MASTERCLASS: A Goals-Based Approach to Exit Planning

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  • 47 mins 31 secs
Business owners are often closely linked to their companies — emotionally and financially. Ultimately selling the business may be one of the most important decisions they make. In this MasterClass, Michelle Black discusses how advisors can use a goals-based approach to build a solid plan and be part of the process before a business is sold.

  • Michelle Black - Head of Wealth Advisory at Capital Group, Private Client Services

  • Matt Krantz - Senior Financial Writer at Capital Group




Matt Krantz: Business owners are often closely linked to their companies emotionally and financially. Ultimately, selling the business may be one of the most important decisions that they make. In today's master class, we'll talk about how advisors can use a goals based approach to build a solid plan and be part of the process before a business is sold. Hi, Michelle Black . Thanks for joining us.

Michelle Black :Hi, Matt Krantz. Thank you for having me.

Matt Krantz:  Why is the decision of selling a business so emotional for business owners?

Michelle Black :Yeah, you know, Matt Krantz, often business owners have put so much of themselves into starting and then growing the business that the process of selling it brings up the range of different emotions, especially if they've had family involved. And they can find it sometimes really hard to let go.


Matt Krantz: Okay. How common is it for clients, high net worth clients in particular, to be business owners?

Michelle Black : Matt Krantz, it's hard to get exact numbers of course, but to put it in some context, it's estimated that about two-thirds of the ultra-wealthy around the world, are self-made. Either through successful investing, or through running a- a successful business. So, one can estimate that it's a fair number of high net worth investors who are either current or were former business owners. I'd add one other stat, Matt Krantz, interestingly, uh, in terms of high net worth investors, they're starting to see entrepreneurship as a more prestigious endeavor. So, I expect that those numbers will be growing in the future.

Matt Krantz: That's great. And these are clients that are- tend to have the typical high net worth needs, but in addition to that, they need the business services as well from their advisor?

Michelle Black : That’s right.

Matt Krantz: Do business owners tend to do much financial planning or thought or put much thought into the sale before the sale?

Michelle Black : You know, Matt Krantz, a surprisingly large amount, do not. Uh, it's estimated in fact, that almost 40% of business owners don't have a plan in place to shield the proceeds from the sale from taxes. You know, they've been the CEO of their business, but not of their lives. A few of the reasons that are given are, that it's just too complicated. Or it's too early, or they can't find any adequate advice. And this in my mind, is where the problem but where the opportunity is for wealth advisors. Right? It's to give them the great advice that we know we can give them.

Michelle Black : I'll throw in one other stat, Matt Krantz. It's estimated that over 80% of business owners don't have a transition plan. Or if they do, they haven't written it down or communicated it to anyone. So, again, uh, it's a surprisingly large number that really haven't done any planning in advance of the sale.

Matt Krantz: Interesting. What kinds of problems does this lack of planning cause later?

Michelle Black : Well, for one, they don't know how much they need to net from the sale of their business to fund their future goals. Often, business owners are so fixated on a particular number, when in reality, the number they need might be quite different.

Michelle Black : If it's higher, then they can manage the business within an eye toward increasing the value. And if it's lower, then maybe they can start entertaining offers today instead of waiting on the sidelines for an offer that may never come.

Matt Krantz: Okay. Have business owners typically done much planning ahead of a sale?

Michelle Black : You know, Matt Krantz, as it turns [00:16:00] out, many of them haven't. In fact, it's estimate that nearly 40% of business owners have no plan in place to shield their proceeds from taxes.

Michelle Black : You know, they've been the CEO of their business, but not of their lives. And some of the reasons given are that it's just too early for them to plan, or it's too complicated, or they can't find any adequate advice. And this, to me, is deeply troubling but pr- presents wealth advisors with an opportunity to serve this marketplace.

Michelle Black : You know, one additional stat that I'll give, Matt Krantz, is that over 80% of business owners don't have a transition plan. And if they do, they haven't written it down or communicated it to anyone.

Matt Krantz: That's interesting. Now, um, with- with so many issues to be involved in in selling a business and planning for it, and being ready for it, and given how important it is to these business owners, do they typically seek any help in making this huge decision?

Michelle Black : You know, usually they don't. Uh, [00:17:00] there are a number of M&A attorneys, as an example, who will tell you that most business owner they work with, uh, have not worked with a financial advisor prior to selling the business. They're really focused on running the business, increasing the financials, etc. They're not focused on what their life looks like after the sale takes place.


Matt Krantz: Okay. What are some of the emotional factors that advisors need to help their clients deal with when looking to sell their business?

