Featuring:

Host: Eric: Boughner, BNY Pennsylvania, Regional President, BNY Wealth

Guests: Alex Murray, Market President – Newport Beach, BNY Wealth & Boryana Zamanoff, Senior Director, 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.

[00:00:33] Eric: I'm Eric Boughner, chairman, BNY Pennsylvania, regional president at BNY Wealth, and the host of today's episode. Welcome back to Your Active Wealth. Today, we have a special episode which will dive into key findings from BNY Wealth's inaugural report for private business owners titled, Mastering the Sale. I'm joined by Boryana Zamanoff, our senior director and wealth strategist, and Alex Murray, market president in Newport Beach/San Diego. Today we'll unpack some of the most revealing insights from the study, which was created with the participation of 127 business owners who are either contemplating a sale or recently completed one. This report sheds light on a process in which there is limited publicly available information. While the study provides detailed analysis from the data that was compiled during the process, this episode will serve as a springboard for Boryana and Alex to share how the findings are embedded in many of the issues they've helped their clients work through when transitioning away from their businesses. Using tangible anecdotes from their advisory relationships with some of the nation's most successful business owners, they will go through best practices for all stages of the sale, highlighting actionable tips on formulating a plan at the onset of the decision to sell all the way through finding fulfilment after the sale. Selling a business is more than just a transaction. We decided to launch this study to unearth and share all aspects of the decision process and also share personal wisdom from some of our most knowledgeable experts who have helped multiple business owners navigate the process. It is my pleasure to welcome Boryana and Alex who will discuss invaluable insights from our study on navigating the sale. To get started, welcome Boryana and Alex.

[00:02:21] Boryana: Nice to be here.

[00:02:22] Alex: Thanks Eric. Really a pleasure to be with you here today.

[00:02:25] Eric: To begin, why is building the right team so critical, and how have you helped business owners with this in the past?

[00:02:31] Alex: To use an overused and stolen cliche, transactions are like snowflakes. No two of them are identical. I've spent the majority of my 18 years in financial services, working with and getting to know professional advisors who are either in or close to the M&A ecosystem. And they're all different. Like other trades and industries, they have unique skill sets, experiences, and unique networks. So, while one investment banker might be a perfect fit for a particular transaction, that same person might be a terrible fit for another transaction. That's why it's so critical for a business owner to start putting this team together early and to have a trusted advisor by his or her side throughout that process. And preferably that person is someone like us at BNY Wealth. We're an objective partner who has known that client in some cases for years, and we understand what their goals and objectives might be. Either way, the client just needs somebody that has a strong network, a knowledge of the M&A environment, and the most critical point is someone that's got a good understanding of the goals for that entrepreneur. It's called a team for a reason, and the coordination is critical. If those people can't collaborate and particularly collaborate in a stressful environment when things may be going awry over the course of the transaction, they may not be a great fit together. I worked on a transaction a few years back where the business owner was adamant that they wanted to use an M&A attorney who was a close personal friend of his. And by the way, this M&A attorney was not getting the deal because it was a close personal friend. He was a very competent attorney. The issue was, because this attorney had had zero experience with either the bankers or the wealth managers and the accountants that were involved in the transaction, they had not really stress tested the ability of that team to work together. And at the 11th hour, there just was a repeated miscommunications between the attorney and the rest of the team that threatened the transaction to get done. So, the client made a difficult decision to replace his friend and put in an M&A attorney that had worked closely with other members of that team before. And luckily the deal got done and everything worked out well, but it's just a further illustration of how critical it is to work with a deal team that knows and understands each other and can collaborate throughout the entire process.

[00:05:09] Boryana: Alex, as you said, no two sales are alike. So sometimes the pre-sale process is more heavily geared towards preparing the business. Their businesses are thriving but need a lot more help in terms of legal compliance, quality of earnings reports, audited financial statements than others. I find that the preplanning work that goes to prepare the business owner and his or her family is almost always there. Most business owners who get introduced to us at BNY Wealth has a future wealth advisor who can lean into unbiased advice focused on only on the needs of the business owner. Most of these business owners only have a basic estate plan, maybe some key man insurance, maybe a succession plan. But when we become a part of the advisory team, we can help model strategies, tax savings, post-sale outcomes for the business owners well in advance of the sale. I'm working with several business owners now whose contemplated sale is years away. So having that process and the right team is critical, as you mentioned.

