The Mahoney Team at Morgan Stanley Wealth Management From business plan to exit plan Thinking about selling your company? Learn how other owners have found help to protect their wealth and family, and set the stage for a fulfilling future. By Scott F. Mahoney, CPWA® Senior Vice President and Financial Advisor The Mahoney Team, Morgan Stanley Wealth Management Millions of entrepreneurial Americans have excelled at running their own companies. But when it comes time to sell or transition out of those businesses, many aren’t sure where to begin. Which option best meets their needs: to retain partial ownership, or sell out completely? To whom should they consider selling: family, valued employees, a strategic partner, a private equity firm? How can they structure the sale to meet key objectives such as cash-flowing their lifestyle, endowing chosen charities and providing for their loved ones? Each day until 2030, 10,000 members of the Baby Boom generation—including many business owners—will reach age 65, according to Pew Research Center in Washington, D.C. The resulting turnover in business ownership could produce the largest transfer of private wealth in our nation’s history. As today’s business owners begin to sell, the effect could be profound because many have so much of their wealth—and their identity—tied up in their companies. That makes it all the more important that they transition out of ownership in a way that honors their company’s past, preserves their wealth in the present and sets course for a secure future. >> 2 A fter more than two decades as a Financial Advisor, I still learn something every day about protecting and growing wealth. And some of the best lessons come from the entrepreneurs I serve. When my client Joe* was a child, he watched his father turn a one-truck garbage collection route into a successful small business. To preserve what his father had built, Joe took over the company. Then, with help from its faithful employees, he grew it into a waste management empire. After years working in company laboratories, Dee* had developed a formula she believed would make her employer millions. When her bosses had no interest, Dee went out on her own. The company she founded became a leader in the personal care industry, with $100 million a year in product sales. For 30-plus years, Martin* took a modest salary so most profits could be plowed back into the building materials business he and others helped create. At age 60, he was ready to sell out his share—but not before looking hard at how the windfall would affect him, his family and their future. I’ve been fortunate to work with many successful business owners like Joe, Dee and Martin. Savvy, determined dreamers, these individuals possess a will to succeed that cannot be taught. They have overcome countless obstacles that stood between them and * Names and details have been changed to preserve confidentiality. their vision. Faced with critical decisions, they have made the right calls at the right moments and chose the right people to work with. My work with each of them begins at some point in what is essentially an ownership life cycle. There’s a beginning, where every ounce of energy and every available dollar is poured into the company. There’s a middle, where the owner counts on valued employees, familiar customers and advisors to help the company build its brand and battle the competition. And then there’s an end, where the business owner will relinquish the reins, for any number of reasons and in many different ways. For years, many of my clients have built and managed wealth—the beginning and middle of that ownership life cycle—creatively and confidently. But I find that, as they approach that last stage of the life cycle, many of them are apprehensive. And they should be. Owners are used to knowing everything about running their company, but often know little about how to sell out of it. They have surrounded themselves with strong partners and advisors—but in most cases, those associates will be moving on with the company, leaving owners to navigate the sale without their counsel. These owners may be the same skilled, smart world-beaters they always have been—but they are entering foreign ground. 3 If these leaders were sailing a yacht, they’d never grab hold of the helm without charts, or leave port without first mates. If they were flying a jet, they’d want flight plans and a seasoned crew. So here is what I tell every entrepreneur who is contemplating the transition out of business ownership: In selling your business, you will be hit with choices, challenges and emotions that you have not foreseen. But you can get through it —and preserve your wealth for yourself and your posterity — with sound planning and advice. Today, in U.S. business ownership as in the U.S. population overall, the “baby boom” generation plays an outsized role. Men and women born between 1946 and 1964 constitute 26 percent of America’s current population. In 2011, the oldest members of that generation began celebrating their 65th birthdays —and every day for the next 19 years, another 10,000 baby boomers will turn 65. Because about nine million of the 15 million businesses owners in the United States today are baby boomers, the coming wave of ownership transitions will probably be the largest transfer of private wealth in U.S. history. (Source: Dance in the end zone: The business owner’s exit planning playbook, by Patrick Ungashick.) I got my first view of wealth management from the passenger seat of a 1974 Econoline van. Perhaps you wouldn’t call it wealth: My father, Regis Mahoney Sr., was managing his two-man electrical contracting business out of that van, and he probably never made more than $40,000 in any year of his working life. And I shouldn’t say “passenger seat”: To economize, Dad bought that van with just one seat – his. So when I went to work with him the summer I was 9, I sat on an overturned milk crate. Still, what I saw Dad doing that summer was, fundamentally, wealth management. He was building a business that would provide for his family. He was making decisions with a realistic view of the risks and the rewards. He was working hard, but also working smart. 4 And when it came time to transition from business owner to full-time grandpa, he had as much reason as any successful entrepreneur to feel proud of his life’s work. For most of his life as a business owner, though, my dad didn’t get much help. He did not have the benefit of counsel from others who had faced struggles much like his own. He lacked the research and information resources that business owners today can tap to guide their choices. And beyond a handful of conversations with our family accountant, my father never worked with advisors who could have helped him maximize and protect his earnings. When I chose a career path, instead of becoming a business owner as my father did, I aimed to become the business advisor that I wished my father had had. My job, in its essence, is to enable business owners to do what Regis Mahoney did: provide for his loved ones and his future. I serve my clients by sitting in their blind spot. I tell them what has been successful—or disastrous—for those who have run the miles they have not yet run. I tell them what threats are looming that they might