Michelle Black : Yeah, Matt Krantz, that's a great question, because that's where I think we need to start. Uh, so there are, uh, several questions that we need to be able to help our clients or business owners think through before selling the business as it relates to their emotions. And the first is, you know, how involved does the business owner wanna be in the business after the sale takes place? Right? Often former business owners find it difficult to stay on working as an employee without the control that they once had. Right? The second is how will their family be impacted? Right? I know of a business owner who sold their business and they used to use Sunday nights as a way to get together with the family and sometimes discuss their business. Once the business was sold, those dinners slowly started to go away. And the patriarch used to often reminisce and sometimes regret selling the business as his once tight-knit family slowly started to disappear.

Michelle Black : The third is, how is the business owner going to feel about having their lifestyle tied to the uncertainty of the capital markets? Right? When maybe they're used to getting a draw from the business or taking a fixed paycheck. And then finally, and this is a biggie, what do they want to accomplish in the next phase of their life? And this is where I think a goals-based approach can be incredibly valuable in working with business owners.

Matt Krantz: How can a goals-based approach help advisors work with business owners ahead of a sale?

Michelle Black : Yeah, Matt Krantz you know, a common mistake that's made is that wealth advisors often aren't brought to the table, or sought after until after the sale takes place. In order to manage the proceeds. I would argue that we should be involved in advance of the sale. And be a part of the sales process. Right? We can help the business owner think about what life looks like after the sale takes place, and help prepare them both emotionally and financially. For me, this really means that wealth advisors can be involved in all aspects of their life. And earn their trust over time. And what this does, is it really helps to lay the groundwork for successful long-term relationships with those clients.

Matt Krantz: Does a goals-based approach require the advisor to change the way that they do the advisory with the- with the client from the very get-go?

Michelle Black : It does. Uh, it is a change [in- in approach from the very beginning. And the reason for this is that we need to really get more specific about what it is that the business owner wants to accomplish after the sale takes place. It's not- not only what are they looking to spend, it's looking in detail how important are each of their goals? When do they take place? How confident do they wanna be in meeting them? That creates in some cases some homework for the business owner, but ultimately results in a much more [01:27:30] detailed plan that the business owner can get comfortable around and help drive them to action.

Matt Krantz:How is the goals based approach similar to, say, an institutional approach?

Michelle Black : Yeah, so it's a great question. Uh, so an institutional approach looks at the present value of their liabilities, which is the amount that they owe to employees over their life expectancy versus the present value of their assets or resources. Private clients [00:21:30] have goals, right? Um, and they also have assets and resources like social security or other income. So what this approach does is it calculates the present value cost of their future goals.

Michelle Black : And it allows us to determine their funded status of our clients life plan today. So clients will have a net surplus if the present value of their assets and future resources exceeds the present value cost of their goals, and they [00:22:00] have a net deficit if the opposite is true. And again, this helps them to really take a look at the different offers that are on the table, net of taxes, of course, to see if these offers will help fund what it is they want to accomplish in their life.

Matt Krantz: Okay, great. When you drill down with these goals that business owners have, d- it seems like they kind of fall in three major, kind of categories. What are those three categories that you've seen? And how are they different from one another?

Michelle Black : Yeah, Matt Krantz, well, I like to use an approach that we refer to as the three Es. The essentials, the enhancers, and the endowments. Now, essentials are those goals which, uh, they want to meet with a very high level of confidence. So I'd put food, clothing, and shelter into this category. Of course, what constitutes essential differs from client to client. But I'd put these at a 90% level of confidence.

Michelle Black : And then we have enhancers. So these goals are still important to the business owner. But they're discretionary.Right? So an example might be that they want to give, maybe it's $50,000 in charitable gifts, uh, every year. And they can go to the fancy dinners. But if they need to scale back from time to time, they're okay with that. So I'd put these at a 75% level of confidence. So still good, uh, but not h- as high of a bar to meet as the essential.

Michelle Black : And then finally, we have endowments. And these are essentially legacies to family or a charity. So while they might have a target goal that they [00:23:30] want to accomplish, uh, they're more comfortable with a wider range of probably outcomes.

Matt Krantz: How do you determine the amount required to net from a business sale?

Michelle Black : Right. So Matt Krantz, this is the whole premise of a goals-based approach. We need to be able to calculate the cost of a business owner's future goals today. And in order to do that, we need to know two things. One, what is the cost of their goals in the future? This, you or they typically know. And two, how confident do they wanna be in meeting it? [01:36:30] Because this will help determine what the discount rate should be. Now, in our world that means the annualized rate of return for a given level of confidence. And this is determined by the asset allocation. So, how you're investing the proceeds, and the time horizon. Once you know what the cost of one's goals are in today's dollars, you can help evaluate a number of different offers, keeping this in mind.

Matt Krantz: That's great. Now, in many of these sales, we find that there's a earn out, an earn out arrangement. What exactly is an earn out? How would you explain it? And what are the advantages and disadvantages of this type of sale versus something else?

Michelle Black : So an earn out is when a business is sold, but a portion of the purchase price is deferred and earned over a specified period of time, typically linked to the performance of the business. And it's great because it helps to bridge the valuation gap between a seller, who might be pretty optimistic, and a buyer, who may not be on the same page.

