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Q&A: Planning Your Exit Strategy


With so much invested and at stake, it’s easy to understand why only one-third of U.S. business owners feel prepared to sell their companies. Learn why planning ahead can save you and your family both financially and emotionally.

Businessman holding a queen chess piece on a block

As any business owner will tell you, starting and growing a company is something of an emotional roller coaster, complete with the so-called peaks of inflated expectations and troughs of despair. So it should come as no surprise that, when it comes time to sell the business — especially the most successful ones — it’s just as emotionally challenging.

As a result, many owners avoid or delay the planning process. Doing so, however, comes with some heady risks for both the short and the long term. To better understand these risks, and learn more about the opportunities for owners after they sell their companies, we sat down with Kenneth J. Shepard, head of the Wealth and Portfolio Strategy Group at Bank of America Private Bank, and Karen Reynolds Sharkey, national business owner strategy executive at Bank of America Private Bank. Both have worked extensively with clients at every stage of the ownership journey.

Bank of America Private Bank: Sometimes selling a company is all about the right time, the right place and the right buyer. Why then is planning ahead so important?

“Planning is key for several reasons. It can help ensure you’re not selling on someone else’s terms — to the first suitor that comes along, for example.”

Ken Shepard, head of the Wealth and Portfolio Strategy Group at Bank of America Private Bank

Ken Shepard: Planning is key for several reasons. It can help ensure you’re not selling on someone else’s terms — to the first suitor that comes along, for example. It can also provide a road map to keep owners on track when they feel the pressure to sell quickly, which may be when a company’s market valuation is suddenly more attractive, or when something like a divorce or illness happens. This is important because if a sale is hurried, the owner may not realize an appropriate valuation for the company. On top of that, without the timetable and strategy a plan provides, key employees may start feeling anxious and leave the company ahead of a sale, which can affect the appeal of the business to potential buyers.

Yet according to the 2018 U.S. Trust Insights on Wealth and Worth®, only one-third of business owners have a detailed plan in place. Why?

Karen Reynolds Sharkey:
Some owners feel they simply don’t have the time to plan because they’re still fully engaged in the business and, while they know planning is important, other activities take priority. Other owners may still be determining their timeline and delay starting the process, assuming time is on their side, which can present an issue if an event, such as an unsolicited bid or unexpected health issue, arises.

Many owners have grown their company with purpose and passion. They identify strongly with it and are used to being in charge. After a sale, they often come to realize that life is going to be very different. Here’s how one client put it: “One day I was running this multimillion-dollar company. The next day, I was still going to work at the company, but I was not the main decision-maker any longer and employees were still looking to me for direction.”

In short, owners considering a sale may feel unsure about what they’ll do with the rest of their lives or, in some cases, who they might be when they are no longer the boss — it can create an identity crisis.

Why is the due diligence process such a burden on owners?

Reynolds Sharkey: It can be a real challenge, emotionally speaking, to work through the due diligence process. The seller likely ran the business for years, with certain companies having no board of advisors or oversight function beyond the owner, and sometimes their family. Then a suitor comes in and basically questions almost everything the owner has done to get the company to where it is today. Having to pull the company apart for inspection, so to speak, can be jarring to some owners. Preparing for that ahead of time will likely save both time and emotional stress.

How do you make a client feel more comfortable with the idea of a sale and the liquidity that comes with it?

Shepard: One of the first decisions to make is where to “park” the liquidity that comes from the sale of a business. The solution may be to deposit funds in a bank or create a short-term fixed-income portfolio that allows the client to earn interest on the new wealth. Our goal is to protect principal and to give sellers the flexibility to start working with us and their other advisors to implement a longer-term plan, once they’re ready to do so.

Reynolds Sharkey: That gives owners some breathing room. After all, there are many things to consider — how the sale is going to affect their family, management team and employees; what it means for their legacy; what the next phase in their lives might look like — and it can be overwhelming to address all these concerns at once. With their new liquidity secured in low-risk assets, they can take their time to decide on a long-term investment, family and life plan.

