Who Do You Need on Your Side when Selling the Business?
By Michael Raine
Jaimie Blackman of BH Wealth Management
When should MI owners begin their succession planning? If you own a store and haven’t begun laying that groundwork, then you’re behind schedule. It doesn’t matter if you’re 32 or 62, succession planning should begin practically the moment you take ownership, according to Jaimie Blackman, a New York-based financial planner and president of BH Wealth Management, who is a former MI store owner himself. In fact, he can give you the precise moment this became apparent to him.
“I live on Staten Island in New York City and Stan Jay operated a very famous store for 40 years called Mandolin Brothers. His clients included Paul McCartney, George Harrison, Bob Dylan, and Joni Mitchell. You’d walk into this store and you’d see 800 or 900 guitars, mostly vintage. It was the place to go and I was a customer for maybe 20 years,” Blackman recalls. “I walk in one day and there are no instruments on the wall. The place is empty. So I knew Stan Jay’s children, who were managing the store, and I said, ‘What’s going on?’ They said, ‘Father died suddenly.’ There was no succession plan in place, no estate plan in place. He had what they call an ‘I love you will’ where all of the shares go to the wife, who is not as involved as the children were who were actually managing the day to day. As a result, the children didn’t have any say on what was going on. The mother felt that she wanted to liquidate and pretty much shut down the business.”
This left Blackman “stunned,” he says, and the memory is on his mind every time he discusses succession planning – as he did during a NAMM U session in January. The problem, he says, is that during that NAMM U session, the audience was asking the wrong questions.
“They all ask, ‘What can I get for my business? What is my business worth? If I have this amount of earnings, what’s the multiple?’ They’re asking the wrong questions. A better question would be, ‘Under what circumstances can I maximize the value of my business?’ Something where there is some thought that goes into it before, ‘What’s my business worth?’ This is a process and the value of a business is nothing more than the risk that the buyer perceives,” Blackman explains. “You build your business to sell it from day one. What’s startling in America, and I would say it’s probably the same in Canada, is three-quarters of CEOs, private and public businesses, have no succession plan in place. There is no CEO that is being groomed, and it could take five or 10 years to groom someone.”
Before even getting into the more obvious elements of building a succession planning team, such as finding the right financial planner, Blackman talks about psychology. In fact, when Canadian Music Trade saw “psychologist” on his list of succession planning team members, we thought it was a bit in jest. Apparently not.
“I do estate planning as part of our practice, and the joke in the industry is, ‘Estate planning turns into perennial planning.’ That is, you start the conversation with the client and they never follow through with what we establish,” Blackman says. “They pay us to put a whole plan in place but they never pull the trigger and actually implement and sign off on it. Why? Emotional and psychological reasons.” It’s not uncommon for business owners of any kind to feel their business is their identity, Blackman asserts, and therefore, “You have to start creating new purpose for yourself or else you’re not interested in having these conversations because you don’t know what else to do.”
Assuming one is in the proper state to sell their business, whether to a family member, key manager, or third party, there is a lot to take care of. “There’s a different standard that the owners operate under when it’s a family member versus a key manager. The family member often gets a free pass; the key manager has got to really earn his or her stripes. The employees know it and that causes a lot of friction,” cautions Blackman.
So who is needed on the succession planning team?
First, a financial planner is needed as a kind of coach or captain to oversee the process over the long haul. “For example, I have a music retailer who retains me to do consulting,” notes Blackman. “We’re building out a business plan, we’re integrating that into his succession plan, and I introduced him to an accountant who is very experienced, and we’re building out the team and I kind of quarterback that. He has five to seven years, which is not a long time. We looked at every part of the business and where the needs are, I bring in the skill set. I think financial planners are in a unique position because we kind of have the personal and the business. We really have a very deep understanding of what [the owner’s] values are, what’s important to them, so when I bring folks in, they don’t have to start all over again with them. I can make sure that they are doing the right thing.”
After that, it’s finding the right accountant, whom Blackman says does the initial valuation of the business. “The accountant can also take a look at profitability, the diversification of their inventory, for example, and make some suggestions.” As well, government, whether it’s the IRS or Revenue Canada, loves a business sale, says Blackman. “It’s like meat on a hook waiting to drop down and the dog is salivating because of the taxes. If [owners] do the wrong thing, they can lose half their money just in taxes. So the accountant is key.”
Next is a business attorney who is experienced in your province on matters such as business estate planning, business taxation, buy/sell agreements, and trusts. There are many elements that come into play depending on who the owner is selling to. If it’s a family member, there are accounting issues related to family gifting and generational transfers. Manager buyouts are another matter if the store is going to an employee. “There’s a lot because it’s the attorney that is actually going to memorialize everything that the client has been discussing with the planner. They are the ones who lock all the stuff into paper and get the sign-off.”
The next team member is a valuations expert, which is especially important if there is any reason to believe the purchasing party, whether a family member or key manager, will dispute a valuation. “If there’s a divorce involved, you may need a more formal valuation,” notes Blackman.
Lastly, a sell-side advisor may be helpful in finding the most optimal purchaser. As Blackman cautions, when you’re selling your largest asset, it’s often wise to get an outside opinion and multiple buyer options. Ultimately, the business owner is the client and they’ll decide what offer is acceptable.
Much of Blackman’s advice focuses on selling the business to a family member or key manager and the reason for that is simple; if possible, don’t sell to a competitor. “Your entire success depends on your ability to mentor, train, and groom one or more individuals. You’re going to get a better multiple if it’s an insider than selling to a competitor,” he says. “That I think is an important point. In other words, if someone says, ‘I know a competitor, I’m just going to sell out,’ professionals will caution and try to put the brakes on that to see if that is really the case. We will challenge that comment because if they’re able to groom someone inside, you’ll always get a more favourable multiple.”
Ultimately, no two sales are the same. If you have the right succession planning experts are on your team, they will tailor their advice to the owner’s situation. “I mentioned that the financial planner is key because if the business owner doesn’t even know what they need for their own retirement, how do they know if what they’re asking for is going to be enough? It has to start with the family needs first, before the business.”
Michael Raine is the Assistant Editor of Canadian Music Trade