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Selling Your Business? Seller Beware

Robert Wermuth, CLU®, ChFC®, AIF® | November 13, 2020

Are you considering selling your business within the next five years? If so, the terms, timeline, taxes and total price likely have changed, possibly forever. 

What else has changed? Our ability to forecast risk, helping you to pursue maximum outcomes. Legacy’s Predictive Outcome Technologies offered through eMoney help business owners in transition model possible results integrated with their goals and historical family finances.

In the following hypothetical scenario, a thorough risk analysis may have helped the seller avoid unfavorable surprises and achieve maximum outcome.

“John” sold his entertainment-industry niche business in the fall of 2018 to a private equity firm that intended to merge it with an existing group of other similarly sized firms. The new company would comprise seven firms and 700+ employees. As the earnings multiple was at its peak, the $75 million price tag was a seemingly great reward for John and his family.

As the numbers were very favorable John agreed to hold a note for 10% of the sale price in exchange for annual interest payments. Another 10% came in shares of the new entity. At settlement, gross cash was $60 million, netting John approximately $40 million after taxes. A “second exit” was planned for 2021, a year ahead of schedule. Then things changed seemingly overnight and today the forecast is bleak. 

No one saw the COVID-19 pandemic coming. Students of economist Adam Smith describe this as an incredible “invisible hand” event. It effectively and suddenly closed the newly formed company at a time when sales were critical. A revised timeline calls for a “staggered opening” six months later than originally scheduled. “Normal” productivity is not expected until July 2021 – crushing the original cash-flow projections. The value of the new company’s shares remains unknown and may be minimal for years.

Simultaneously on the personal side, interest payments have stopped with no indication as to when they will resume. John’s stock portfolio experienced a 15% decline just months after being fully invested. Further, it will be years before his interest-bearing holdings will produce a competitive return. Presently, he stands to potentially lose 20% of value or $15 million in owner-financing. 

John sold a thriving business at a great time. His advisors got him a good deal.

The question: What went wrong?

The answer: We believe no one asked the hard questions. No one asked: What if..? A truly comprehensive risk analysis was not performed.

The lesson: If you plan on selling your business over the next five years it is imperative to look behind the curtain.

Here are a few questions to ask:

  • What will the multiple be and will it be enough?  
  • Will the proceeds provide adequate replacement income to maintain your lifestyle?
  • What will the basic terms be? 
  • What if the escrow and earn-outs are not paid? Will the cash alone be enough? 
  • Are you comfortable providing owner-financing? 
  • Has your potential tax liability been examined? What if rates change?
  • Are you prepared for an “invisible hand” event?

How We Work Towards Maximum Outcomes

At Legacy Planning we say selling your business is about a lot more than selling your business. As we have seen, it is about risk. Does your present analysis take the numerous forms of risk into account? Will you be ready if another “Invisible Hand” event strikes?

Technology + Experience = the Answer

At Legacy Planning we combine cutting-edge technology of eMoney with years of experience to help you pursue the best possible result. Our technical modeling and forecasting processes will alert you to the many forms of potential risk, enabling you to adjust your plan as needed to continue towards a maximum outcome. 

Risk assessment can improve operational and business efficiency by proactively identifying and mitigating numerous threats. We look beyond today’s factors to help you gain a competitive edge by determining what may happen tomorrow. The result: accountability and operational efficiency that can furnish you with a clearer forecast than traditionally provided.

When combined with years of experience, insight, knowledge, and networking capabilities we can increase the odds of providing the best possible outcome when it comes to the sale of your business.

For a complimentary assessment of your business sale opportunities contact me directly at Legacy Planning at rwermuth@legacy-online.com or by phone at 610-719-8600 x102.

The preceding case study is provided for illustrative purposes only and may not be representative of the experience of other clients. Every situation is different and actual performance and results will vary. This case study does not constitute a recommendation as to the suitability of any investment for any person or persons having circumstances similar to those portrayed. Please consult a financial advisor regarding your individual situation. Past performance does not guarantee future results.

Legacy Planning does not provide legal or tax advice. You should consult a legal or tax professional regarding your individual situation. 228 West Gay Street, West Chester, PA 19380

Securities and advisory services offered through Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser

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Rob Wermuth is a senior partner with Legacy Planning who combines nearly 30 years of financial services experience with cutting-edge technology to deliver to his clients integrated solutions to simplify their complex financial reality. He specializes in documenting goals and developing strategies for significant life events, including: corporate succession planning, estate planning and establishing or managing a family foundation.

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