Michelle Black : Now, this is terrific, because it will give the business owner with immediate proceeds upon the close. But on the other hand, or on the flip side, it still means that they're tied to the performance of the business often with a lot less control.

Matt Krantz: How do the earn outs typically end up for the sellers? How do these things usually work out for them?

Michelle Black : Yeah, not great, actually. So a recent study has shown that only 50% of earn outs were actually met and paid according to the seller's expectations. And only 6% were partially met and partially paid. So that leaves a full 44% of earn outs whose metrics, uh, weren't met and they weren't paid out. So, you know, talk about regret. Uh, it's really, uh, a coin toss whether or not it will work out in the seller's, um, favor.

Matt Krantz: Given how uncertain the earn outs can be, how do you plan around that kind of black box that you have to deal with, that's so important for advising.

Michelle Black : Yeah, well often we'll look at an earn out from at least two, vantage points, right? One is an optimistic scenario where all earn out targets were met. And they are receiving all of the potential upside from that earn out. And then a pessimistic case where maybe the seller doesn't stay on as long, or they miss some of their metrics. And so they only get a portion of what they expect in the optimistic case. We'll look at those two as a comparison to say, "You know, if the reality is that somebody wants to walk away from the sale maybe six months after the, uh, close of the sale, then they have the opportunity to do that." And what would the impact be on their lives?


Matt Krantz: So now, let's talk about a hypothetical situation of a business featuring a Mr. Sweet. Mr. Sweet has been in the business of selling sweet gourmet ice cream. His ice cream is distributed throughout the United States through fine stores across the country. He's been in the business for 20 years. But he now ... He's at an inflection point. He can either sell or grow the business. And at the age of 61, he's starting to like the idea of selling a little bit more, but he does have some big goals, such as 100 foot yacht that he'd like to spend around $ [00:30:00] 6 million for. And he's also considering traveling and looking to invest in a vineyard in Northern California where they've got a contact that thinks that they can purchase this for $1.5 million.

Matt Krantz: And they're very charitable. And that is also to be factored in. So given this scenario, Michelle Black , we're going to talk a little bit about what we can think here, and to drill down on his goals.

Matt Krantz: So, so now let's drill down a little bit more into Mr. Sweet's case study, and then we can look at his goals, which is also his liabilities, his lifestyle expenses of $500,000 a year. Let's assume that's going to grow with inflation and that boat. Well, it's not just the cost of buying it, it's the cost of keeping it, so we will need to factor in the maintenance costs as well on that vessel. Finally, he and his wife would like to make an annual exclusion gift to three family members totaling $90,000 starting in year one, and they want to maximize their wealth transfer within the available surplus.

Matt Krantz:   So now let's consider Mr. Swede's resources.

Matt Krantz: He is sitting in a situation where he has $8,000,000 in personal liquid assets, $3000,000 of which that are held in low basis stock. He also has $750,000 in a retirement account. He also thinks his business is worth $50,000,000 and we're going to assume this is an S Corp with a zero basis. Now let's add in social security at age 70. And we get a good explanation void is resources look like, don't we, Michelle Black ?

Michelle Black : Well, it's interesting that you think about the $3,000,000 is that Mr. Sweet has and the concentrated low basis stock a part, if not all of that could be used right to meet some of his philanthropic goals. Uh, we saw in the first introductory slide that they were philanthropically oriented and we can presume they've been evaluating the benefits of a donor advised fund or adapt versus a private foundation. I would say in this case a donor advise fund can make a ton of sense because it allows a business owner to diversify that concentrated stock position.

Michelle Black : It also allows them to get a charitable income tax deduction in the year of the gift, helping the offset part of the gain from the sale, [00:38:00] thereby reducing the overall tax liability from the sale. Finally, Matt Krantz, with a donor advised fund, in these cases, it gives the business owner flexibility. They don't have to make decisions about where to instruct their charitable donations to go to until after things settled down from the sale and business owners tend to really like that type of flexibility.

Matt Krantz: Okay, great. Now let's take this a hypothetical example a little bit further. Our friend Mr. Sweet is lucky and he gets two offers.

Michelle Black : Right.

Matt Krantz: us a little bit about these two offers and what they look like and how he can consider them.

Michelle Black : Sure. Sure. So he does get two offers. Ah, the first is from a financial buyer who provides ah Mr. Sweet with a two year earn out offer totaling $55,000,000, assuming all metrics are met, ah 85% of which would be paid up front for two years, 85% of which would be paid up front. He would get a salary of $5,000 per year and he has the potential [00:39:00] to earn a bonus of over $3.6 million dollars per year. This compares to offer number two from a strategic buyer. Comes in with an all cash offer of $50,000,000.

Matt Krantz: Now that Mr. Sweet has this fortunate situation where he has two great offers. One is the earn out situation. How do you look at the pessimistic versus optimistic scenarios to help him think this through?

