April 18, 2023 • MICHAEL MADDEN
Moneta, Integrated Partners, Savvy Wealth And Crewe Advisors Discuss Key Issues For Clients Selling To Employees Including Financing, Valuation, Control, Risk and More
Often we speak of succession plans in wealth management, and many times the solution firms choose is a sale by the owner and senior advisor to junior advisors. For many advisory businesses and RIAs, an internal sale provides continuity to retain client loyalty and incentive for mid-level talent to step up into leadership, while leaving the senior advisor comfortable that the clients remain in trusted hands.
For similar reasons, an advisor’s business-owner clients also frequently plan for succession by selling their firms to junior partners, other key employees or a broader range of employees. If a client is considering such a move, their advisor can play a key role in helping them prepare for and execute the sale.
To learn about the key issues advisors need to consider to guide clients selling to employees, we spoke with Peter A. Racen, Partner at Moneta; Richard Austin, Executive Director at Integrated Partners; Kevin May, Founding Principal Wealth Manager at Savvy Wealth; and Megan Slatter, Wealth Advisor at Crewe Advisors.
We asked them:
When advising a client who owns a business and is considering selling to employees of the business, what are the top three issues the advisor should address?
They responded as follows:
Peter A. Racen, Partner, Moneta
Selling their business to a key employee or key employee group is one of the exit paths many business owners want to pursue, however, they face several obstacles. Advisors working with business owners should help them address the following top three issues first to ensure their objectives are achieved.
Do they want to be a business owner? There is a false assumption that everyone wants to own a business. Just because a business owner thinks their key employees would be good candidates for owning and running the business doesn’t mean they are willing to take the risks necessary to own a business. It is vital that the business owner hires a firm that specializes in conducting assessments of their key employees to determine if they are a good fit.
Lack of capital: Most key employees don’t have the personal capital or collateral to purchase the business without the assistance of the business owner. It is counterintuitive to the business owner to help finance their own exit plan, but they will have to develop a plan to provide the key person with the financial ability to purchase the company.
Time: It can take five to 10 years to prepare a company for sale to key employees. In addition to the preceding two issues, a business owner must prepare the key employees to take over the management of the company and transfer any specialized knowledge to them. The key employees must also develop relationships with other stakeholders such as bankers, vendors and customers.
Richard Austin, Executive Director, Integrated Partners
Here are the top three issues that an employer should consider when contemplating a sale to employees:
Available markets: Which market is available for the employer’s business? Markets can include a sale to a third party, a sale to key employees and an ESOP (employee stock ownership plan). Sometimes a transition to key employees will include a combination of those markets, due to financing, sales or management reasons.
Valuation: A business’ value is based on market conditions, financials, business operations and the transferability of the business itself. Once the value is determined, the deal can be structured and tax planning strategies can be applied. Remember, it is not only the value received but even more importantly the net proceeds retained that matters. The higher the net proceeds, the higher the probability of a successful exit and post-sale financial independence of the employer.
Financing the sale: Employees may not have the resources or capital to purchase the business outright, which means that the employer may need to provide financing or structure the sale in a way that makes it more affordable for the employees. Employers may consider a two-staged plan – first, a transfer of a minority interest to employees, then having the employees obtain outside financing for the balance of the purchase price.
An employer considering selling to employees should work with their advisory team to develop an exit plan that meets the employer’s goals and maximizes the value of their business.