not recognize, and how we can help keep those threats away from their wealth. Especially at this turning point in U.S. economic history, my job is to help owners act wisely before, during and after a lifechanging liquidity event. That means taking inventory of the reasons to cash out or stay in (see box on page 16), and making clear-eyed choices. It means hammering out an exit strategy through consultations with trusted advisors. It means deciding to whom they would sell — family member, employees, highest bidder? It means some soul-searching: Can they really walk away completely, or would they rather maintain some role or stake? And for those who choose to walk away, it means smoothing the transition from a work-focused existence to a productive, rewarding Act Two. Once an exit strategy’s foundation is laid, there are more issues to address. If the owners and their current advisors lack expertise in selling a business, who must they add to the team to gain that knowledge? If they are stepping 5 away from an enterprise that occupied them 24/7, how will they fill the void and establish a new identity? If the sale will result in significant proceeds, these individuals may soon see many of their dreams within reach. They may want to make a top-flight college education possible for children or grandchildren. They might want to provide the seed capital that will give loved ones a great start in life, whether that’s with a home or a business. They may dream of a vacation home on the beach or in the mountains. They may want to leave a sustaining gift that will enable their favorite charity to continue its work. When a seller checks the account balance after a business is sold and sees that big number, it’s a euphoric experience. But from my perspective, it is also an investment crossroads where it is easy to take costly wrong turns. Conscientious owners are used to controlling business wealth, all the earnings they have plowed into the company. But until the sale, many of them never will have controlled so much spendable wealth. They never needed to have expertise and confidence in managing and investing significant amounts of spendable cash—but the moment the wire transfer hits their account, they will need exactly that. That is where the high-value investment advisor comes in. In ideal situations, I would have begun working with owners when they first contemplated selling. With my extensive wealth planning resources, and in consultation with their other advisors, we would plot every step of the transition, creating a comprehensive framework for making wise decisions that help achieve their many financial goals. Then we’d all be on the same page by the time the transfer hits, bringing with it a host of happy yet weighty questions: What are the clients’ dreams and ambitions for their life in this next chapter, and how much income will they need to cash-flow that lifestyle? How can they best help provide a measure of security to their children and other heirs, in a way that helps the recipients feel financially responsible instead of entitled? What are their goals for philanthropic giving, whether to their community, their house of worship or their favorite charities? What combination of investments will keep their wealth growing and shield it from undue risk? As noted earlier, many business owners now completing a sale have had a large share of their wealth—and their identity—tied up in their companies. That makes it all the more important that they learn from what previous business owners have done to ensure a successful sale and an admirable legacy. >> 6 The case studies that follow are drawn from my work leading The Mahoney Team, which is part of the Morgan Stanley Wealth Management . To preserve confidentiality, I have altered names and other details in the narratives. Although these case studies are composites of many business owners’ situations, they accurately reflect the way I and my team have served actual clients. The lead players in these narratives—of diverse ages, family backgrounds and professions, from across America—had at least two things in common. They held ownership in companies that had achieved multi-million-dollar success. And they needed help stepping back from that role in a way that achieved three key goals: honoring the company’s past, preserving their wealth in the present and setting course for a secure future. I have been proud to serve them and am happy to share what I learned from them. business selling remanufactured machinery, equipment and tools. By selling to a strategic partner, co-owners preserve their family business while moving on with their dreams. A&B Equipment, Brooklyn, NY Remanufactured equipment business Co-owners Ahmed* and Bashir* Ahmed and Bashir are first cousins. They have been as close as brothers since childhood, when their parents left Beirut together and settled with other Lebanese Christians in Brooklyn’s South Ferry neighborhood. As young men, they kept one foot in their native culture while pursuing their American dreams: business courses for Ahmed, machinist school for Bashir. When South Ferry’s factory owners began calling on Bashir to help find machinery or parts they needed, the cousins saw an opening. Soon, their parttime salvage work grew into a full-fledged Five years after they had started, Ahmed and Bashir’s business, A&B Equipment, had outgrown its warehouses around New York. I met the cousins when I helped them arrange a line of credit to acquire space in New Jersey. Not long after that, Ahmed called to say the two were contemplating another move: Selling the business. To begin exploring their interests and options, I invited Ahmed and Bashir to a discovery meeting. Whether individuals are considering a business sale or some other important financial move, this meeting is always the first step in understanding his or her wealth management needs. Through wide-ranging discovery interviews, we would examine the cousins’ current situation, list the goals they wanted to achieve and identify the challenges standing in the way of those goals. Bashir and Ahmed were very clear on their reasons for considering a sale. While they * The case studies presented are provided for illustrative purposes only. Past performance is no guarantee of future results. The information has been obtained from sources we believe to be reliable, but we cannot guarantee its accuracy or completeness. These strategies do not guarantee a profit or protect against loss and may not be suitable for all investors. Each customer’s specific situation, goals and results may differ. 