An offer they can t refuse

Transcription

1 An offer they can t refuse An Ascent case study By Michael Malakoff CENTER for WEALTH IMPACT

2 Ascent case study An offer they can t refuse Investment products and services are: NOT A DEPOSIT NOT FDIC INSURED MAY LOSE VALUE NOT BANK GUARANTEED NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY 2

3 An offer they can t refuse An Ascent case study By Michael Malakoff While certainly more welcomed than Vito Corleone s offer, an unsolicited call has Major and Minnie Taylor in a position similar to The Godfather s fictional film producer. They ve received the proverbial offer they can t refuse. Major and Minnie are co-owners of Taylor Systems, and they ve just met with a competitor that wants to purchase them. The couple always thought of Taylor Systems as the family s legacy and had no plans to sell. In fact, like 80 percent of family business owners, they have no written plans for transition of the business. After an unsolicited offer from a competitor, a family reflects on what they ve built and the uncertain road ahead. However, the meeting forced them to face certain realities. They have been running non-stop, working long hours over the last 20 years to build their business. From its start in the family s basement, Taylor Systems has grown from a two-person hardware installation and repair business to 100-plus employees providing hardware, software and cloud-based technology solutions. However, if they want Taylor Systems to continue to be a key player in what has become a crowded space, they now need to grow even faster. Major and Minnie aren t sure they have the energy, and their children aren t ready to take over. Maybe it would be nice to stop and smell the roses for once. The industry is consolidating and business is good. The timing seems right. The Taylors are faced with some difficult decisions. They ve decided the time is right to sell, but how? They feel certain the first offer shouldn t be accepted. And, worse yet, how should they break it to the kids? Three of whom are now working alongside them in the business. Plus, what will they do with the rest of their lives? They re not entirely ready to just sit on the porch. What are you going do? Preparing for sale of the family business Immediately following the meeting, the Taylors agree on their first order of business: assembling a team of professionals to advise on all aspects of the sale and transition. As clients of Ascent Private Capital Management of U.S. Bank, the Taylors have access to a diverse team, including their local office, the national investment management, private banking and wealth PREPARATION 3

4 Ascent case study An offer they can t refuse A decision is made, the team is assembled and our family begins planning for the transition to a financial enterprise. sustainability teams. Through Ascent s contacts with investment banks and mergers and acquisitions consultants, along with their own current corporate legal and tax counsel, the Taylors feel they have all bases covered. With the team assembled, the Taylors turn to the matter at hand, selling the business. After some deliberation, Major and Minnie have decided to begin by disclosing the deal to their children. Working with Ascent s strategic wealth coaches, Major and Minnie hold a meeting where the details are communicated. The meeting is facilitated by a coach who assists the family with the dynamic issues of fairness, and provides an environment for addressing the family s concerns and expectations around the sale. The Taylors are also concerned with getting management buy-in and use Ascent s coaches to develop a framework for those discussions, working through the sensitive issues and eventually getting consensus. With some of the human capital issues addressed, the Taylors move on to financial aspects of the sale. Their Ascent wealth strategist and wealth sustainability team work in concert with the family s tax advisors to begin the financial analysis of the deal, including planning for cash flow, taxes and retirement. As part of the income tax analysis, Ascent assists in identifying solutions designed to lower the tax burden. Executing the deal A signature on the contract EXECUTION With the help of Ascent and their other advisors, the Taylors interview several investment banks to find a firm that has the right industry and deal experience and is also a culture fit. The Taylors land on a firm with a solid reputation that has recently completed several deals in their general industry, and engage the firm to complete a full due diligence review of their company. The firm reviews Taylor Systems financials, operations and contracts in order to uncover and correct any issues before a prospective buyer could. After identifying and addressing key value drivers, the investment bank develops a timeline and strategy for the sale. Part of the strategy involves a quiet testing of the waters, where the investment bank uncovers a multi-national corporation discreetly shopping for a U.S. acquisition. If this multi-national were to acquire a U.S. based entity, it could put Taylor Systems competition out of business. It turns out the original competitor s purchase offer, while unsolicited, was very much preemptive. During negotiations, the Taylors ultimately decide to sell to their competitor even though the multi-national would have paid a significant premium. The thought of their legacy being reduced to a name on an organizational chart and ultimately phased out was too much to bear. The investment bank was entirely supportive, proving to be a good cultural fit with Major and Minnie. Even so, the ultimate agreed upon price is nearly 30 percent higher than the original unsolicited offer. And, the competitor wants to retain the current 4

