Andy Swanson and Maxwell Youngquist from RSM, specialize in working with family-owned businesses, focusing on tax and family office management. They discuss the importance of planning for the possibility of selling a family business, emphasizing the need to run the business as if preparing for sale regardless of immediate plans to sell. 

Transcription

Dan: Hey everybody, thank you for joining us. This is another edition of Never Go Against the Family, our UNI Family Business Center podcast, joined by a couple of folks from RSM. With me today are Andy Swanson and Maxwell Youngquist, they are a couple of folks in their family office space that do a lot of work with family owned businesses, both from a tax standpoint and as well as other things when it comes to family office management. We wanted to preview their session a little bit today to give you a better sense of what they will be talking about at our conference on November 2nd. The focus of their presentation is gonna be on thinking about your business, think about the possibility of sale. I used to work in the investment banking world and I now see the other side of it. Private equity is all over the place, constantly knocking on the door of these families and companies, looking for deals, looking for yield, and looking for return. Because of all that family and companies are certainly in that wheelhouse. And so I know that our members are getting hit up, and I don’t think we would do justice to serving our families if we didn't cover this topic. Andy, you mentioned one thing that I thought was kind of cool, you talked about beginning with the end in mind and thinking about your business from that standpoint. The end is a myriad of options, it's selling to the outside world or it's giving or selling to the next generation of your family as well. But if we focus on selling to the outside world, what are your thoughts when you mention that phrase or when you hear that phrase beginning with the end in mind? 

Andy: Yeah, Dan, it's a really good question. You hear beginning with the end in mind a lot in the startup world, right? Where you kind of organize yourself in order to eventually sell the business or do whatever it is that you want to do with it. But I think it also applies to growth phase businesses, businesses that are within the family and plan on staying within the family. And the reason I think it's important is you think about those last three years before a sale, oftentimes you're focused on valuation. How do I drive the highest valuation I possibly can for that, and realizing I'm going to be exposed to some kind of post-sales. So I'm making decisions a little bit differently. Well, it just so happens those same decisions can kind of apply a lot earlier. So you think about growing your business, that's one of those things that's going to lead to a better valuation, finding new uses for old products, finding new ways to market products, things of that nature. All of those things, if I come up with them 10 years before a sale, they're just as valuable, if not more valuable than if I come up with them three years before a sale. And that's one of the reasons we say, let's run our business like we're getting ready to sell our business. I think the other reason is we've all heard stories where we weren't planning on selling until somebody knocked on the door and said, hey, you know, I've got this offer and you can't refuse. The bad thing is by the time you get that offer, you can't refuse and there's not a whole lot you can do in order to plan for the sale. But if you've done this, if you've run your business, like you're getting ready to sell your business, then it doesn't matter because you've always run your business like you're getting ready for that day that offer comes in. 

Dan: That's just a good practice in general, right? If you're running your business like you're gonna sell it, you're probably running it in a way to continue to reap the most rewards out of it as well. Rather than the hit by the bus type of scenario where you're not planning for your family business that can manifest itself in a lot of different ways from, liquidity needs of the next of the current generation or a branch of the tree that goes awol or something on you or whatever it might be that could force your hand in those ways too, right? 

Andy: Yep. 

Dan: Okay, I like that. So if we think about running our business with that end in mind, you talked about some of the different growth drivers out there to be focusing on. What about if we think about how we're then running our business and Max, I think you said this, at some point you start to look and feel like you've got one foot in the business and one foot out of the business. How do you do that? How do you manage that? Knowing that, we're running this thing potentially for the next generation and trying to be good stewards of it. But at the same time, what if we get that offer? Who will turn this down type of thing? Do you see the owner's letter in that situation or how do you keep them going nuts in that situation? 

