Colorado M&As highlight need for business succession plans

Many medium-sized Colorado businesses have accumulated sizable cash reserves since the recession. Now, a decade later, with an improving economy and interest rates still relatively low, (causing lower-than-wished-for returns on saving cash) companies are looking for a way to grow their assets … and their businesses.

Mergers and acquisitions (M&As) in the medium-sized business range are increasing given business’ desire to invest in capital expenditures for growth. At a national level, 40 percent of small business owners plan to make a capital expenditure to expand their business in the next year. In Colorado, that rises to 49 percent of business owners, according to the 2017 U.S. Bank Small Business Annual Survey. Often, the M&A process is initiated with a company making an unsolicited offer to a competitor, or from a private equity firm looking for the next opportunity. When a business receives an unsolicited purchase offer and moves forward with the transition, money may be left on the table due to lack of business succession planning.

As these mid-range business transactions happen, we’ve seen significant wealth transitioning from a number on paper to actual dollars sitting in an account. Too often however, the seller is busy managing the details of the sale and doesn’t consider how to manage the new liquid wealth until after the sale is completed. That can be very problematic in the long run.

Business Succession Plans

A business succession plan is important to have in place as early as possible in the life of the business – even the first year. This plan should include everything from listing the current value and assets held by the business to deciding what happens to the income when the business transition is finalized. In Colorado, 64 percent of small business owners do not have a succession plan, according U.S. Bank's survey, either because they are unaware of how important it is to help keep the wealth of the business intact when the sale happens, or because they’re intimidated by the concept of how much work goes into developing a plan. Or they’re just too busy running their business.

What does the planning process look like? Using the expertise of a team of wealth planners paired with Certified Financial Planners™ and tax advisors, business owners are presented with the discussions and decisions they need to ensure their needs and wishes are met when they’re ready to be done with the business.

Part of this discussion includes planning for how to not only maximize the sale of the business, but also maximize how the sale will benefit the business owner’s family. For example, there are several charitable or tax-advantaged processes a business owner may wish to use to reduce capital gains. However; setting up private trusts or private foundations takes time, and is better managed when someone isn’t trying to negotiate the sale of a business.

The bottom line is that once a letter of intent is signed, pre-exit planning is limited. In today’s merger and acquisition market, buyers aren’t interested in waiting around for a business owner to get his or her transition ducks in order. Buyers will push for faster turnaround, and if preplanning isn’t done with a strategy in place, a lot of money could be missed in the sale, and unintended consequences could also negatively affect the selling family, former employees, business partners, etc.

Start Early

A business owner might question why we recommend having a business succession plan in place even in the first year of business operations. Surprises happen in the business world, and having a plan allows one to better negotiate the unexpected. In addition to receiving unsolicited offers for purchase, we’ve seen business owners need to suddenly exit for health or family reasons. It is much easier to spend a short amount of time annually reviewing the plan and adjusting for life changes if needed than to scramble to develop a plan at the last minute. We’ve found for many business owners, being educated about the options available for transitioning a business allows them to pivot on a short-term notice if an opportunity comes up unexpectedly.

Share the Discussion

Finally, we’ve mentioned the idea of how the family receives the sale proceeds should be a critical part of a business succession plan. A significant part of this includes having conversations with family members about plans post transaction. For example, it’s not a simple process to go from running a $250 million illiquid company on paper to actually having $250 million in the family liquid investment account.

Questions we ask the business owner and his or her family while setting up the succession plan include:

1. Is a family member willing and able to be the successor?
2. Is philanthropy an interest?
3. Should trust funds be established for children or grandchildren?
4. How will each family member handle the wealth?

These questions aren’t traditionally easy to answer. And it’s much easier for a business owner to consider the answers when they’re not going through the complications of negotiating the sale.

We expect to see continued higher numbers of mid-size company mergers and acquisitions over the next couple of years as companies look for growth in this improving economy. Acquisitions will result in the transfer of significant dollars into the pockets of business owners. The question is: are these business owners primed to make the most out of the transition process with a business succession plan in place?