actually a really good time to discuss how the sale relates to leaving a legacy. How should business owners think about legacy planning as it pertains to the sale?

[00:18:52] Ryan: Todd, you know, the shift from driving headstrong in running your business with a focus on optimizing its success and its value in a sale to the personal planning side, it can feel really sudden and challenging for business owners in my experience. With legacy planning, what we're talking about is how the business owner is going to incorporate the proceeds of the sale into their family and personal situation. You know, for the family situation what we're talking about is how to structure that wealth. And that requires an understanding of the business owner's values. If they have children, how to most effectively impart those values into their children and subsequent generations. For some clients, that means creating a family constitution or a mission statement. Some of our clients create a family office, a family bank. There's a strategy of establishing something called a letter of wishes to accompany an estate plan. For some clients that means establishing irrevocable trusts and transferring wealth into those trusts through gifting or sales. For example, dynastic trusts that can last for multiple generations while minimizing estate tax. A lot of our clients pursue that strategy. They can incorporate into these trusts provisions for when the children and subsequent generations to learn of that wealth, under what conditions the children and subsequent generation can receive distributions. Some of these trusts, they permit the creator, who is what we call the grantor, flexibility to swap assets into and out of the trust under certain conditions, which can be helpful in optimizing tax efficiency and cash flow. And on the philanthropy side, a lot of our clients are interested in pursuing philanthropy in connection with a business sale. So, for example, establishing a family foundation or a donor advised fund, if they don't have it already. There's even a trust instrument with a charitable component that we often use for tax planning called a NIM-CRUT. And you know, the trust estate and tax lawyers among us love to use acronyms. But I encourage our listeners to reach out to us directly or to their estate planning lawyer to learn more about the available strategies. One last thing, Todd, you know, with business owners, it's really important for them to think about what they're going to do after the sale of the business. Are they going to stand with the company for a period of time? Are they going to start up a new company or get involved with another company, which many serial entrepreneurs do. Do they want to focus on philanthropy, such as serving on a board or a charitable organization? Or instead, do they want to focus on hobbies and well-being, or spending time with their family and travel? All of those things are the thought processes a business owner needs to go through when they're thinking about their legacy.

[00:21:53] Todd: Ryan, you touched on a number of tools that are available to business owners as they think through family governance and as they think through how do they prepare their family for the liquidity event or the wealth, and you've certainly given a ton to think about. At the same time, the universe of tools that are able to business owner can be pretty overwhelming. Where do we generally recommend starting?

[00:22:17] Ryan: Todd, most of us have heard of the shirt sleeves to shirt sleeves paradigm. What is the shirt sleeve to shirt sleeve paradigm for those who haven't? Basically, by the third generation, the wealth created by the business owner is gone. Most clients, of course, want to avoid that paradigm. And, you know, really important to this point is understanding that building wealth is a generational effort and it requires hard work. I would start here with communication. It seems obvious, but I cannot underscore enough how important communication among family members is. And this includes holding regular family meetings and ensuring that family members attend those meetings. Many of our clients, they have consequences for family members missing family meetings. For example, many of our families have a family bank. And within that family bank, family members will make loans to members of the next generation, provided the members of next generation provide a business plan. And if the family members don't attend the family meetings, the family numbers cannot take advantage of loans from that family back. A lot of our clients engage in family retreats. And this is typically a fun process to help them plan for the family retreats. The family retreats, typically in my experience, the client will mix serious with fun. For example, one family with whom I worked had the younger generation plan and participate in a play before the other family members. Another family held a white elephant gift exchange so that the family members could better understand each other's values while keeping the mood light. It's really important in these family retreats and other family get togethers, similar to the retreats, to mix in the fun with the serious. And by serious, I mean meetings on financial, philanthropic, estate planning topics. And we often are involved in helping them plan for these meetings and even participate in these meetings. I would say focusing on common family values among family members instead of differences is very important in preparing for family governance after the sale, especially as the different generations. I also find that a great entry point for involving the younger generations in these discussions is charity, which will give them a healthy lens on wealth. Promote having them view wealth from the start as not what it can do for you, but what it could do for others. Some clients allow their children to establish a business plan for picking. The charitable organizations that the family is going to direct a portion of their annual giving. I have seen some families create a committee among their children to create a business plan for giving to charity with the idea that having this committee will further collaboration among the next generation.

[00:25:17] Todd: Ryan, any final takeaways for our listeners? I have a strong indication of what you might say, but I figured I'd give you one more chance, just any final thoughts as we wrap up our time together.

[00:25:28] Ryan: Yes, Todd, I think the one or two things that listeners should take away, again, is start planning early. Bring in those trusted advisors early. If the business owner doesn't know who to bring in, strategize with your most trusted advisors on who else to bring in. I would say be patient. Give yourself a long runway to, for example, get the company's books and records in order. Find the right buyer. Do that tax planning that requires sufficient advanced planning to do that legacy planning. Be transparent with the family. Be flexible for the market and economic conditions that can arise. Be clear on your intentions after the sale. What will you do when you're no longer running the business? How do you intend to structure and incorporate wealth within your family? And lastly, I would say speak with people who have been through the process and their experience post-sale so you can get a better understanding of what to expect. And lastly, Todd, I encourage our listeners to reach out to us directly, and we'd be happy to discuss these matters more.

[00:26:33] Todd: Ryan, fantastic insights. Thank you so much for spending a little time with us today. Now to our listeners, to learn more about the most important considerations when selling a business, I echo Ryan's sentiments, which is I encourage each of you to reach out to a member of our BNY Wealth team. Thanks for joining, and we'll see you on our next episode of Your Active Wealth.

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