Michelle Black : Right? So in the earn out, as I mentioned earlier, we'll want to look at both optimistic and pessimistic scenario. So let's start with the pessimistic case. In the pessimistic scenario, we assume that Mr. Sweet grows weary of working as an employee and he leaves, and he leaves after just six months on the job, right? He gets the upfront payment of almost $47,000,000 or 85% of the purchase price and a salary for six months resulting in $250,000 with no bonus.

Michelle Black : In the optimistic case, he hits all of his metrics, right? So salary plus bone essays to total $55,000,000 over the two year period in all cash offer. It's pretty straightforward. $50,000,000 which that needs to be taxed.

Matt Krantz: How would you counsel him about which ones would be a better idea, but maybe let's skip ahead. Maybe kind of getting to what you said earlier in our conversation [00:40:30] is, how do you sit down with Mr. Sweden, help him determine what he needs to net in order to meet his goal.

Michelle Black : Right, so again this comes back to what is the present value cost of his future goals. So if we turn to the next slide here, we've added up the living expenses, the gifts to family, charity, the vineyard, and the yacht and associated expenses.

And we come up to a number of just under $34,000,000. Now keep in mind that this is based on a modest overall asset allocation of 40% equity, 60% in fixed income with the retirement account being invested a bit more aggressively at 80, 85% equity, 15% in fixed income.

Michelle Black : Now remember, in this framework, risk is not defined as volatility. Risk is defined as shortfall against one's goals. So typically the more important ones goals are and the sooner that they want to to meet those goals and we're conservative, one needs to be an investing, so it's pretty intuitive, I'd say. So a couple of things that I would point out, the living expenses that equal $500,000 a year for 25 years will remember here. He wants to be very confident that he's going to be able to meet them.

Michelle Black : So the total cost of this is just over $13,000,000 over the 25 year timeframe. That's the joint life expectancy of Mr. and Mrs. Swed. Now look at the yacht expenses while the cost of purchasing that yet with [00:42:00] only $6,000,000. The cost of owning it over the 25 year period is 50% greater at nearly $9,000,000 for a total of nearly $15,000,000 to buy and keep the yacht. This according to the way he scoped out his goals for us today is what he needs to at least be able to meet after taxes from the sale of his business.

Matt Krantz: Okay. So now let's take a look. Let's drill down even further and let's look at the pessimistic case of the earn-out scenario. What are some of the factors that needed to be considered there?

Michelle Black : Right. So here, remember he only stays on the job for six months, so he gets 85% of the $55,000,000 purchase price upfront, which amounts to just $32,000,000. So just under $32,000,000 after taxes, he gets a half a year salary to total just over $100,000 in year one, and he doesn't receive any bonuses now that plus his existing assets and any anticipated social security payments total over $41,000,000, $4.2 million in this scenario.

Michelle Black : So that's pretty [00:43:30] good, right? He has more money than the cost of his goals and he has a surplus of about seven and a half million dollars. So when my team ran this analysis and looked at the number is we're bought Mr. Swed would be pretty happy in this case. Right? Um, even in the worst case that he's outlined, maybe leading the job after just six months on that, he's still able to meet all of his goals and more.

Matt Krantz: Now, that's the pessimistic situation. [00:44:00] Let's talk about the optimistic scenario.

Michelle Black : Right.

Matt Krantz: How could things go even better?

Michelle Black : Right. Well here he receives the same upfront proceeds of nearly $32,000,000 after taxes and he stays on with the company for the full two year period, earning the full salaries in years one and two and the full bonuses. So these monies or so these assets plus his existing assets and future social security payments total $ 45,000,000. So of course it works out to be even better leaving him with a surplus of over $11,000,000.

Matt Krantz: Tell me about the cash option. What happens with that? Step me through that.

Michelle Black : Sure. Well, Matt Krantz, this is where things get really interesting. So [00:45:00] here we found that on an after tax basis, it nets in $34,000,000 to total 43.3 million when combined with his other assets and future resources. So this provides him with a nine and a half million dollar surplus that he can use to maximize the wealth transfer to his family. It's in between the optimistic and pessimistic scenario in the earn out, but this doesn't come with the requirement that he has to stay on as an employee work for the two years.

Michelle Black : He can literally sail off into the sunset. So from my vantage point, while the additional $5,000,000 potential was attractive on the surface from the earn out, it's really helpful to quantify how much that's really worth in the context of Mr. Swede's goals and he, you know is able to really recognize what these offers mean for him. And for his family.

Matt Krantz: Great. Great. So let's talk about Mr. Swed And what he decides to [00:46:00] do. Let's see, let's see, he's got these great options on the table and he's kind of evaluated using the framework they've you've presented with us, what else he decided to do.