5 management team of Taylor Systems, which is as important as the legacy of the company to all of the Taylor family. The Taylors focus on communication and management s buy-in proves to be a tremendous asset, and the deal closes without a hiccup. But, the Taylors story does not end there Filling the vacuum and sustaining the family s legacy after the sale of the business will be the Taylors next challenge. Leave the business. Take the cannoli. Post-sale strategic and tactical matters Major, Minnie and their children work with Ascent and their tax advisors to coordinate the mitigation and payment of taxes. Ascent identifies investment losses to harvest in order to offset gain from the sale, coordinates charitable deductions and ensures the family has adequate liquidity to make timely tax payments. Charitable planning often works lockstep with tax planning and the Taylors wish to continue the business positive impact within the community through family funded philanthropy. Ascent facilitates philanthropy goal-setting and vision and mission statement development. And, brings in its Philanthropy Services Group to help the family set-up and manage a new private foundation with a focus on youth education and entrepreneurship in developing countries. POST-SALE The last bit of tax planning the Taylors embark upon is estate and gift. The Taylors still have their full lifetime exemption amounts remaining for transfers to family. And, tax reasons aside, the couple wishes to maintain their financial legacy for generations to come. As such, protection from creditors is a major driver for their planning. With trust capabilities in South Dakota and Delaware, two key jurisdictions in which to establish a perpetual trust, Ascent not only assists with the design of the family s transfer tax plan but also arranges to handle the day-to-day administration after implementation. The final order of immediate post-sale business for the Taylors is to fill the vacuum of personal service left after the sale of the business. First, the Taylors are faced with the question of whether to create a family office, join an existing multi-family office or use professional service firms for accounting, bill pay and record keeping services all of which were being provided by Taylor Systems employees. For ease and efficiency, the Taylors decide to hire Ascent to replicate all these services through its team of family office advisors. Second, the family needs to decide whether to create a family governance structure, such as a family council or board, after the sale to help safeguard the family s human, intellectual, social and financial capital. Ascent s wealth dynamics coaches help develop a governance roadmap for the Taylors to develop policies and learn to operate effectively within their new system. 5

6 Ascent case study An offer they can t refuse That s a true story that s my family. The Family Wealth Enterprise Fast forward two years and we see Minnie, Major and their children at a twoday family retreat. On the agenda is time for education, discussion, decisions and of course, family fun and celebration. The retreat represents a culmination of the work the family has been doing with Ascent s coaches, collectively and individually, to develop plans for the next chapters in their lives. Key to that work has been the exploration and articulation of their passions and goals, and the development of a plan for their lives beyond the business. Major s focus is on the family philanthropy and Minnie s is on mentoring young entrepreneurs. Up for consideration at the retreat is whether the family will invest as a group or individually; what the new portfolio will be comprised of; and who will control the investment decisions. Plus, another portion of the retreat will be devoted to how the family plans to communicate going forward, how to best educate and develop future generations of leaders within the Taylors. Finally, the family has agreed that it s time to make decisions around their annual gifts from the foundation, and everyone from age 12 and up has a chance to make a pitch for their favorite cause within the foundation s mission. Maddie, age 15, makes an impassioned and persuasive pitch for Pencils for Promise, to help build a new school in Guatemala. The family agrees, allocates 20 percent of their annual grant and empowers Maddie to write a letter to inform the nonprofit. Throughout these conversations and decisions, the family will explore and leverage its collective story; the shared history of the family and origins of its wealth provide fertile ground from which future generations can thrive and grow. MAINTAIN CONTROL OF YOUR WEALTH PREPARATION EXECUTION Preparation Human, financial and business capital Execution Maximize stakeholder value POST-SALE Post-sale Transition to a financial enterprise INITIAL STATE No formal governance or succession plans OPTIMIZED Written processes and policies to direct, administer and control the corporation. And, clearly define relationships among all stakeholders. 6

7 I will call upon you to do a service for me. The Ascent solution The Taylors are a true success story. Through hard work and determination, not only did they build a very prosperous business that created great opportunities for the family and made a positive difference in their community, but they also managed to do the seemingly impossible: With help from key partners, they transitioned beyond the sale into a thriving family financial enterprise that reflects the values and visions of the family, while still supporting the dreams of the family members, with all indications of being able to do so for a long time. Thankfully, the Taylors fared better than Luca Brasi and our saga has a happy ending. Legacy secured, Minnie and Major sailed into the sunset... and were not left to sleep with the fishes. Let us do the same with you and your family. 7

8 About the author Michael Malakoff is a managing director of wealth sustainability for Ascent Private Capital Management of U.S. Bank in San Francisco, California. He holds a J.D. and an LL.M. and has previous experience as both an attorney and tax consultant. Important disclosures Wealth Sustainability services are not fiduciary in nature, and Ascent serves in a non-fiduciary consulting role in providing these services. Wealth Sustainability services may include wealth dynamics coaching services in order to facilitate your self-assessment of wealth sustainability issues. These services are not psychological or counseling services. Ascent does not engage in the practice of psychology. U.S. Bank and its representatives do not provide tax or legal advice. Each individual s tax and financial situation is unique. You should consult your tax and/or legal advisor for advice and information concerning your particular situation. Credit products offered by U.S. Bank National Association, subject to normal credit approval. Deposit products are offered through U.S. Bank National Association. Member FDIC 8

9 CENTER for WEALTH IMPACT The Center for Wealth Impact is Ascent Private Capital Management of U.S. Bank s virtual consulting cooperative for knowledge and thought-leadership development. It is where our experience and research generated inside our organization and gleaned from the world s leading experts come together to drive everything we do. ascent.usbank.com 2017 U.S. Bank 3108-WIP (6/17)