[00:06:17] Eric: As you mentioned, no two deals are the same. But one common theme that we found through the study was that many parts of the process, business owners wish they started sooner, especially around estate and tax planning. They wish they'd started that earlier. Boryana, why do you think this part of the process oftentimes gets pushed off?

[00:06:35] Boryana: Thanks, Eric. As you mentioned, almost half of the business owners we surveyed, around 40%, told us they wished they had engaged in tax and estate planning earlier. In practice, why are not enough business owners focusing on tax and estate planning ahead of an exit? I think there's several reasons for that. First, a lot of entrepreneurs are focused intensely on operations. They are running a successful business and they're not thinking about the exit itself. Second, a lot of people are not aware of how much tax they would owe or what strategies may be available to help them minimize those taxes, both federal and state tax. Third, a number of business owners believe that the deal may fall through and want to delay planning until there's a certain deal on the table. By which point, unfortunately, some of the strategies we can discuss may not be available. Finally, when the sale and the sale proceeds are still abstract, I find that entrepreneurs are reluctant to pay advisors such as CPAs and attorneys, not realizing that the tax savings would significantly outweigh the fees that may be associated with this advice. And all of this brings us back to the original point Alex mentioned, having the right advisory team who can guide the business owner fairly early on, map out some tax strategies and wealth transfer options, introduce other trusted advisors is the key to having a successful exit. I think a trusted wealth advisor is the right person to lead the initial effort since they're organically aligned with the business owners and are not getting paid, actually, until the business proceeds are available to manage.

[00:08:36] Eric: Thanks, Boryana. Now back to the question, your experience, what's the difference between going into a deal with a two-year runway versus scrambling at the last minute?

[00:08:46] Alex: So, Eric, you know, usually the best teams in life are those that are well-prepared. So, for our football fans out there, I'll use the analogy. It's not a surprise that Bill Belichick and Andy Reid coach teams, typically in the year in the Super Bowl. The same is true of M&A transactions. Those that are prepared usually come out on top. They adjust better when something changes in the timeline or the terms of the deal. They've thought of potential roadblocks in advance. And they planned accordingly, and they're thoughtfully considering the impact of the transaction on all stakeholders. Because they've got a clear roadmap, a slight detour doesn't typically derail them. There's significant financial benefits to early planning as well. The further out from the sale you are, the better the valuation and discount you can take when you're using the shares of your company and planning. There's lots of complexities to this concept, which is where BNY and your deal team come in. But simply put, early planning and preparation is your friend when using shares of your company in this process as a funding source for trust, for gifting, et cetera. And that's where someone like Boryana comes in, very important in the process, and I'm sure she'll have some things to share on that. The closer you get, the more doors that are closed to the entrepreneur, and you really want the whole playbook open and available to you. So, we're going to really hammer home this point the rest of this conversation. The earlier you are in the process, the more thoughtful you are on the process and the sooner you engage all members of the deal team, the more beneficial it is to you in the long run.

[00:10:27] Boryana: And if I may jump in here, let me provide a couple of different examples to illustrate the importance of having that runway, right? A client was thinking about going to market with her private business that she had been growing for about 10 years. And it was very important to her that she provided for her parents and son in a tax-efficient manner from the proceeds of the sale. We ended up setting up a zeroed-out GRAT a year and a half before she was approached by a private equity fund that bought the majority of her interest in the business. As a result of the sale, the GRAT ended up pushing close to $20 million gift tax-free out of her estate, and in a trust for the benefit of her loved ones. Contrast that to another business owner whom we began advising last year when the deal talks were already underway with an acquirer which was a publicly traded company. Given the timing of the letter of intent which was imminent, it was clear when we got involved in advising the client that there won't be any opportunity for valuation discounts that you, Alex, mentioned or any other significant tax planning. This second client ended up setting up an irrevocable intentionally defective grantor trust for the benefit of his kids and funding them with cash once the deal was closed. Here, engaging in planning essentially 18 months earlier for one client than the other saved the first client $20 million. So, a very, very significant impact.

[00:12:03] Eric: Thanks, Boryana. So, we've built a great team. We've started well in advance. Let's get a little more tactical. What are some tax strategies that you typically recommend to help business owners keep more of what they've built?