Michelle Black : Wow. Matt Krantz, what would you do when we asked this question of others? I think that it was pretty clear here. Mr. Swed decides in this case study to take the all cashnoffer. He doesn't have to take the risk of being unhappy working as an employee for the full two years and meeting the performance metrics of the earn out. He doesn't need to stay on when he has the ability again [00:46:30] to walk away and fund all of his goals and more and frankly by taking him through this process, he's really grateful because you know, the advisor who's worked with him, right, has been able to quantify the true meaning of the offers on the table.

Michelle Black : What Mr Swed and other business owners really want is the ability to have control over making that decision. They don't want somebody else making that decision for them. And I think that going and taking them through this kind of a process really helps to bring that to light.

Matt Krantz: But as you talked about earlier, there's a lot of emotional situation that goes along with this as well.

Michelle Black : Right.

Matt Krantz: As an advisor, how can you bring that aspect to the planning process to get a great holistic answer for the client?

Michelle Black : Right, right. Well Matt Krantz, I think that that is the beauty of this approach, right? A goals based approach really, ah require is right the client to be able to define what their goals are, the importance of those, right, not just in and of themselves, but relative to one another. And it allows business owners in this case to work with other family members and in this case, Mr. and Mrs. Swed. Really think through what they wanted to accomplish after the sale takes place.

Michelle Black : You know, we recently met with a business owner who was being urged by his investment banker to sell the business. Um, he could quantify, you know, the growth of his business on what the potential trajectory of that business look like when he couldn't quantify was what the after tax proceeds could do for him and for his family. And what he shared with us is that by taking them through this process, we helped him think about that go no go decision. And again, I, in my mind, this really helps business owners feel that they continue to have control over that decision.

Matt Krantz:   And that's an important different, differentiator between them, maybe a business owner and another client is they, are they more into having control of the situation and they want to be treated almost like through the CEO of the decision and you're an advisor plugging into their decision.

Michelle Black : Absolutely. That's a great way of putting it, Matt Krantz, and I think that that's why, again, I come back to a common mistake, is that wealth advisors only got involved after the sale takes place to help manage the investments. In my mind, what this approach allows you to do is to help identify, right and put different offers on a level playing field to help identify what type of structure makes sense for the business owner to take, a and think about what their goals are after the sale [00:50:30] takes place, and that all happens before even thinking about the right policy in terms of investing the proceeds after the sale.

Matt Krantz: Why is this pre-planning so important to this decision making process?

Michelle Black : Yeah, it's a great question. So [00:52:00] not only will it allow business owners to really determine what they need to net from the sale of the business in order to fund their future goals, but it allows business owners to potentially take advantage of discounting and estate freeze techniques, and that means that they might be able to transfer any surplus assets so those assets not needed to meet their primary goals and objectives above the lifetime exclusion amount into certain vehicles and really maximize the amount they transfer to their family and future generations.

Michelle Black : It also allows one to consider taking pre-sale shares of the business to fund their charitable objectives, thus reducing the ultimate tax liability from the sale. Matt Krantz, remember that stat that I gave earlier that nearly 40% of business owners don't have a plan in place to shield their proceeds from taxes. Well, I think this is an opportunity to really help change those statistics, right? If we're involved in advance of the sale and part of the process, we can help to determine a plan to do exactly that.

Matt Krantz: Okay. So, Some of the techniques in involved in selling a business can get fairly technical.

Michelle Black : Hmm.

Matt Krantz: And one of the devices that we see or vehicles use as the intentionally defective grantor trust.

Michelle Black : Right.

Matt Krantz:   What is that and how can it be used in various scenarios when selling a business?

Michelle Black : Well, Matt Krantz and intentionally defective grantor trust or an agent as we like to say, a is trust that is a completed gift for gift tax purposes, but defective for income tax purposes. So the grantor is still on the hook for paying any income and capital gains taxes within the trust. This can be great [because it allows gifts to be made using pre-sale discounted shares, typically in the range of maybe 20, 25%, sometimes more. And any of the appreciation prior to the sale taking place occurs outside of their estate.

Matt Krantz:   Okay. So how is IDGT  better or worse or how does it compare? I should say, with a cash offer.

Michelle Black : Now, Matt Krantz, that's a great question. Because of the impact of discounting and allows one to fund the trust with more than the equivalent, a gift amount using cash. And what this does is this, it means that if the business actually depreciates a certain amount potentially before the sale takes place, that it's a win, win, lose, win scenario, especially given the impact of, ah compounding over time. And I think that, you know, this differential can really be quantified again through this pre-planning process and taking a goal spaced approach.

Matt Krantz:   Okay. In your mind, what are the key benefits of a goals based approach when approaching such an important decision for a business owner?

Michelle Black : Yeah, Matt Krantz, there are really four key benefits in my mind to taking a goals based approach in exit planning, clarity, conviction, momentum and collaboration. So clarity comes from the business owner, presumably having more peace of mind that having gone through the process and knowing which offer they've taken and, and really understanding why, right. They've seen the trade offs of different offers.

