The Kids Are Not Alright & The Alchemy of What If

By Bill Snow

You worked a lifetime to build a something you’re proud of.  You planned to pass the business to your kids, but alas, the kids are not part of the plan. They have their own lives and careers and have no interest in your business. Or worse, you can’t trust them and they lack the ability to operate the company. Or worse still…they don’t deserve it. Unfortunately, and with apologies to Pete Townshend, the kids are not alright.

Despite the lack of a family successor you are thinking more and more about selling the business and retiring. Let’s face it: The siren call of Florida or Arizona — or any place other than where you live now — is whispering in your ear. Some times it kicks you in the middle of the night and you swear it has the sound of your spouse’s voice as it says, “I want to go. I want to leave now. You’re done working. I don’t like it here.”

So you start talking to people. Your attorney or accountant or wealth manager provides some introductions to a certain ilk of people called investment bankers.  These people use all sorts of fancy terms such as “creating liquidity” and “monetizing” and you suppose those are apt terms, but what you know what this really means: sell, get the dough, and play golf. Or Travel. Or Sail. Or whatever it is you and your spouse want to do now.  OK, let’s be honest: Whatever your spouse tells you to do.

The hitch in your giddy-up

The one hitch in those plans is today’s lousy economic environment. No way around it.  Your business isn’t as profitable as it was in say, 2006. And buyers of businesses – be they PE firms or strategic buyers – are not as apt to pay the frothy multiples of a few years ago. So, let’s see, smaller number times smaller number equals…yikes!  A double whammy.

While you may be thinking about riding out the storm and rebuilding your business to its former peak, you should also consider what affect delaying a sale process for a few years may mean to you, especially if your company represents all or most of your net worth. If all or most of your net worth is tied up in an illiquid business you are effectively gambling with your all or almost of your net worth. You’re leaving all of your chips on the come line in order to (hopefully) squeeze out a relatively small increase in your proceeds. How comfortable are you risking 100% of your principal for that modest profit?

The Alchemy of What if

This gamble is the Alchemy of What If, and it plays out something like this: You start with a perfectly good business that could fetch an acceptable price today and through the alchemy of “what if” you hope that a slew of factors completely outside of your control all fall into place perfectly thus resulting in a future economic climate, perhaps many years from now, that enable you to sell your business for a price, adjusted for inflation, that is a bit higher than today’s value.

While the factors that comprise the Alchemy of What if are numerous and can vary from person to person and from situation to situation, in my view the “What If” ingredients include taxes, the business attitude of Washington, industry changes, credit markets, and our grand experiment with fiat currency.  Let’s take a look at each of these “what ifs”.

  1. Taxes – What if the tax environment takes a turn to the onerous? Remember, tax rates are set to go up in 2013 with the expiration of the Bush tax rate cuts and because of increases in Medicare taxes as a result of the 2010 Affordable Care Act.  What if the federal government fails to get its financial house in order? What if the capital gains rate goes up? What if the retiring baby boom generation and the resulting drain on Social Security and Medicare blow an even bigger hole in the budget? What will the future hold for taxation?
  2. Washington’s Business Attitude – What if the business environment in DC declines (even further)? Will your industry be in the crosshairs of a politician’s speech?  What if well meaning but ultimately unknowing bureaucrats decide to “help” your industry through greater regulation?   If you’re still not convinced, talk to Boeing and its would-be employees in South Carolina about the NRLB.
  3. Industry changes – What if your business takes a turn for the worse because of, say, changes in technology? I worked on a deal a few years ago where we tried to buy a company.  The owner eventually passed on selling his company to us because he didn’t think our price was high enough. Unfortunately for him, he failed to keep up with changes in technology, lost his competitive edge to nibbler companies, and when I checked in with him a few years later, his revenues had fallen by nearly 50% and he lamented passing on our deal. A bird in the hand, indeed.
  4. Credit – What if banks do not ramp up their lending? What if regulators increase capital requirements for banks.  What will this do to your business’s access to capital…and your customers’ access to capital?
  5. The Federal Reserve – What if the dollar continues to fall in value?  What will further quantitative easing do to the dollar and how will that impact your business? What if the dollar loses its reserve currency status?  How do currency fluctuations affect your business?  Does the dollar’s loss of purchasing power pose a threat to your business’s vitality or worse, lessen its ability to be a going concern?

Speak to a wealth advisor before you speak to an investment banker

As you think about retiring or moving on to a new challenge, sit down with an advisor and do some calculations. First, do you have enough now – liquid and safe – to gamble with the 100% tied up in your illiquid holdings by indulging in the Alchemy of What If? Second, what are your goals? What do you really need to live the way you want to live?

A wealth advisor worth his salt should be able to do these calculations as well as craft a plan that allows you to retain as much of the proceeds from a business sale as possible.  If you are without an advisor or if you are not confident of your advisor’s ability, contact me. I can put you in touch with some capable people.

Regrettably, far too many business owners seem to rely on a very informal, almost back of the envelope type of calculation.  They do that calculation for themselves and more often than not, they do it by simply pulling a number from thin air. And then they insulate, coddle, and protect that number against sundry economic detractors they see on the horizon – most notably, the nebulous and ill-defined affects of taxation – by padding and inflating that number.

When business owners do consult a wealth advisor, it is often in the wrong time: after the sale closes. Far too many advisers first learn of the business sale is when their client calls them and says, “hey, do something with this pile of dough.”

Working with a financial advisor in advance of a business sale process will help the business owner not only determine what he actually needs to live his desired lifestyle, but will help the owner reduce, mitigate, and lessen that scary and unknown apparition called “taxes.”

This planning does not mean that the business owner absolutely has to sell the business.  Instead, it merely supplies the owner with needed and accurate information thus enabling the business owner to make a fully informed decision about selling her business.

If not now, when?

If selling your business now will create enough liquidity to provide the lifestyle you want, then you should ask yourself if you’re young enough and energetic enough to earn it all back in case the Alchemy of What turns against you.  If you’re 45, yeah, you have a good chance. If you’re 55, maybe, but maybe not. And if you’re 65, probably not.

If the lifestyle you want is at your fingertips and if leaving it all on the come line means you might lose it all, you also need to ask yourself: Is playing the Alchemy of What If really worth it?


Bill Snow is the Managing Director of Investment Banking at Cambridge Partners & Associates, Inc. Bill is also the author of Mergers & Acquisitions for Dummies. Visit Cambridge Partners Investment Banking and for more information.

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