[00:12:17] Boryana: Thanks, Eric. In our survey, business owners responded with a big emphasis on the importance of tax planning. So, as you said, let's unpack a couple of the more common strategies that a lot of business owners deploy. On the income tax side, the Internal Revenue Code doesn't offer us many gifts, but if the business owner is a founder of a C Corp and meets certain holding and capitalization requirements, he or she may be able to qualify for a QSBS treatment and exclude the greater of 10 million or ten times basis from federal capital gains on sale. Also, there is the possibility to create a multiplier effect of this QSBS exclusion by gifting C Corp shares to non-grant or trust before the sale. So, to give you an example, if the business owner has three non-grantor trusts to which he or she makes these gifts, he or she can now exclude 40 million or four times basis from federal capital gains tax. Another often used strategy is charitable remainder trust, which allows deferral of capital gains and provides the business owner with lifetime income. The business owner gets a charitable deduction and pace tax, only as the income is received over time. This is ideal for business owners who are looking to blend philanthropy and tax deferral. With a number of business owners who live in high tax states, such as California, New York, Connecticut, Hawaii, we often talk about state tax strategies. A lot of business owner start thinking about changing state residency well before the deal in order to move to a lower, no-income tax state, and if the business owner were to do that, they could be looking at saving an additional 10 to 13% in state capital gains taxes. On the wealth transfer side, as I mentioned earlier, a business sale is often the main opportunity for creating multi-generational wealth. And several of our survey participants spoke to that point. For those business owners who are looking to realize significant proceeds from the sale, transferring business interests out of their balance sheet and into irrevocable trusts, whether those are intentionally defective grantor trusts, GRATs, as I mentioned earlier, if those irrevocable trusts are thoughtfully drafted to accomplish their goals, they represent a massive opportunity to save estate tax and provide that multi-generational wealth down the line.

[00:15:04] Eric: Good insights. Let's shift gears a little bit. What do you think drives financial satisfaction after a sale? And how important is early planning in getting there?

[00:15:16] Alex: So, you know, Eric, I think what's interesting to me is that I think every owner would and should have a different answer to this question. But, you know, they'd be lying if they said they didn't have a number in mind. And it's not a bad thing. As Boryana said, this represents their best opportunity, and it represents a lifetime worth of work. Our job is to help kind of dig into that number and understand why it's there. It's not pulling it out of thin air. Our belief is that the discussion should really be kind of shaped around goals and dreams and kind of help put some substance around what their answer is to that question. I can't really answer, you know, what financial satisfaction means to someone else, but I can definitely sit with them and, you know, ask a ton of questions and help them better define what that means to them. You know, it's also a moving target. We're asking these entrepreneurs who have poured everything into a single endeavor and we're asking them to envision a totally different life than they've ever lived, and that's really hard to do. So, what might feel like the right number or the right answer to that question today, might be very different once they've actually walked a mile in those shoes, so to speak, and lived that lifestyle for a while. We worked with a client a few years back who demanded, for lack of a better term, that his business was worth $100 million. You know, the problem was, as in any industry that has an open market, there wasn't a buyer that was willing to pay that amount of money. But they got a really good offer for a portion of that hundred. But also, what came included with that was employment for a couple of years, and then an equity stake in the business. And so one of the things that we talk about in our report is, do business owners stay on afterwards as equity owners and for how long? And you know, I think about, I want to say the number in the report was about 70% of business owners retain some stake in the company that would continue to gain value, right. You're not going enter into a transaction if it's not going continue to add value to the existing shareholders. Just like a buyer is not going buy into that company if they don't see future value in it. So ultimately that entrepreneur achieved a number that was well in excess of a hundred million dollars. So, the outcome actually ended up turning out better for them once they had that second exit on the remaining equity stake. But the other thing that, you know, really gets to the heart of our role in the process is we've got a proprietary wealth planning tool called Advice Path that we'll use with clients in the process of a transaction where we'll actually take different numbers that will take kind of a best case, worst case, middle case type scenario in the transaction, and we'll help them model that out using our capital market assumptions over the next five, ten, fifteen, twenty years. And we'll to help them model what their net worth will look like given their goals, given their objectives, and given their risk tolerance. And so what we ultimately are trying to get to a conversation where we say, hey, let's reshape this into what your goals are, and then let us see if we can get there with the numbers that are being told to you by your deal team. So again, this really comes back to doing this early and having the right team, and we're going to continue to reiterate that, as I said, because if you're able to go through those different iterations and get comfortable, it will make that owner that much more comfortable as the deal progresses and knowing that they've got a peace of mind to what's going to happen on the other side of the transaction.