Michelle Black : Conviction comes from the increased confidence in their decision because they've been able to see what their potential life could look like after the sale takes place. Momentum comes from frankly allowing them to more quickly come to a decision in terms of selling their business in the first place and which offered a take, and this helps to minimize the probability of a significant price decline in their business.

Michelle Black : And finally, collaboration of course comes from the planning and advance. It allows wealth advisors to have a seat at the table and work with the client's other advisors, whether it's their accountant, their investment banker, their M and A attorney, uh, and even their trust and estate planning attorney to really think through different planning techniques to help maximize the net after tax amount they received from the sale and help maximize the impact of the sale on their future goals.

Matt Krantz: So we're dealing with a business owner who's probably very used to calling all the shots. How does the advisor approach this relationship, in a concentrated way, knowing that there's going to be other centers of influence involved as well in this big decision?

Michelle Black : It's interesting, Matt Krantz, uh, when we've been involved in the process in advance of the sale, it is often from the standpoint that the other advisors will admittedly not have the expertise in wealth planning or financial planning. Right? Um, so for them, this is a great opportunity again for us to help the business owner come to a decision when maybe they've installed and waiting on the sidelines.

Michelle Black : This really helps the business owner, again, put into context what the sale proceeds from their business can do for them and their family and it puts them in the driver's seat if they want to potentially increase the value of some of their goals may be they can do things that they haven't considered before. It allows them to be able to keep that in mind and really quantify the impact of that. On the other hand, you know, as I've taken you through this process, if the result is that they have a net deficit, then they can do one of two things, right? They can look at, again, not selling today and really focusing on increasing the value of their business over time, or they can take a look at their goals and really assess whether [01:01:30] or not those are goals they really want to accomplish or if they're willing to scale back some of their goals.

Matt Krantz :And I'm glad you talked about this decision. The business owner may decide not to sell the business at all.

Michelle Black : Right.

Matt Krantz: What are some things that an advisor can do in that situation because it's not really at that point. It's not really a financial decision. It's more of like an operations decision maybe.

Michelle Black : Right. Well, I think that wealth advisor can play it a few different roles. But there is a reason why you hear so many stories of at the 11th hour of a deal. So you know about to close the business owner or pulls out, right? They get cold feet, they get just too nervous. This process allows them to continue to follow through for the reasons that I mentioned. So in my mind, this really allows the wealth advisor or to work with the business owner and it can be an iterative process.

Michelle Black : It doesn't have to be one and done. They can look at the different options and they can think about what's the right sales structure for them. Maybe they haven't received it yet or as they're working with their investment banker who's out there potentially soliciting offers ah, they can now do that with this in mind.

Matt Krantz: Right. And we talked a about a lot of the challenges that the business owner faces when approaching this decision. What about the advisor? Are they put in a difficult situation at any point, does the business owner push back harder on this decision? So it's such a big deal. How does, how does the advisor deal with some, maybe some difficulties that they face?

Michelle Black : Yeah, I would say not that, at least in my experience, uh, the pushback really isn't to the wealth advisor in terms of the work that the wealth advisor does, right? It might be more delayed, than maybe we anticipated upfront in the relationship because they want to see a number of different iterations,  but I can tell you that more often than not, the business owners are very grateful for having taken them through this process so they can understand, you know, what the after sale proceeds can really do for them and their family, what the potential range of outcomes would look like when we take the after tax proceeds and invest that in the capital markets. That's just not something that they really have been used to looking at in most cases and we can help as part of that education process.

Matt Krantz: Great. Now with a business, especially a family business, I'm assuming that there'll be a lot of people at the table. How do you deal with the family, the spouse, the children and their concerns or is that not a consideration at the advisor needs to really pay attention to?

Michelle Black : I think everything is on the table as you say. I think it's really ultimately up to the business owner in terms of who he believes needs to be a part of that decision making process, uh, at the end of the day, it depends on what the ownership structure looks like. Uh, and then we can provide, you know, education, again, an insight to the business owner if they're struggling to help convince family members that this is the right thing to do.

Michelle Black : And again, I think this is an area where collaboration really comes into play. So we have been asked in a number of situation, to get involved with other advisors who consult with business owners in terms of how to increase the value of their business. And some of these firms actually have psychologists on staff to help with those family dynamics. And again, it's really every advisor has a different role to play and we have one role to play and we can help quarterback a lot of what that looks like for the business owner.

Matt Krantz: Great. And as beginning of the interview, you talked a lot about how the business owner almost becomes so intertwined with the business.

Michelle Black : Hmm.

Matt Krantz: And they become the business and I think they wake up in the morning and they think about the business and they think about the business when they go to bed at night. How do you help a person like that think about their life beyond the business when they don't have to be at the office at seven in the morning, they don't have to worry about the profit loss statement and they have all these new concerns about where they're going to fish.

Michelle Black : Yeah.

Matt Krantz: How do you, how do you deal with that?

