Have you thought about the end? The
meaning of life after the business is
sold? Who should get the company, and when will you be ready to pass the hat
to a family member or sell what is, for
many entrepreneurs, “the third child”?
Planning how you will exit your business is
just as important as strategizing how to
launch a company and grow it.
“Everyone must exit their business at
some point,” says Joel Guth, an advisor
with Citigroup Global Markets Inc.’s
Citigroup Family Office in Columbus. “You
either sell it, pass it on to family, or you
pass on. Planning allows you to pick the
best option. The sooner the better.”
Smart Business spoke to Guth about succession options and executing the planning
process.
When is the right time to start considering a
succession plan?
Actually, when you start the business, you
should already be thinking about how you
are going to exit. Certainly, if you are three to
seven years away from retirement or at least
want to reduce your involvement or risk in
the business, it is time to have a serious conversation with your advisors about how you
will exit, what your options are and what
you want to accomplish. The sooner you
plan, the greater the potential you have to
enhance the after-tax value of the sale proceeds or reduce your tax liability.
What are the first conversations concerning
succession that you have with business owners?
The first questions I ask are, “What are
your business goals? Do you want to
enhance the value of your company and sell,
do you want to pass it on to your children,
or do you want to sell it to key employees?”
When you plan, you get to decide who will
be your partner in your exit strategy.
Next, we discuss personal goals. Are you
at the point where you are truly ready to
quit working? What role do you want to
play when you exit? Will you walk away or
maintain a position in the business for a
few years? Or do you want to retire from the business and start something new? If
we understand the vision of the owner, we
can help him or her design options that are
in line with this vision.
Is the risk of owning one’s own business a
concern?
Business owners have an extremely concentrated investment. The business may be
worth $50 million and they might be worth
a total of $55 million — so more than 90
percent of their wealth is tied up in one
investment.
In your middle to late 50s, you may be
concerned about that risk. If the owner
wants to diversify some of the concentration risk, there are options. One option is to
consider bringing in a private equity firm
and selling a piece of the business. This
may allow an owner to take a considerable
amount of money out of the business, but
continue to run the business and still maintain an ownership position.
What are the advantages and disadvantages
of selling the business to a private equity
firm?
Private equity firms are more aggressive now than they’ve ever been in acquiring
middle-market companies. Institutional
investors are placing record dollars with private equity funds, therefore expanding
those funds’ ability to target middle-market
companies. They work with the owners and
management to leverage the resources of
the private equity group to grow the company and make it more profitable. They then
sell the business within a short period of
time — three to seven years, usually.
The advantage for business owners who
want to continue to work and reduce their
risk is they can sell 60 percent to 80 percent
of the company and still have ownership.
This percent ownership may be a significant piece of the value when the equity
firm sells the business.
After determining personal and business
goals, what next?
The third piece is timetable. The
timetable is a function of your personal
goals, business goals and the economy. You
don’t want to exit during a lull in the economy because you will take a reduced value
for your business.
Also, some industries are more cyclical
than others. You must consider factors like
interest rates and the M&A market. Ideally,
you want to design the exit that fits your
goals and be able to pick the timing of your
sale.
Citigroup Family Office is a business of
Citigroup Inc., that provides clients with access
to a broad array of bank and nonbank products
and services through various subsidiaries of
Citigroup, Inc.
Citigroup Family Office is not registered as a
broker-dealer nor as an investment advisor.
Brokerage services and/or investment advice
are available to Citigroup Family Office clients
through Citigroup Global Markets Inc., member
SIPC. Guth is a registered representative of
Smith Barney, a division of Citigroup Global
Markets Inc., and he has qualified to service
Citigroup Family Office clients.
JOEL GUTH is an advisor with Citigroup Global Markets Inc.’s
Citigroup Family Office, in Columbus. Reach him at (866) 464-2750.