[00:19:19] Eric: Alex, maybe a quick follow on back to you on that. So, for many owners, what happens after the sale to the business can be even harder to control than the financial proceeds from the sale. In your experience, how can they help protect the culture and ease concern about their employees after a sale?

[00:19:36] Alex: It's a great question because in many cases, those employees have become their family. And in the course of doing our report, that point was emphasized, 32% of respondents in the survey said that the impact of the sale on the employees was their top concern. You know, number one, obviously, it's because they care about the individuals, but number two, and to the heart of your question, they care about the culture. You have to really come to grips with the fact that it's no longer your business. And it's not necessarily your choice, but there are things that can be done during the course of the business transaction negotiation that might help to mitigate the erosion of the culture that you've worked so hard to build. Number one, and this is easier said than done, because again, it's an open market, but you've got to choose the right buyer. Sometimes the highest bidder, isn't the best steward of your business. And that's something you have got to be very honest about. So you have got to kind of look at the landscape of offers and decide what's best considering all those factors. Number two, you've got to be very transparent with the buyer about what made that business successful in the first place, right.  Because they're coming in at it and looking at it from a different perspective. And if you believe that culture was critical to making it what it is today, then that point has to be discussed. Number three, you've got to build in a thoughtful transition plan from you and your executive leadership team to what ultimately the executive leadership team will look like. So, as I said, there's oftentimes, I would say, probably at least half if not more of the transactions I've seen in the course of my career, there's a post-transaction period of employment for the entrepreneur where they will kind of help ease that transition into the new leadership team. And oftentimes that person will end up staying on a board, create retention packages for key employees and offer additional kind of held back or retained equity for some of those key employees so that they stick around and make sure that transition happens in a thoughtful and orderly way.

[00:21:51] Boryana: I want to jump in here to underscore Alex, what you said and point out that 32% of our respondents mentioned that the impact of the sale on the employees is a top concern in the sale process. And I do find a lot of business owners are treating their employees and key team as their family, right, as their extended family and they want to work on, as Alex you mentioned, retaining the key employees that make the business successful and they want to reward them from a successful exit, whether through phantom stock or other arrangements. I'm working with a business owner now who is growing a massively successful business that will be going to market in two to three years. And in the very first conversation we had about the exit, he told me that his number one concern was how his key people will experience the future sale. So, this is real for a lot of business owners. And with this particular entrepreneur, we are working with a corporate lawyer to document the vision and the goals for the employees, both during and after the sale. And so this is an important consideration for a lot of entrepreneurs.

[00:23:09] Eric: Yeah. So this topic of preparing for life after the sale is important and relevant to all transactions. Are there ways in which we help business owners navigate this transition?

[00:23:20] Alex: Yes, you know, absolutely. I think clearly entrepreneurs have kind of established a personality around themselves and their business that creates a certain identity and purpose for themselves. And that's something that's really difficult to change once it's been ingrained in them. This is a very real concern, and this is one that, you know, is not easily answered with a model or with a trust and estates tax doctrine in front of you. This is something that happens over a long time, many conversations. And you know in the same way that people lean on their mentors in business, I believe they should lean on mentors in life. They need to have people that have gone through this process that can help them kind of understand. You know we can serve that role, right, because we've worked with tons of entrepreneurs; we've seen them on both sides of the transaction. So that's something I take a lot of time and thought and work with our clients on. The other thing is, we try to connect our clients with others that have gone through similar situations. It's very hard to put yourself in their shoes, but we have a unique network that can help people through the transition. Again, I'm going to sound like a broken record here, but you need to start thinking about this early. You need to start talking to people early and understanding, hey, is this what I really want? Because your life is going look different on the other side of this. Again, we talked about building in a transition time. And the transition time is one where maybe you're sitting on the board, and you still feel an identity and a purpose tied with that business, but it's not explicitly tied on a daily basis. So, I think the obvious answer is getting involved in other things, right. Charities, boards, investing, family, travel, passion, golf. Whatever it is that gets you excited to get up in the morning, because that's what your business did for you. And so as long as you can kind of work to try to replace that, but don't think that it's going to be an identical replacement of purpose. It's more kind of finding what that purpose looks like and experimenting and seeing what kind of gives you a really good and excited feeling in that next act of your life.