7 had worked 16-hour days, their children had grown up and launched careers—in medicine, education and the arts, but none felt drawn to the family business. Each man longed to spend more time with his grandchildren than he had spent with his own children when they were young. As the business prospered, both had moved their families from Brooklyn to exclusive communities on Long Island. Ahmed was dreading more long drives to A&B’s warehouses, and Bashir wanted to spend more time in South Ferry working on a project close to his heart: a cultural center dedicated to preserving the Lebanese immigrant community’s history. Not surprisingly, the two were less clear about what to do next. They wanted to sell at the right time to get the greatest reward for all their hard work. They wanted to find the right buyer, someone who would keep their veteran employees on the job and their longtime customers satisfied. They knew they would need highly specialized financial and legal counsel, but had no relationships with such advisors. I ended our discovery meeting by setting a date for a planning meeting two weeks later. At that session, I outlined my team’s holistic approach, and presented my diagnostic of the cousins’ situation and my recommendations for moving forward—the plan that would form the foundation for our work together. Ahmed and Bashir looked over the plan with their families and lawyers, and liked what they saw—so in another two weeks, we reconvened for a mutual commitment * The case studies presented are provided for illustrative purposes only. Past performance is no guarantee of future results. The information has been obtained from sources we believe to be reliable, but we cannot guarantee its accuracy or completeness. These strategies do not guarantee a profit or protect against loss and may not be suitable for all investors. Each customer’s specific situation, goals and results may differ. 8 meeting. We agreed to work together, and executed the confidentiality agreements and other documents necessary to get started. My first task as the cousins’ wealth manager was to help them sort through the many options before them in structuring a deal. Option one: An outright sale of the company, paid in cash. Option two: A deal that paid the partners somewhat less, in cash and in stock, and required that they stay involved with the company for a transition period. Option three: Selling part interest to a private equity firm to get some of their equity out and growth capital in, but remaining part owners. We set about getting the cousins what they needed to make informed decisions. To help them assess the appeal of option two, the cash-and-stock deal, I took them to meet one of my firm’s leading stock analysts. The approach had its merits—but because both men were eager to move into the next chapter of their lives, they chose option one, the straight sale. In follow-up meetings, I began connecting the cousins and other A&B personnel to specialists from my firm and network. That included tax and M&A specialists who could sit down with A&B’s comptroller and do due diligence on years of titles, property purchases and transactions to be sure no surprises would arise at closing. I introduced the cousins to several of the blue-chip, boutique investment banking firms with whom The Mahoney Team has alliances, with emphasis on banks that had done deals similar to theirs and knew both their industry and the marketplace. Then I attended meetings with them and advised them as they chose the banker who would put together a book for use in pitching A&B to prospective buyers. Through my involvement with all parts of the process, I was coming to know A&B and its owners much better. In the near-term, I was focusing on the structuring of the deal and execution of the sale. But I also was taking a longer and broader view toward investing the eventual proceeds to gain the most benefit for Ahmed and Bashir over the long haul. While the sale process often involves a large cast of characters— auditors, brokers, lawyers, bankers—most of those players move on afterward. Then, typically, I am the last one standing with the sellers, essentially serving as the chief financial officer to their family in concert with their attorney and accountant. The first-rate investment bank that Ahmed and Bashir chose went to work, creating the pitch to sell A&B and determining the range of prices for which it might sell: one worstcase, one best-case and one in-between. The cousins, frankly, found all three projections a little mind-boggling. So while the bankers pursued the sale, I developed scenarios with the cousins for managing the proceeds. I strategized with them and tax attorneys on how to structure the sale to minimize tax implications. We devised investment plans that * The case studies presented are provided for illustrative purposes only. Past performance is no guarantee of future results. The information has been obtained from sources we believe to be reliable, but we cannot guarantee its accuracy or completeness. These strategies do not guarantee a profit or protect against loss and may not be suitable for all investors. Each customer’s specific situation, goals and results may differ. 9 would protect and grow their wealth and cash-flow their lifestyles. And I worked with each cousin individually to build his dreams into the deal: For example, we set up a foundation for Bashir into which he would transfer some of his A&B stock and then, when the strategic partner bought A&B from the foundation and the cousins, the foundation would have funds to use for the Lebanese cultural center. Ahmed chose to establish trusts for his descendants. Just about eight months after I had begun working with them, Ahmed and Bashir—who together had $278 in the bank when they started their company—signed an agreement to sell it for millions of dollars. As part of our Wealth Management Consultative Process, I see them once a quarter at regular progress meetings to review investments and plans. They’ve never looked back since the sale. And they’re still active in their old neighborhood, where they recently helped A&B’s new owners start a job-training program for ambitious youngsters like they once were. Selling to employees allows an owner to preserve the business his family built as he eases out of leadership. Titan Collection, Toledo, OH Waste management company Owner Joe*, son of the founder When Joe recalls his childhood, one image stands out: His father Al’s big hands on a big steering wheel. Even after Al’s garbage collection business had grown from one truck to a small fleet, Al still took to Toledo’s streets several mornings a month, to keep his hand in. On some days before school, Joe would ride along with his father for part of the route, drinking cocoa from his small Thermos as Al drank coffee from his large one. Al always had dreamed his children might someday help run Titan Collection, but that was as far as he got. That is surprisingly common: When CEOs of America’s privately held companies are asked about their preferred exit options, the majority say they’d like to transition the business to a succeeding generation. But a fall 2011 survey of high net worth families conducted by SEI found that fewer than half of them actually had a plan * The case studies presented are provided for illustrative purposes only. Past performance is no guarantee of future results. The information has been obtained from sources we believe to be reliable, but we cannot guarantee its accuracy or completeness. These strategies do not guarantee a profit or protect against loss and may not be suitable for all investors. Each customer’s specific situation, goals and results may differ. 