Maxwell: You know, Andy kind of said it too. Part of this is getting your business ready for the end in mind as you're starting to also mentally prepare the family and the family members that you're doing this process with and you're setting up this roadmap. So early on you're communicating with them that we may get an offer and we may sell. So you're gonna start doing that kind of family negotiation beforehand of what that looks like. What would be their goal if we did sell? Would they want to exit or are they gonna move on or would they actually like to stay in the business even if it does sell and still be an employee? So I think working out those processes before you actually get those facts in the door is important. As Andy said, with an offer for X amount of millions of dollars, you've started to have those conversations. People are mentally preparing that their lives may have a big shift for them and their environment everyday. And so when it comes up, it's not gonna be a fight because everyone loves surprises until they get one like this. It is an emotional gut surprise where you're not going to have the best emotional responses to it. If it's an immediate thing where it's like only having 60 days or 90 days, or it's already started. You feel those walls coming in a little bit on the decision itself. It's a very emotional and family decision, because if they have a roadmap for getting to the sale and even after the sale, it's going to be easier to get through this. Proper planning really goes a long way for those kind of conversations.

Dan: Yeah, I think that's great. Thinking about the fact that selling doesn't mean that you're potentially losing your job. 

Maxwell: But that's going to be their first response if you haven't talked about it. Oh, I'm out? Oh, we're done? 

Andy: We were actually talking earlier today, Dan, nine times out of 10 it doesn't mean you lose your job because the team that's buying you likely needs you for integration for a period of time. Oftentimes to manage the company into the future, depending upon what the buyer looks like. 

Dan: Great point. You may be just changing what's written on your W two or whatever. So then another couple of points that you are going to expand on at the conference are going to be things about post sale. So now we've sold the business and what do we look like? Are we still a business family? Are we still keeping our assets tied together? Are we doing some sort of family office? What things the business might have been doing for us on the family side a little bit? Where are we going for those services now? Are our branches going in separate ways? Are we looking to get into different types of opportunities? How do you coach families to think about that, because that's obviously a real thing too. There's the tax implications part of it and what that lump sum looks like, but then what do we do with that lump sum? 

Maxwell: Yeah. What we want to talk about is you have a kind of a formal family business governance. Potentially you've sold the entire thing, you've exited it. So setting up a family governance framework to operate after the business isn't in existence, to make family decisions. Now, if everyone's just gonna go their separate way, they're gonna have their own team of advisors that we try to have them set up. Again, because you've had a windfall of money and you may be great at managing your own business, that doesn't mean that you don't need outside advisors and an outside team to now manage your wealth. It's not often that you can find everyone that can do everything so you're gonna need that evolving set of advisors whether they stay together or don't. If they do stay together, you need that informal family governance framework to keep decisions moving so you don't hit paralysis. We've seen this a couple of times where they don't have anything in place and everyone sold. But now nobody knows the chain of command anymore or how they're gonna work or how they're even gonna make decisions together. Then the last one is if the family business was a big source of family unity, what's gonna bring us together now? And that's sometimes where you do get into a family office is gonna bring us together. Sometimes you don't need that, or sometimes there's elements of a family office that are gonna provide that unifying thing. Lastly, the family business is probably doing a wide variety of services from the family, from administrative to cash management, maybe even doing that financial planning that is now going to be outsourced. This even goes back again to once you hear of the transaction or even before, making sure you have that process and roadmap in place. Because you don't want that big gap where you’ve lost the administrative system, lost the person that was doing our cash management. You need to have that in place, so when you do have that windfall of money, that apparatus is in there to start helping you through that. So that time isn't wasted. Overall it's always good to have these conversations, especially like 36 months in advance. A lot of people tend to not even make that decision about what they're gonna do if it involves retirement. So when the business is sold or a complete kind of change in trajectory in their lives, you're working towards that too. So it's not like a lever, where we closed that one, now we're going to open another. Because it's going to be more successful, I think, for these life transitions as they go through. Some people take up a new hobby, some people even start a new business. It's much easier to drive into those when a little bit of that pre-work and framework is put in place so you're not going through those family emotional ups and downs. It's comforting to know that all of that just didn't go away, so having that kind of pre-prepared a little bit with knowing what you are going to do. Even if you end up changing it afterwards, having at least that roadmap and a plan and the bricks in place, you can do that. You also don't want to be sitting on wealth and you miss investment opportunities or you miss a big bull run in the market. It's going to have that bad moment when it's like, well, we miss it as a family because we didn't plan or we didn't have advisors in place. Those take more time than people think to kind of change banking relationships, change advisor relationships. Because again, that set of advisors you have is going to evolve. It's going to involve a different set of lawyers, wealth planners, and tax expertise. Tax is a big one too, because you had this entire tax industry expertise and now you're gonna have to onboard and get associated with the people that are gonna handle some of these other issues. So, the earlier you do it and the more you have in place and know who to call, it's gonna be a lot easier for the family to make that transition. 