Three Buckets for Your Funds
How to organize your assets after selling your business.

Your Funds Three areas to focus your assets when developing an investment strategy post-exit
Short Term – 1. Liquid Assets
Long Term – 2. Investment Portfolio
Life Goals – 3.  Aspirational

After planning for the immediate needs, where should sellers be focused?

Shepard: We’ll talk with them extensively to get a sense of their longer-term financial goals, as well as their life goals, post exit. For some that may include starting — or investing in — another business. Based on what they tell us, we’ll suggest creating three “buckets” of funds, each with a different focus. Once clients understand the concept of the buckets, it can help them get their head around the investment strategy we’ve designed for them.

How do the three buckets differ?

Shepard: The first bucket is for liquid assets such as cash or short-term fixed income investments. These funds are meant to be readily accessible for clients to use for near-term spending needs, such as mortgage payments, taxes they may owe on the sale, charitable gifts and living expenses for a year or two. The second bucket is typically a longer-term investment portfolio with a variety of assets such as stocks, bonds and alternative investments. It’s designed for growth and to help provide for clients’ long-term needs, as well as maintain their lifestyle. The third bucket is what we call opportunistic or aspirational, and it’s one that is easily overlooked. These funds can be used for any future business investment, or as leverage for a line of credit or a loan.

Reynolds Sharkey: Establishing the three buckets is vital because they address what may be at the top of an owner’s mind — what to do with all of this liquid wealth. Once the buckets are set, owners should take time to consider what their next chapter might be personally. It might be sitting on a board, investing in another venture, spending time with family and friends, or pursuing a philanthropic endeavor. As a cautionary tale, current owners should consider learning from the experience described by one former owner we worked with: “I’ve spent time with family and friends. I’ve travelled the world. Now I don’t know what to do with myself.”

Talk a little about the reluctance some owners have to giving up control and allowing someone else to manage their wealth.

Reynolds Sharkey: An owner may have a large portion of personal wealth tied up in their business. From the outside this looks a lot like what investors call a concentrated stock holding. While regarded as high risk in the eyes of investors, the owner may be very comfortable with a concentrated stock holding because they made all the decisions for the business — everything from determining the capital structure to who gets hired. If something goes amiss, the owner can fix it. By selling a company, the owner gives up control and essentially hands over a large portion of that wealth, it not all of it, to portfolio managers and other investment professionals, who then invest it across a range of asset classes.

This requires a shift of mindset in the owner. They will still be involved in setting up an appropriate investment policy, of course, but the portfolio manager will be responsible for the day-to-day running of the portfolio. That can be a difficult change for some owners, but most eventually feel comfortable with the transition and understand why it’s necessary to the process — but it can take time.

Do you provide any educational programs for the seller or the seller’s family?

Shepard: Once we’ve developed a timeline spelling out what needs to be done and when, a question we frequently hear is, “How will this wealth impact my family — my children in particular?” We may work with families to develop a curriculum that addresses a wide range of important topics — investments 101, estate planning and philanthropy, to name a few.

A key aspect of the curriculum focuses on how children and families can protect themselves from cybercrime and other ways people target wealthy individuals. We may also spend time working with the kids on understanding what this wealth could mean for them later in life. And we can develop an estate plan that helps to protect them and provide for them long after the parents have passed away. It’s a multifaceted education program that usually starts with the business owner, but often involves other members of the family.

Learn more about Bank of America Private Bank’s Financial Empowerment Program.

Reynolds Sharkey: A sale can also be stressful for employees of the business being sold. To make it less so, we can sit down with owners to determine how they might want to protect their employees. And in situations where employees are part owners and are also coming into wealth, we can provide a team and resources to help educate them as well.

To learn more about Bank of America Private Bank’s services for business owners and their families, contact your advisor or visit Business Owners Solutions.

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