By Tristan Tahmaseb
Vice President
ButcherJoseph & Co.
Most founder- and family-owned businesses transact for reasons other than market timing. At ButcherJoseph, our primary clients are closely held private businesses. Through our work, we have observed that life events or underlying business conditions often are the instigator of a sale event. As our clients should be, they are typically heads down, focused on growing their team, developing new products, and managing daily business challenges, only to realize belatedly that an ownership transition event is overdue. As a result, many enter a sale process without a deliberate plan.
However, what if you knew that a major shift in the macroenvironment was coming in the next 10 years? Given your personal circumstance and business positioning, how would you prepare yourself and your business to navigate this expected change and maximize results?
Our friends at ITR Economics, the leading economic forecasting group for business, forecast an economic depression in the 2030s. While a depression can present opportunities, most private business owners today are baby boomers and will be approaching retirement as we head into the next decade. Armed with the knowledge of a potential depression, we urge business owners to take a moment from building and be thoughtful about succession. Many are unaware that an ownership transition event can take years to fully realize. Given your retirement and estate goals, it may be prudent to secure value for your life’s work by initiating or preparing for a sale before the uncertainty of the 2030s – particularly because owners often have most of their wealth tied up in their business.
Business owners have several options when considering ownership transition. As a boutique investment bank, we assist owners as they explore sale options and help our clients select a path that achieves their individual objectives and aligns with the business’s profile. The most common paths to ownership transition are a third-party sale to a strategic or financial buyer or a sale to employees via an employee stock ownership plan (ESOP). Depending on the buyer, it may take several years to receive total proceeds.
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In a third-party sale, the buyer may require you to roll over some equity or accept an earnout over time. Conversely, many business owners find that selling to their employees makes the most sense given the flexibility and benefits, though it requires patience. For the average company, a sale to employees takes five to seven years for a seller to recoup total sale proceeds. That said, there may be tax advantages available for owners that are unique to an ESOP sale that can result in higher total economics than a third-party sale. So, if you are a business owner and interested in securing value and diversifying your wealth in advance of the 2030s, we encourage you to start thinking about an ownership transition today.
Further, you can maximize the result of a sale process – whether a third party or ESOP sale – with advance planning. We encourage clients to conduct a strategic review and evaluation of their business from a buyer’s perspective. If you were to sell in three to five years, what could you do to setup your business for success? Do you need to strengthen your executive team, diversify your customer or supplier base, or address potential challenges with your product set? Implementing changes can take time, so addressing a few key aspects of your business sooner rather than later can make the difference in the outcome of a sale process.
Succession and ownership transition are crucial elements of strategic business planning. With economic turbulence forecasted for the 2030s, business owners should take steps to prepare themselves. With thoughtful planning and a clear blueprint, you can position yourself and business to achieve optimal results and satisfy your retirement goals.
To hear more on this topic, listen to ITR Economist Lauren Saidel-Baker and I during a complementary webinar where we discuss the general outlook for the economy, M&A activity, and how to ensure your business is well-positioned for a sale now or in the future.
To view the webinar, click here.