The ordeal of a deal – surviving the sale

Ed Lazar is president of Threshold Group, a multi-family office headquartered in Gig Harbor, WA.

"I've sold my family business – now what?" The deal is done but the ordeal is not. Ed Lazar explains how the personal change for the owner is only beginning and how families should be prepared for what comes their way in the aftermath of a business sale

Peter Smith did not really believe it would happen until it did. So it took a while to register when the closing generated a $200 million cash deposit in his bank account a few months after he sold his family business.

Until then, the money had existed largely on paper, a theoretical value assigned to his company. Now it had materialised as a liquid asset he could deploy. He would no longer need to manage the business, but instead would be faced with managing an unprecedented sum of money.

As days turned into months, Smith began to experience the seller's aftermath. He realised all his planning had focused on managing the sale rather than the liquidity it would create. He regretted failing to plan fully and effectively. Not only had the ledgers in his bank account changed, his life had changed. His day-to-day challenges had changed. And, perhaps most demanding of all, his family and community relationships had changed. He had graduated into an entirely new chapter of his life and his new challenges and uncertainties were beginning to make business ownership seem fairly simple.

Smith is not alone. An increasing number of family business owners will face similar dilemmas in the next few years as they cash out of their businesses and confront their new stage of life. In 2006, private equity firms raised $400 billion in investment capital, according to The Wall Street Journal. This swell of deal-making cash is likely to lure many family businesses into selling.

If these business owners neglect to plan effectively for the impact of the sale, they will find themselves facing a multitude of issues they failed to foresee. Their newfound riches might unsettle and potentially undermine their personal value system and even their whole framework for life.

The financial impact might be obvious. Less so is the impact the sale will have on their time, their family and their community ties. Having early awareness of the challenges that might arise is a good start to making such plans. Scenario planning, a discipline that involves looking at the outcomes of financial or family decisions, might also play a useful role.

The changes often require extraordinary patience – a quality that highly-driven business owners sometimes lack.

Dealing with the cash quandary
An immediate challenge involves how to invest and distribute the money itself. After addressing inflation-adjusted income and other basic tax and living needs, the seller must answer questions such as: Is the goal to continue growing the family's wealth or simply sustain it and put it to work? Does this new life involve world travel, socially responsible causes, starting a new business, completing a special project or turning a lifelong hobby into a fulltime pursuit? In short, what's next?

Most business owners will have at least a rudimentary knowledge of the capital markets and finance, but their newly liquid wealth opens a new spectrum of alternative investment strategies available to them, such as real estate, hedge funds and private equity. They may find interest in venture capital or socially responsible investing. Some might even want to start another business and need to consider whether they have the liquidity to do so.

When facing these decisions, some family leaders might overreact, freeze or even panic. Faced with the pressure of liquid cash, they rush to invest the money and may select ill-advised securities or create a portfolio poorly suited to their needs. Some will buy a second, third or fourth home, forgetting that their new properties will generate maintenance, upkeep, taxes and transportation costs – all of which can be complicated by the hassle of a remote location or excessive travel distances. Their newfound wealth also will demand legal, accounting, tax and estate-planning expertise. Often, they also need someone to help connect and coordinate the expertise into a cohesive family plan.

Another dimension comes into play if business owners decide to retain stock in the company they have just sold. They may want to have a say in the running of the business to ensure their investments are safe. The acquisition business is full of disturbing stories of family owners who pay regular visits to the business to ensure the new owners are running it effectively.

A tough dilemma for family business sellers involves how much wealth, if any, they should hand on to their children and when they should transfer it. Most want their children to live comfortably and have opportunity, but they know that excessive giving could lead to wastefulness and erode their children's potential.

In addition, children often will have widely divergent goals, aspirations, maturity and attitudes. For better or worse, adding wealth to the mix often exacerbates the idiosyncrasies of individual family members. One sibling might want to start a business and might benefit greatly from a family assignment of angel investing.  

Another may be tempted to demonstrate financial "arrival" in the form of yachts, cars, nightclubs or luxury properties. The parents are placed in an awkward role of judgemental family grant-making.

Attempting to handcuff the wealth by "guiding" children in how they spend it can often generate bitterness and conflict within a family. For example, one wealthy family leader gave only a small portion of her newfound wealth to her children, putting the rest in a trust fund that would see to their needs in retirement. But her children proved to be less than happy with this arrangement and ganged up against her, demanding they "get the money and get it now".

Experience shows business owners need to be brutally honest with themselves when considering how the family dynamics will change when the money becomes liquid. Failing to rise to this challenge will bring out the worst in a family.

Freedom … to do what?
Another new challenge comes in the form of newfound freedom. How do you replace all the mental energy and time devoted to the business? In one case, a family client sold his business and presumed he would have time for all those pet projects that he had dreamed of for so long. He proudly proclaimed, "Golf, the pool and travel will completely fill my time." But on the links he had never broken 100, he had spent little time in the pool since his 20s and ever since 9/11, he hated being in an airport. Eventually, he realised that replacing all the activity and stimulation of his working life was not an easy transition.

Others are confident they will spend more time with their children and grandchildren. Many vow to devote themselves to hobbies even though nothing in particular outside the business has ever truly interested them. Some turn to charitable work, unaware they risk becoming every charity's heroic benefactor.

Demands on their time might also come from an unexpected source, replacing the infrastructure that will disappear with the sale of the company. Many family business owners rely on the company's trusted employees to handle personal bills, personal tax compliance, property management and travel arrangements. If they serve as trustees to family wealth, they can also be surprised to realise the time demands created by the trusts established as part of the sale.

For most successful family leaders, a legacy is more than investing for themselves or even their family. Giving back to the community is something many business people begin while they are actively running their businesses.

After leaving the day-to-day running of a family business, a leader must decide whether to shift toward devoting personal time and money to the community. In some cases, former business owners have not been directly involved or visible in charitable programmes. Now they have to decide whether to step onto the stage or remain in the background.

Those considering selling a family business can benefit by talking in advance with others, particularly those whose financial standing and lifestyle are similar and who have already experienced liquidity "trauma".

Their answers can help draw up blueprints for a more successful, less abrupt transition to new wealth. Calling on those with experience or professionals with access to advice is not an admission of failure. Essentially, it's the equivalent of hiring smart people to help with a business.

For those who approach their personal liquidity with this perspective, the wire transfer of a business sale becomes one step in a process, more of a beginning than an end. Indeed, prior planning that looks beyond the event of the sale can make all the difference in defining what's next.