10 or strategy in place for the transfer of their wealth to the next generation. Al was proud that Titan’s success enabled Joe, like his two sisters before him, to go to an Ivy League college. But by the early 1990s, to stay competitive, Titan needed to expand, and Al had neither the resources nor the energy to make that happen. At home during the summers, Joe, a business major, saw signs that the company was in decline, and Al’s spirits along with it. In Joe’s senior year, when he told his father he hoped to work at Titan after graduation, Al’s tightlipped response was: “If it’s still here.” Two weeks after Joe got his diploma, Al passed away in his sleep. Joe couldn’t stand the thought that the company his father built might vanish, as Al had feared. Joe was scared and green, but determined. He put together a plan, secured a bank loan, and by 1996 was sole owner of the business. Joe’s first act as sole owner was to bring back a former employee—a lieutenant of Al’s when Joe was a kid—and make him Titan’s CEO. “I want to surround myself with highquality talent and people who share my values,” Joe told me when we met. For the next few years, Joe and I met once a quarter with my firm’s analysts. Picking their brains about what other firms in his industry were doing enabled Joe to stay on top of trends. With insights from those meetings, Joe grew Titan into a business Al would have liked— one that cared for its employees with good benefits and stock-sharing plans, yet ran up very little business or personal debt. After a few years, Joe and I both knew that Titan could become an even bigger enterprise, but that Joe couldn’t realize its full potential without giving up his quality of life and precious family time. By this point, we had developed a frank relationship, and Joe spoke his mind. “I love and admire my dad,” he said, “but I don’t want to repeat one mistake he made: I don’t want to die in the saddle. It’s a big world out there, and there are other things I want to do. So I want to start easing myself out of the business—but I still want it to thrive.” For any owner who has poured lifeblood into his or her company, contemplating its sale will be emotionally difficult. I knew Joe would need to do more than just achieve his financial goals with this sale. He also would need to honor his father’s legacy and to do right by the employees who had stood with them both. I offered Joe what I considered his best options, and we began to explore them. Joe could sell Titan to a private equity firm, whose goal would be to grow the company. He could structure that sale to keep only as much investment and involvement in the company as he wished. Joe and I sat through meetings with several * The case studies presented are provided for illustrative purposes only. Past performance is no guarantee of future results. The information has been obtained from sources we believe to be reliable, but we cannot guarantee its accuracy or completeness. These strategies do not guarantee a profit or protect against loss and may not be suitable for all investors. Each customer’s specific situation, goals and results may differ. 11 internal market from which Titan employees would buy the shares. Joe paid virtually no tax on the sale proceeds which we then invested for him. private equity firms in my network, and Joe heard them out. But partnering with them felt, as he put it, “like a marriage that wouldn’t make it past the church doors.” By going through that process, Joe and I both discovered just how concerned he was about entrusting the company to outsiders. “I do want to sell,” he said in frustration after one meeting. “But I’m never going to sell to someone who might close the company, or move it out of town, or fire all my people. These are people who have been with my dad, and now with me…” The more Joe spoke about Titan’s people, the clearer it became to me: Joe’s best option was to sell his company to them. The employee stock ownership plan (ESOP) that we helped Joe set up was ideal for his situation. It allowed Joe to sell a big, initial chunk of his Titan shares to an The company could borrow money to fund the ESOP’s purchase of shares and enjoy the tax advantage of servicing that debt with pre-tax dollars. As Joe sold and employees bought more shares from the ESOP over time, he would be transitioning the company to strong, seasoned managers who shared both his vision for and devotion to Titan. Employees would keep their jobs and benefits. Vendors would keep their contracts and the community would keep a major employer. Joe had found a winning solution—and such a lucrative exit strategy that he and I began meeting twice as often, to manage the investment of his new-found spendable wealth. Since Joe signed off on the ESOP deal a few years ago, Titan has continued to flourish. Joe is still active as a company advisor, but now enjoys Titan’s success without worrying about day-to-day operations. He achieved this happy outcome—one that would surely make Al proud—by making principled, well-informed choices with advice from specialists. * The case studies presented are provided for illustrative purposes only. Past performance is no guarantee of future results. The information has been obtained from sources we believe to be reliable, but we cannot guarantee its accuracy or completeness. These strategies do not guarantee a profit or protect against loss and may not be suitable for all investors. Each customer’s specific situation, goals and results may differ. 12 Giving heirs a role in business growth and formation allows owners to transfer wealth and responsibility over time. Mi Vida Buena/MVB Inc., New York, NY Restaurants/markets /food distribution Co-owners Luisa* and Esteban* The first thing I heard about Luisa was that her family made the best Puerto Rican food in all of Spanish Harlem, from the gumbolike asopao to the roast pig known as lechón. Later, I heard the whole story of how she expanded from a single storefront into a market and food distributor. And later still, it was my pleasure to help Luisa and her husband, Esteban, structure the family business’ expansion so it would provide income for their descendientes and for their golden years. Luisa is a classic example of how, with diligent advance planning, an entrepreneur can get what she wants from her transition out of ownership. aging Signore Accetto—and when that kindly gentleman retired, he gave Luisa and Esteban a sweetheart deal to buy him out. Luisa painted a new sign for the storefront with the name she had chosen: Mi Vida Buena, “my good life.” The deli became a Latin foods market and café, with sales increasing as more Hispanics moved to the neighborhood. The couple bought the house next door and lived there with their growing family, four sons and a daughter born in an eight-year span. When more storefronts opened up on the block, they bought those, too. What started as a sideline selling Latin delicacies to other markets mushroomed into a food distribution business, MVB Inc., serving restaurants and retailers all over New York City. Luisa became literally the face of the business, with her smiling likeness on food wrappers. Esteban kept the books, hiring more accounting assistants as the businesses’ profits soared. At lunch, Mi Vida was often full of hungry financial professionals. Two regulars, principals at a prominent investment firm, had told Luisa for years that her restaurant was good enough to go national. Their comments got Luisa and Esteban arrived from Puerto Rico as the upper-Manhattan neighborhood once known as Italian Harlem was on its way to becoming Spanish Harlem. Luisa’s brothers helped her get hired at the small deli where they worked for the * The case studies presented are provided for illustrative purposes only. Past performance is no guarantee of future results. The information has been obtained from sources we believe to be reliable, but we cannot guarantee its accuracy or completeness. These strategies do not guarantee a profit or protect against loss and may not be suitable for all investors. Each customer’s specific situation, goals and results may differ. 