[00:25:39] Eric: Thanks, Alex. Another angle to this is that many entrepreneurs and business owners are serial entrepreneurs and have started and sold multiple businesses through their careers. Boryana, do you often see owners looking to dive back into a new business after selling? And do you think it's a good idea, or potentially to take some time off first?

[00:25:58] Boryana: Yes, Eric. 59% of our participants stated that they were actively planning new business ventures, mostly new industries, and another 34% were interested in doing that. And that corresponds to my experience and the experience of the team here at BNY Wealth. While a lot of people approach the sale process with the mentality, “Oh, if I make it once, I never want to have to make it again and I am going to have this unlimited time to relax, pursue my passions, not be actively engaged in creating or running businesses.” For a lot of them, as you mentioned, Eric, having a real pursuit, being an entrepreneur is a part of their identity. I work with and provide advice to a lot of business owners who are part of Vistage or other business groups. And many of those folks are on the second or third ventures and even when people take a year off, subject to health or age concerns, they're getting back to another project and sometimes the approach to run another person's successful business. Also, having a successful exit allows business owners to have a redo or to do something differently about the next company and the next exit. I had a client who sold their business to a private equity fund and watched how their business evolved under the new ownership. They were not truly happy. What they perceived as the special aspects of the business, having a direct reach out to clients, having scientists who created a newsletter with some findings. Those things essentially immediately disappeared for efficiency and cost purposes. And that specific client, a year or two after the sale, created a parallel business in the same industry and threw their passion into creating and running a business that they could see thriving without having the individual pressure of having to fortify their own balance sheet and be personally successful.

[00:28:17] Eric: Thank you. So we've covered a lot of ground. But before we wrap, any final takeaways or advice you'd like to leave with our listeners?

[00:28:26] Boryana: I may start, I heard a saying earlier this week, when you don't have a plan, you plan to fail. And I want to turn that on its head and say, in the positive, when you have a plan, you're more prepared to succeed. I think for business owners, having a robust plan around the exit and having that plan come together early is a key to a successful exit, personally and professionally.

[00:28:56] Alex: I would just say that this discussion, the very fact that any entrepreneur is having this discussion around a possible transaction really is something to be celebrated. And it means that they have achieved a level in their business which very few people have achieved. And you've worked so hard and you've spent so much time building this asset and this enterprise, that going through this transaction deserves the same attention. And maybe to recap some of the key suggestions from the research paper and in what Boryana and I have kind of talked about over the last thirty minutes or so, you've got to start early. That's critical. You've got to build the right team that understands you, your business, and your goals. You've got to think about your life post-sale. Is this a transition that you're ready to undertake? You've got to take the time to find the right buyer that's going to help you preserve the culture that you worked hard to create. That's going essentially, you know, it's kind of like taking your kid to college. You've spent your entire life raising this person. You need to be able to trust that the people at the next stage are going to do that when you're not there to watch. It's a very similar emotion. And then finally, you got to be really clear about your personal goals, both financial and emotional. You kind of can't wing that, right. That's got to something that you've developed over time and that you feel like this will help you get closer to what those goals are. The bottom line is this is the very best part of our job at BNY Wealth. We love it. We invested in this research paper, just like we invested in this podcast, because we want to work with more entrepreneurs and help them in this process. It is absolutely the most rewarding thing that we do in our industry. And it really excites us to see people realize a positive outcome on their life's work. And so if you're considering that, we would love to have that conversation with you and we would to walk alongside you in that journey. So thanks for having this conversation with us, Eric, today, it was really fun. 

[00:31:19] Eric: That’s a great place to wrap it. Boryana, Alex, thank you both for joining us today and sharing your insights. And to our listeners, thank you for joining as well. To take a deeper dive into these insights, we encourage you to download the full report at bny.com/business-owners. Also, please reach out to us if you're interested in kicking off conversations or in a sales process or would like some guidance. Thank you for joining us and we'll see you on our next episode of Your Active Wealth.

[00:31:51] VO: Thank you for listening to this episode of Your Active Wealth. Be sure to subscribe to this podcast on Apple Podcasts, Spotify, or wherever you listen to podcasts, and visit bny.com/wealth to view the latest insights on the subjects that matter most to you.

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