Michelle Black : So I think that that's where really the personal interaction in that personal relationship really gets magnified and on greater importance in these kinds of relationships. Uh, we've had relationships with business owners in the past where we've helped them think about how they can make a bigger philanthropic impact in their community as an example. So we provided them with introductions or other ways to think about their philanthropic impact. Maybe it's combining, for example, I mentioned the Donor Advised [01:06:00] Fund or a DAF previously and a private foundation with us.

Michelle Black : fund or a daft previously, and a private foundation with other types of charitable vehicles. It doesn't mean that they only have to use just one. There are different charitable vehicles that they might wanna take advantage of. And they can work in concert with one another, right? It's not just choosing, um, one over another. They're not mutually exclusive. We can help to think through those different avenues and give them introductions to again, um, other organizations within the community or on a broader scale. [01:06:30] And that helps them think about how they wanna spend their day-to-day.

Michelle Black : Another example might be that if they wanna get involved in helping other businesses, right? Sometimes we've seen business owners get on advisory boards for other companies where they're a former business owner, they've gone through the process of selling. Now we're introducing them. Again, it's a way for them to give back and think about what they want, you know, to do in the next phase of their life. And then sometimes, a business owner might just be a serial entrepreneur. Right? They might wanna just move on to the next thing. And that's what this goals-based process also allows us to be able to do. And it helps them to think about are they ready and willing to move on to their next business venture?

Matt Krantz: That's a great point that you bring up, because it's so key for the entrepreneur to know what his or her goals will be.

Michelle Black : Right.

Matt Krantz:   And it makes you wonder how they're gonna determine what those are gonna be. So, it sounds like something advisors can help with as well.

Michelle Black : Absolutely.

Given the magnitude of this decision for business owners-

Michelle Black : Mm-hmm (affirmative).

Matt Krantz: It's probably natural for some of them to maybe regret the decision that they made.

Michelle Black : Sure.

Matt Krantz: They may wish they didn't sell at all, or they would've sold it in a different way.

Michelle Black : Mm-hmm (affirmative).

Matt Krantz: How can an advisor advise a client who has regrets or maybe prevent that from setting in, in later years?

Michelle Black : Yeah. Well, Matt Krantz, I think that the second part of your question is what's key. How do we prevent them from regretting it? Right? And we can only  do so much as a wealth advisor. You know, it's interesting, uh, a recent study has also shown that about 50% of business owners say that they were dissatisfied with the post-sale results of, uh, their business, right? A recent study has shown that about 50% of business owners say that they were dissatisfied with the results of selling their business. And more often than not, it had to do with the financial results. And this is where the goals-based approach and, wealth advisors working with business owners in advance of the sale, can help to minimize that kind of regret, right?

Michelle Black : So it, again goes back to helping them think through what their real goals are, what the cost of it's going to be, what the right sales structure for them might be, um, and having that clarity and conviction and making a decision to- and to be able to move forward. There are some other factors, um, that go into regretting selling the business that we may not always be able to assist with. Some of those are maybe the more emotional and behavioral aspects of it. Uh, and it's really just helping them think through again, how they're going to spend each and every day when it doesn't have the same structure as it did in the past.

Matt Krantz: That makes a lot of sense. And structure, you talk about that several times in your presentation as well. In terms of giving a business owner structure, and you mentioned the paycheck, not getting that paycheck, not having that asset that they can draw from at a ready hand by taking a partnership [01:11:30] distribution or what- or whatnot. How do you give a business owner kind of a financial structure that would make them feel confident that they can reach their goals?

Michelle Black : Yeah, great question. So, we take them through the goals-based approach. Uh, sometimes it's very clear how much, uh, the business owner would like to or needs to set aside upfront from the sales proceeds in order to fund some of their immediate goals. Uh, and then of course there are the ongoing future goals that [01:12:00] they have. So, in the example in the case study that we walked through, lifestyle expenses of $500,000 on an annual basis would come in the form of a distribution. And typically it's, uh, done on a quarterly basis. Um, for some it might be monthly. Others might be comfortable, uh, less frequently maybe twice a year. But that's something that we have to plan for. And in order to plan for that we need to ensure that the assets are invested in the appropriate manner.

Michelle Black : But you know, typically they're going to get a fixed, you know, either check or wire transfer into their account, which then grows with inflation. Uh, it's quite rare for a business owner to feel comfortable with modifying what those distributions from their portfolio would be on a go-forward basis. Um, they just need to feel comfortable that they're getting a fixed amount, which if they wanted again to grow that in the future, we can certainly do. That all comes back to how is the account- account invested? And what are our capital market assumptions, right? And so, that's the educational piece of that. What are our expectations for returns and volatilities for various asset classes to help determine what a sustainable distribution rate might be?