13 her thinking: What else did she hope to achieve in this good life? From my first discovery meeting with Luisa and Esteban, they knew what they wanted most: to help their children find rewarding work, within the family business or outside it. As youngsters, all five had worked their shifts at Mi Vida and MVB. Now, all were in or through college. They were ready to launch careers—just as Luisa was hearing, from customers and advisors, that the sky was the limit for her company. formation into a draft investment policy statement (IPS), a document that captured their investment philosophy and goals. Once Luisa and Esteban signed off on that, we began work with others in our network to roll out a multistage plan to both grow and manage their wealth. Luisa and Esteban saw no need to create more wealth for themselves. They already had more than they could have imagined when they arrived from Puerto Rico. They were generously supporting the construction of a school and clinic in Luisa’s hometown. They also wanted to support their children, but not hobble them with handouts. For example, I arranged a meeting for Luisa and key players on her staff with business development specialists from my network. If the family wanted to grow the MVB empire in ways that paved the children’s career paths, what was the first logical move? Luisa’s answer was immediate: Their firstborn, Carlos, had a culinary school degree and a longing to run his own restaurant. The popular Mi Vida turned diners away most nights. Why not let Carlos open a sister restaurant nearby? Tailoring our Wealth Management Consultative Process to meet the family’s needs, we fashioned the discovery meeting in- While Carlos scouted locations, I walked Luisa through an expansion plan with a twist. Although she and Esteban would bankroll the new venture, we would structure the deal * The case studies presented are provided for illustrative purposes only. Past performance is no guarantee of future results. The information has been obtained from sources we believe to be reliable, but we cannot guarantee its accuracy or completeness. These strategies do not guarantee a profit or protect against loss and may not be suitable for all investors. Each customer’s specific situation, goals and results may differ. 14 with Carlos as sole owner. That way, the family would be building wealth, but not wealth that the parents would someday have to transfer (with all the attendant costs) to the child. The process could be repeated for other children and, in time, grandchildren. Research told us that MVB Inc. products would find buyers beyond the New York City area. The couple’s second son, Hector, whose degree was in retail and merchandising, was eager to plant a Mi Vida market in New Jersey, and could imagine more markets, even franchises, in the future. The family’s only daughter, Mariela, favored writing over restaurants. With our team’s business development experts, she drew up plans to establish a small press publishing company, with an emphasis on showcasing emerging Latina authors. Sons Jorge and Jose, still in college, are looking forward to the opportunities that their parents will underwrite for them. Luisa has warned them that she might just move them into her kitchen and administrative jobs, and take early retirement. I think that she is joking—but if or when she is not, we will help her with that passage, too. The needs of a family like Luisa’s dovetail perfectly with the approach The Mahoney Team uses to address four areas of a client’s financial life. We focus on: Wealth enhancement—try to achieve the best possible investment returns consistent with the client’s level of risk tolerance and to help minimize some of the tax impact on those returns. Wealth transfer—to find and facilitate the most tax-efficient ways to pass assets to succeeding generations, in a way that honors the client’s wishes. Wealth protection—to help safeguard the client’s wealth against potential creditors, litigants, children’s spouses and potential ex-spouses. Charitable gifting—to fulfill the client’s charitable and philanthropic goals, in balance with the other three aspects of his or her financial life. My team’s service to Luisa has so far focused most on wealth transfer. But clearly, none of these areas stands in isolation from the rest. By creating an overall wealth management plan with Luisa years before she expects to transition out of her business, I can work with her systematically on each area while maintaining an integrated approach to them all. * The case studies presented are provided for illustrative purposes only. Past performance is no guarantee of future results. The information has been obtained from sources we believe to be reliable, but we cannot guarantee its accuracy or completeness. These strategies do not guarantee a profit or protect against loss and may not be suitable for all investors. Each customer’s specific situation, goals and results may differ. 15 Selling to a private equity firm lets an owner keep a role in her company and grow wealth while working less. GADco, Inc., Scranton, PA Personal care products manufacturer Founder and owner Dee* Her Italian-immigrant mother insisted on naming the baby girl Donata, a family name meaning “gift from God.” But as she grew up in lower-middle-class, urban Pennsylvania, everyone called her Dee. A dogged student, Dee took junior-college science classes at night while working days as a secretary, at a giant consumer goods company whose personal care products were in most Americans’ homes. come with her, and went out on her own. In a nod to her heritage, she named the fledgling company GADco—G-A-D for grazie a dio, “thanks be to God”—and began building a line of Grazie treatments and cosmetics. In the early years, Dee spent 16-hour days at GADco, pumping every penny the family could spare into the business. Two friends since childhood—Sam, an attorney, and Karen, an accountant—gave her pep talks and free advice. Once her products hit the market, they were even more successful than Dee had imagined. By its 10-year anniversary, GADco had expanded from one plant to two. By its 20-year anniversary, both sons had joined the business, which had several hundred employees. After 30 years, GADco’s annual sales exceeded $100 million. While building the business, Dee and Rocco never left the family’s hometown—until a fire destroyed their home, and they moved to a country estate. Dee was promoted to a laboratory job the same year she and her high school sweetheart, Rocco, were married. By the time she was a lab supervisor, she and Rocco had bought a modest house in a small suburb, where Dee’s mother lived with them and helped care for their two sons. The fire and the relocation caused Dee to take stock. She