Stephen Wright & Mark Schrieber
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This article was originally published by the Philadelphia Business Journal.
U.S. companies benefited from lower tax rates in 2018 as a result of the previous year’s corporate tax reform, and better earnings and cash flow metrics have helped to enhance valuations. As we approach the latter stage of the current expansion cycle, many private business owners are exploring the idea of selling their company. This idea reflects the current deal environment in Greater Philadelphia. One in four middle market companies (26 percent) are planning or considering a full or partial transfer of the business in the next one to two years, according to the JPMorgan Chase Business Leaders Outlook survey.
Define your goals early
For business owners, to sell or keep their company is a momentous decision that shapes their lives and their families’ future. Selling a business is a deeply personal matter often motivated by factors other than financial metrics. It is important to assemble the right corporate and personal advisory team to help maximize the value of the business and achieve personal objectives. A strong advisory team is multidisciplinary, with specialists in law, accounting, tax, mergers and acquisitions, wealth management and technical areas that can facilitate the transaction.
Among business leaders who do have a business transition plan in place, just 31 percent would describe their plans as efficient, illustrating a need for thorough strategic planning. Answering questions such as the below can help prioritize your needs and profile the ideal strategic or financial buyer.
Put your financial house in order
If you’re a privately held business owner with plans to sell in the next several years, strategic planning with a corporate finance and personal advisor needs to start today. Advance preparation will not only minimize risk around the transaction, but should generate a higher price and optimize the value realized by the owners. It will also ensure that the goals established at the beginning of the planning process are in alignment with the personal financial objectives of the owners.
Owners can position their businesses to go to market when the time is right by focusing on the below factors in the planning stage.
Take a holistic approach
Beyond corporate financial planning, business owners must also think about their personal balance sheet in the context of a transaction to ensure that the result is optimized when the deal is complete. Too often, business owners focus solely on the how to maximize the transaction value and do not take the necessary steps to secure the best personal outcome from the sale of a business. For example, engaging in thoughtful pre-transaction planning around the wealth that the deal will generate could provide a better long-term result for your individual bottom line and family’s financial legacy.
The most successful outcome will often include a well thought-out tax plan, a multigenerational wealth strategy and a comprehensive short and long-term investment plan. Prior to a transaction, it is important to work closely with your corporate and personal advisory team to consider gifting opportunities for your family and charity, which could provide significant tax savings by leveraging valuation discounts and the tax law through the use of trusts, asset pooling vehicles and philanthropic entities such as a donor advised fund or family foundation.
You should also work with your team to develop an investment plan to accomplish the goals you have established for the proceeds. This should include a short-term cash management strategy for the liquidity and the tax liability, as well as a longer term investment strategy that focuses on asset allocation, risk management, portfolio implementation and ongoing monitoring.
Working with your advisors well in advance of a potential transaction to position your business for a successful sale will enable you to get the most out of your hard earned equity interest.
Stephen Wright is a Managing Director and Market Manager of J.P. Morgan Private Bank. Mark Schrieber is a Managing Director and Region Manager of JPMorgan Chase Commercial Banking. They are based in Philadelphia.
About the Authors:
Stephen Wright, Philadelphia Market Manager of J.P. Morgan Private Bank
Mark Schrieber, Region Manager of JPMorgan Chase Commercial Banking
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