Dan: And the family can make that transition, right? 

Maxwell: Yeah! Some of this is really easy to get in touch with, like interviewing some advisors. Also  knowing that, when we sell, I give this person a call, we file this document, we do this, we meet as a family, we know the structure, we know the cadence. That goes a long way, especially when anxiety can be running high.

Dan: Yeah. It's a big life transition. If you wait until the moment I'm sure then you're making more emotional decisions and we can use that wealth created by the saler. 

Maxwell: Yeah, and mobilizing it quickly is important too. The other thing is the rest of your life doesn't stop. You know what I mean? Like there's also those other things happening in your life that you're also trying to manage. We have this phenomenon where they get so focused on this, they forget about other things. This then becomes a little bit chaotic, because the rest of their life hasn't changed. There's still babies being born, kids going to college, buying a vacation home, moving houses, and more. So it can be very overwhelming during this process if there isn't a roadmap in place. 

Dan: Just as we wrap up here, the importance of the planning, is they come with a deadline on them, right? So you don't have six months to just sit there and think about it or have three quarterly family meetings to try to get your family warmed up to a point of being interested in the sale. 

Andy: I think part of it's because everything comes with a deadline, right? The other component of it is, time is the enemy of a transaction. The longer it takes to get from that first deal sheet to a definitive agreement, the more likely it is that any deal is going to fall apart or that the purchase price is going to start dropping. So that's part of the reason this is so important. 

Dan: I could definitely see that a lot of times if you're the reason for the time delays, you're losing power in the negotiation as well. 

Andy: You're also looking disorganized, like hey, I really don't know what's going on. That creates risk for the buyer and that creates a decrease in purchase price. So the quicker you can move, the more you look put together and the less likely you are to see those decreases and see the deal fall apart. 

Maxwell: Also, once you get the evaluation, you know what the potential price is, and you're having that conversation with the family of knowing what they want the price to be. So making those two numbers agree, six months isn't gonna be enough time usually to do that. 

Dan: Then you can save a lot of everybody's time on both sides if you know that deals coming your way just aren't anywhere close to where you want to be. 

Maxwell: Exactly. You know what to entertain and what not to. 

Dan: Maybe the ones that are coming in are maybe your family who has outsized expectations and you can have those conversations as well. 

Maxwell: Exactly. If they're saying we think it's worth X, Y, and Z and your valuations are way under, maybe it's bringing some expectations back to reality a little bit. 

Dan: Okay. Well, I appreciate it. I know that private equity is incredibly active, there's a ton of it out there and they're looking for deals. Is that still the case? Is that still pretty true? 

Andy: I'd say there aren't as many deals today as there were six or 12 months ago, but transactions are still happening and it'll probably pick up in the not too distant future would be my guess. 

Dan: Okay, yeah. So being prepared, like somebody told me once your body won't go where your mind hasn't taken it, that's kind of what we're talking about here today. How do we think through where we could end up being and what do we look like on the other side of that and how does that affect our family, our family dynamics and our wealth? Really excited about having you guys with us at the conference. Again, it's November 2nd in Ames, and our host is Agilator Technologies. For our members and those listening that want to come, please come to unibusinesscenter.com and you can sign up there. Maxwell, Andy, thank you so much for being with me today and we appreciate your support and we'll see you in a few weeks. 

Katie: Thanks for listening to this episode of Never Go Against The Family, a podcast produced by the University of Northern Iowa Family Business Center. You can find more information about the center membership and upcoming events at https://unifamilybusinesscenter.com. As Vito Corleone advises, never go against the family.