knew GADco was ripe to become an even bigger player in its field. But she was pushing 70 and felt that neither she nor her sons, Sal and Frank, were fully capable of taking the company to the next level. In 1972, after years of off-hours experiments trying to develop antiaging skin care preparations, Dee hit pay dirt. She went to the company with her revolutionary idea. Her superiors rejected it. Convinced she could find a market for such products, Dee persuaded a few key scientists in the lab to Dee wanted GADco to thrive— and she wanted to spend half the year chasing grandkids around the country house, and the other half in Florida playing golf with Rocco. Dee felt ready to team up with a private equity firm. * The case studies presented are provided for illustrative purposes only. Past performance is no guarantee of future results. The information has been obtained from sources we believe to be reliable, but we cannot guarantee its accuracy or completeness. These strategies do not guarantee a profit or protect against loss and may not be suitable for all investors. Each customer’s specific situation, goals and results may differ. 16 When friends introduced me to Dee, she had no idea how to arrange such a deal, but a good idea of what she wanted from it. She wanted her sons to remain in the company. She wanted to keep an ownership stake and a board seat for a while, then ease out of the firm altogether. And she wanted to be sure that her proceeds, carefully invested, would allow her and Rocco to live comfortably in a house by a Florida fairway. In discovery and planning meetings, I helped Dee dig deeper on each of these goals. And I introduced her How Will You Know When It’s Time to Sell? New York Times business blogger Barbara Taylor says that many owners reach a point in the life of their businesses where they hit a wall, a point beyond which they are either unable or unwilling to go on. The wall can be generally defined as 1) motivational, 2) capital, 3) operational, 4) marketing and 5) transfer. Investment banker Richard Trottier describes them in detail in his book, Middle Market Strategies. Every business owner will hit one or more of the walls that stand between them and the growth of their business. It’s important for business owners to start the exit planning process as soon as they have a sense for what wall they have hit—or may hit in the future—in order to preserve both the value of the business and their options for a successful exit. Barbara says it may be time to consider selling your company if: “It’s not fun anymore. Burnout is a very real issue for business owners, and an entirely legitimate reason to sell.” “You’re not inclined to invest in growth. You may be comfortable with the current size and profitability of your business and have no desire to make the capital expenditures necessary to take it to the next level.” “You feel your management skills are overmatched. It is not uncommon for business owners to build their business to a certain point and then realize they lack the skill set required to go further.” For entrepreneurs considering when to sell, Barbara also recommends the book Every Family’s Business: 12 Common Sense Questions to Protect Your Wealth. Author Thomas William Deans provides a useful template for how owners should be reviewing their business and succession plans on an ongoing basis. * The case studies presented are provided for illustrative purposes only. Past performance is no guarantee of future results. The information has been obtained from sources we believe to be reliable, but we cannot guarantee its accuracy or completeness. These strategies do not guarantee a profit or protect against loss and may not be suitable for all investors. Each customer’s specific situation, goals and results may differ. 17 to a veteran private investment firm leader in my professional network: Chris Michalik, managing director of Kinderhook Industries. Chris knows that while price is important to entrepreneurs in selling their business, it’s hardly the only factor. As Dee contemplated looking for a buyer or PE firm, Chris listed three other considerations to keep in mind: Information risk. “As you will be opening your books to a stranger, or many strangers, all of your confidential business information will be at risk—and the broader you go in search of a buyer, the greater the chance your competitors will learn your secrets,” Chris cautions. By working with an investment firm, a seller can limit the dissemination of information and ensure that a solid organization stands behind a confidentiality agreement. Certainty of close. “Selling a business is a difficult process and most likely, you only want to experience it once,” Chris says. “So you should look for a buyer or partner with a long-term track record of successful execution.” Chris advises asking a potential buyer or partner “to allow you to speak to the last five sellers from whom they have acquired businesses. If they can’t give you five completed deals, then their experience is in question. If they won’t give you the last five, then look elsewhere.” Future and legacy. Chris says a seller can refine their thinking about who they want as a buyer or partner “by answering a single question: ‘What are my thoughts on the future of my company and my involvement?’ Because that buyer or partner will play an integral role in determining the seller’s legacy and the role they play in the business going forward.” Between my counsel and Chris’s, Dee and her family had a lot to consider. I suggested an approach that I have found especially productive: A family retreat where the key decision-makers could talk business in a more relaxed atmosphere. On the appointed weekend, I met Dee, her husband and her sons’ families at a lakefront lodge, complete with a Little Ranger program to occupy the grandkids. My two-and-a-half-day agenda included time for shared meals, canoeing and golf— but mostly, conversations designed to determine a course of action. Not surprisingly, Dee and the others didn’t always see eye to eye, and occasionally tempers flared. Sometimes, my role in managing wealth is also managing family dynamics. And that means helping the decision-makers recognize and leverage all the expertise, experience and goodwill within their group. In that spirit, we evaluated each investor that had expressed interest in GADco and played out likely scenarios for the next five years under each. Ultimately, Dee settled on a firm that was appreciative of her company’s his- * The case studies presented are provided for illustrative purposes only. Past performance is no guarantee of future results. The information has been obtained from sources we believe to be reliable, but we cannot guarantee its accuracy or completeness. These strategies do not guarantee a profit or protect against loss and may not be suitable for all investors. Each customer’s specific situation, goals and results may differ. 