Michelle Black: You know, I'll make one other point, Matt Krantz. We do take an approach that we refer to as our wealth strategy pyramid. Right? Um, what that does is that looks at setting aside that one to two years worth of living expenses for any client, right? To help to provide them with that emotional ability to withstand the volatility of their longer term investments. I do think that that can also be really helpful here, in working with business owners, because they can invest their longer term assets. They see the volatility of the markets, maybe that's inherent and you know, uh, the day-to-day. They see the news, but then when they're concerned, then we can always point them back to how they have at least, you know, one or two years worth of expenses set aside, in very liquid, very short-term, very stable assets, and that gives them comfort to not throw in the towel at the exact wrong time.

Matt Krantz: That makes a lot of sense. Now, would there be some cases where the advisor would interestingly tell the client not to sell? Perhaps their- their goals for the future are so lofty they aren't supported by the present value of the business if they were to sell. Or perhaps, they feel the business could actually be much more lucrative if they don't sell now, if they wait. Or that's not really the role of the advisor, to go that far?

Michelle Black : Yeah. I- I'd say it's partially the role, right? But the wealth advisor's role in my mind is really not to evaluate the valuation of the business, right? There are other experts that do that. There are evaluation consultants, they're in that market place, they're looking at competitors, they're looking at what the actual valuation of the company is. Um, and there are a lot of factors that go into that, that wealth advisors really aren't spending all of their time looking at and doing. On the other hand, I do think that this does provide an opportunity for collaboration.

Michelle Black : So, uh, in the best case scenarios that I've seen, the wealth advisor works in conjunction with the valuation consultant, right? Or the M&A attorney or the investment banker. And will look at the analysis that we've provided, and it might turn out as you pointed out. That they have a net deficit. That their goals are too lofty. But the valuation doesn't call for them to be able to net the amount that they need from the sale of their business. So, this provides an opportunity for a conversation. And it might be something that doesn't take place until a few years down the road, but again, we're there. We have a relationship with the business owner. So, that instead of once the sale takes place, you know, you're competing with any other wealth advisors that are calling upon the business owner who know about the sale. You already have the relationship. You've earned their trust.

Matt Krantz: That's great. Now, how does an advisor get in the position where they are trusted to become ... To provide this type of advice? Is this through referrals? Is this through practice?

Michelle Black : Yeah.

Matt Krantz: Are there books that they should be reading? How do you build up the ability to offer advice in this kind of technical area?

Michelle Black : Yeah. Yeah. It's a great question. It's probably, I would say, a function of all of those things that you mentioned. Uh, again where I've seen it work quite well is when the wealth advisor has been able to network with different centers of influence. Um, and so these are again, other advisors that work closely with business owners, but who will admittedly say that they don't provide the financial planning and wealth planning needs, after the sale takes place. But, many business owners that they work with are stalled in that decision-making process.

Michelle Black : So, they really like to bring us to the table to help the business owner think about their life after the sale takes place. Uh, this is where I've seen a number of wealth advisors really get those referrals from. And I think in order to put yourself out as an expert, it's you know, it is ... It's reading a lot, it's attending conferences and joining organizations that focus on business owners and some of the things that they're going through, so that they're ahead of the curve. Um, and they're thinking about how to use different approaches to help with the planning process. And I think you know, when you have an opportunity being able to demonstrate your value add, uh, at least once, then twice, and then a third time, really helps to gain the confidence of other advisors that could be really great referral sources in the future.

Matt Krantz: Kinda tied to that, we talked about how a lot of business owners don't even ... They're not even thinking about selling their business. While at the same time, there's a conflict of the advisors to be most effective, need to get involved early on.

Michelle Black : Mm-hmm (affirmative).

Matt Krantz: So, how do you reconcile these two things? How as an advisor do you start talking about the sale of a business when the entrepreneur or the business owner might not even be considering that yet?

Michelle Black :Yeah. That's uh, (laughs) that's a great question. That's one of the trickier ones, I think. Uh, and I would add to that, that a lot of business owners if they are contemplating it, and it's in the back of their minds, they're really reluctant to let anybody know, right? Um, so they're reluctant to attend any conferences where they might run into their competitors, or let anybody, um, who works for the company and their employees to get wind of the fact that they're thinking of selling the business. Uh, so again, I think in my mind, it is trying to work with the advisors that are already working with the business owners, in getting those advisors to you know, recognize an opportunity when it might be a good time to sell.

Michelle Black : Again, right now would be a great example. Uh, the time is quite ripe to be able to have these conversations with business owners, because valuations are- are very high. Um, and uh, that's across the capital markets. Um, now it could be different of course, industry by industry, um, but this might be a good opportunity to say, is this a good time in terms of you know, the um, lifecycle of the business to contemplate a sale and what could that look like? So, I think it's finding out who the advisors are out there that work already with business owners.

Matt Krantz: Alright. Thank you so much Michelle Black , for stepping us through this such important decision that business owners face when looking to exit their business, and the considerations that advisors should make when approaching with a goals-based approach. Thank you so much.

Michelle Black : Thank you for having me, Matt Krantz.