18 tory, accommodating to her family interests, and ambitious about maximizing GADco’s value in coming years. Anticipating that growth in value, I created trusts for Dee’s children and grandchildren with a specific plan. Dee made gifts to the trusts, which had tax benefits for her. The children used the trust cash to buy GADco shares from Dee. In that way, Dee could transfer value to her offspring—and as the new firm grows GADco, the kids’ and grandkids’ holdings will gain value. Dee and the PE firm had struck a deal that delighted all parties. While Dee sold out of GADco, her sons retained financial stakes and leadership positions there. Dee’s grandkids still saw their dads going to work every day in the family business, continuing the family work ethic. The PE was thrilled to keep each son’s particular strengths: Sal’s rapport with employees, and Frank’s ties to buyers and suppliers. To compound those strengths, the PE firm brought in a new president who could take the company to a new level—perhaps even to the point of selling to a strategic partner who would take the company public. Meanwhile, Dee is living her dream life. A generous income from careful investment of her proceeds from the sale. A seat on GADco’s board, and regular appearances in the community as an ambassador for the business. “So I still have a hand in,” she says happily—plus all the grandma time and golf time she desires. Selling his share of a start up enables a father to make investments in his children’s future as well as his own. BuildWell Corp., Green Bay, WI Building materials manufacturer Founded by owner Larry* with 11 employees, including Martin* From the time Martin became one of the first employees of a Wisconsin building materials business 35 years ago, he had known when he would sell: at age 60. The company’s founder, Larry, told his small band of 11 colleagues that if they accepted modest salaries and left the rest as equity in the business, BuildWell Corp., he would guarantee each a hefty payout when they hit 60. The years passed, and the company prospered and expanded. Martin, an engineer, stayed on the job through a series of life changes: becoming a single father to his two children after his marriage ended, then remarrying and becoming a father to two more. As Martin neared his 60th birthday, he and Louise had been happily married for 22 years, and the family’s four children ranged in age from 32 to 19. The week after Martin’s farewell party at BuildWell headquarters, $90 million landed in his bank account. He says the moment was * The case studies presented are provided for illustrative purposes only. Past performance is no guarantee of future results. The information has been obtained from sources we believe to be reliable, but we cannot guarantee its accuracy or completeness. These strategies do not guarantee a profit or protect against loss and may not be suitable for all investors. Each customer’s specific situation, goals and results may differ. 19 both exhilarating and sobering, but he felt generally prepared for it, thanks to conversations we had beforehand. Through discovery meetings with Martin and Louise, I had learned what was important to them in seven life areas: values, goals, relationships, assets, advisors, process and interests. I learned about hobbies they wanted to pursue and projects they wanted to support, including a small foundation Louise had launched to help disadvantaged children. I also had touched base with the couple’s existing advisors and had become familiar with their operating style as investors. I organized what I learned into the total client profile flow chart below, making it easy to see how each aspect of their financial life related to the others. * The case studies presented are provided for illustrative purposes only. Past performance is no guarantee of future results. The information has been obtained from sources we believe to be reliable, but we cannot guarantee its accuracy or completeness. These strategies do not guarantee a profit or protect against loss and may not be suitable for all investors. Each customer’s specific situation, goals and results may differ. 20 During discovery, it was instantly apparent that one of Martin’s key concerns going forward was the four grown children. Of the four, son Paul and daughter Kay were married and raising families. Son Rob, disabled by a brain injury, was living at home and would always need dependent care. Youngest son Kirk was just starting college. The couple had raised the children in comfortable affluence, but never really had spoken about the fortune that Martin was amassing. Over the years, I have learned that even the most self-assured, articulate clients can be squeamish about discussing their wealth with their children. It’s like the stereotype of parents nervously attempting “the talk” about sex: They’re not sure when to raise the matter, or what to say. Shortly after Martin’s retirement, he, Louise and three of their children came to my office for a seminar designed to help families discuss finances. I could tell Martin still was uncomfortable, so I offered to meet first with his sons and daughter to break the ice. In the conference room with Paul, Kay and Kirk, I asked if they knew why they were there. “I guess because our parents are rich?” Kirk ventured. They said they had drawn that conclusion years ago because Martin’s company was so profitable and the family could afford extras like a vacation home. “But Scott, we don’t care,” said Paul, a successful real estate broker. “Our parents are young and healthy, and we won’t have to think about inheritance for years.” I saw Kay’s brow furrow and encouraged her to say what she was thinking. “I could use some help now,” she said quietly. While she stayed home with three small children, her husband Steve’s earnings as an insurance agent were barely covering the bills, and being cash-strapped was affecting their marriage. Kirk spoke up next: “I’m starting to invest in real estate,” he said. He and a friend scraped together $10,000 to buy a small property they hoped to sell at a profit later, “but I can’t talk to my dad about this,” he said, “because he’d make me feel badly if I am doing it wrong.” * The case studies presented are provided for illustrative purposes only. Past performance is no guarantee of future results. The information has been obtained from sources we believe to be reliable, but we cannot guarantee its accuracy or completeness. These strategies do not guarantee a profit or protect against loss and may not be suitable for all investors. Each customer’s specific situation, goals and results may differ. 21 When I returned to meet with Martin and Louise, I candidly summarized what their children had said. Martin hung his head and as Louise put a hand on his knee, a tear rolled down his cheek. After a moment, he made it clear that he wanted to help his kids but was reluctant to “just hand them money.” We settled on an approach that I had used before: customizing a financial opportunity or solution for each child. We built these solutions into the overall action plan for Martin’s investments— a plan whose framework we displayed in another flow chart, below. It showed how Martin’s efforts for his children related to other parts of his investment strategy, and made it easy to track which actions were completed, which were in progress and which would occur in the future. * The case studies presented are provided for illustrative purposes only. Past performance is no guarantee of future results. The information has been obtained from sources we believe to be reliable, but we cannot guarantee its accuracy or completeness. These strategies do not guarantee a profit or protect against loss and may not be suitable for all investors. Each customer’s specific situation, goals and results may differ. 22 For Rob, the solution would be straightforward: a trust that would perpetually pay for his care. Paul had no immediate, personal need for funds, but was happy for Martin to set up generation-skipping trusts for his children. For Kirk, a partnership with Martin would provide access to real estate investment capital (and fatherly advice, if he chose to ask for it). And for Kay, the solution was literally a new start: Martin would help her and Steve acquire an insurance agency from an owner poised to sell. As I worked with Martin and Steve to appraise the prospects and then structure the purchase, I watched the men become not just partners but closer friends. Kay was overjoyed. Now that Martin and Louise have directed wealth to the benefit of each child individually, I’m working with the family to manage it collectively. At an upcoming family meeting, I’ll help the parents and siblings draft a financial constitution that lays out the vision, values and goals they share. The siblings then will nominate charities they think fit the constitution’s principles and develop proposals for funding them. Then together, they’ll all decide which charities will receive grants from a donor-advised fund that Martin and Louise have set up. Clients thank me for leading them through this process because it gives them insights into how their children might perform in a future business venture or family foundation. It allows them to lay the groundwork for their children—and their children’s children—to be stewards of the abundance for which they worked so hard. And it is, in the final analysis, less about looking after wealth than it is about family members looking out for each other. During that summer I spent going on electrician’s calls with my dad, he would make the same stop at the end of every Friday. He would pull up to his sister’s home, put his hand on my shoulder and say, “Son, stay right here. I will be back in a few minutes. I just need to speak to your aunt.” Desperately curious, I would watch through the van windshield. As Dad approached the front stoop, he would put his hand in his pocket. My aunt would open the door, and * The case studies presented are provided for illustrative purposes only. Past performance is no guarantee of future results. The information has been obtained from sources we believe to be reliable, but we cannot guarantee its accuracy or completeness. These strategies do not guarantee a profit or protect against loss and may not be suitable for all investors. Each customer’s specific situation, goals and results may differ. 23 most days she either was crying or looked like she had been. They would exchange a few words, and then my dad would clasp her one hand in both of his. When he returned to the van, he would say little for our ride home. One Friday, I snuck out of the van, ran around the side of the house and crouched within earshot. I couldn’t hear everything, but enough to figure out what was going on. My aunt’s husband—Dad’s partner in the business—had been ill off and on, but this summer he was too sick to work. So my dad was supporting his sister and brother-in-law’s family as well as our own. The Friday handclasps, when he discreetly handed her money, would go on for many years. I snuck back to the van before Dad returned, and I never asked him about what I had heard. But I later learned that other relatives also had counted on Dad as the go-to guy for counsel and support. I hope I am becoming even half the man my father was. My goal, personally and professionally, is much like his: to protect and provide for family—mine, and my clients’. At The Mahoney Team, that is what we do. About Scott F. Mahoney Scott Mahoney specializes in helping his clients through significant financial transitions, particularly clients who own their own business. Drawing on his experience, Scott strives to make sure business owners know what to expect during and after the sales process. He knows that when a business owner decides to relinquish the reigns, he or she has to focus on making the best possible business decisions. As a result, they often overlook preparing for life after the transition. With Scott’s assistance, they can put a long-term plan in place that helps them realize new goals—and challenges— that face them and their families. At Morgan Stanley Wealth Management, Scott leads The Mahoney Team, a select group of wealth management specialists who share Scott’s vision and passion for investment excellence. With the team’s support, Scott serves as Portfolio Management Director for clients. He not only actively manages money for affluent families, he confers regularly with those clients’ other professional advisors to make his wealth management more coordinated and effective. Over the last 20 years Scott has earned top industry certifications for his financial management expertise. He has been named a Certified Private Wealth Advisor® by the Investment Management Consulting Association. He also has earned the Family Wealth Director designation issued by Morgan Stanley Wealth Management, recognizing his knowledge and experience in many aspects of wealth management. Scott’s articles on investment strategy have appeared in Worth and several business management magazines. He has also appeared on Fox Business News and other financial news broadcasts. 24 The Mahoney Team at Morgan Stanley Wealth Management Scott F. Mahoney, CPWA® Senior Vice President and Financial Advisor Direct: (866) 932-3032 Branch: (973) 539-6700 Fax: (973) 695-1669 Email: [email protected] Twitter: @themahoneyteam >> For reprints or more information, please contact Dorothea Accetta, Registered Senior Client Service Associate, at The Mahoney Team at Morgan Stanley Wealth Management. By phone: (866) 932-3032 By email: [email protected] By mail: 1200 Mt. Kemble Avenue, P.O. Box 1903, Morristown, NJ 07962 Tax laws are complex and subject to change. Morgan Stanley Smith Barney LLC, its affiliates and Morgan Stanley Wealth Management Financial Advisors or Private Wealth Advisors do not provide tax or legal advice. This material was not intended or written to be used for the purpose of avoiding tax penalties that may be imposed on the taxpayer. Individuals are urged to consult their personal tax or legal advisors to understand the tax and related consequences of any actions or investments described herein. The investments listed may not be suitable for all investors. Morgan Stanley Wealth Management LLC recommends that investors independently evaluate particular investments and encourages investors to seek the advice of a financial advisor. The appropriateness of a particular investment will depend upon an investor’s individual circumstances and objectives. This material does not provide individually tailored investment advice. It has been prepared without regard to the individual financial circumstances and objectives of persons who receive it. The strategies and/or investments discussed in this material may not be suitable for all investors. © 2012 Morgan Stanley Wealth Management. Member SIPC.
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