How One Couple Successfully Sold Their Family Business

Situation

A new stage of life: navigating the unknown 

Arjun and Neha were cofounders of a successful construction supply company in Denver, Colorado and had dedicated much of their lives to building the business. While they knew they would sell the business someday, and had received letters of interest from several private equity firms, as they approached a traditional retirement age they felt some hesitation around how and when to do so.

Maintaining their lifestyle beyond the sale of a their business was a top priority for the couple. Arjun is an art enthusiast who enjoys traveling to build his collection, and Neha is highly involved in coaching female business owners and charitable endeavors in their community. It was also important to them that they could transfer wealth to their two adult daughters in a manner that supported them, but still incented them to pursue their own ambitions.

Solution

The value of an experienced team

Over the span of a year, Northern Trust’s Business Advisory Services team met with the couple, the company’s board of directors and the broader management team to navigate an array of complex planning topics. With backgrounds in investment banking, accounting and corporate finance — and experience interviewing more than 250 investment banks across the country — the team advised the family across the entire journey of the transaction, from their initial contemplation of transitioning the business through the successful sale of the business. Over the course of a year, the Business Advisory Services team:

• Performed due diligence on the business from an outside investor’s perspective to evaluate its strengths and risks
• Evaluated a range of transition alternatives, including leaving the business to their children, sale to the non-owner management team, sale to an ESOP and a third-party sale
• Built a roadmap of action items to maximize the value of the business and facilitate the efficiency of the transaction process for the couple and their management team
• Hired an accounting firm to perform a quality-of-earnings analysis to prepare the business’ finance team for the due diligence process and further validate the financial statements. In this instance, by performing this work in advance the team was able to help the couple identify and resolve deficiencies with their financial reporting and arrive at a defendable adjusted EBITDA. This proved crucial to a seamless transaction when the buyer conducted their buy-side quality-of-earnings analysis
• Recommended investment banks and managed the interview process with the owners and the board of directors, ultimately negotiating with and hiring the most well-suited investment bank

A coordinated, holistic approach

In parallel, our Wealth Planning team guided the couple through a personalized assessment of their goals. This ongoing discussion addressed how the couple envisioned their lifestyle in the years to come; their desire to fund their daughters’ educations and first homes; and their intentions to support future generations and their community. With a goals-driven analysis, we:

• Determined how much Arjun and Neha needed to fund a lifetime of expenses and goals, which helped to inform what minimum amount they would need from a sale
• Reviewed their current estate plan and helped to estimate what estate taxes would look like today and in the future — which helped drive recommendations for additional wealth planning opportunities
• Recommended an asset allocation that was customized to their unique needs. Taking into consideration items like short-term liquidity demands, such as taxes on the business sale, as well as market volatility — knowing there will inevitably be market stress — the team helped Arjun and Neha become confident that they could maintain their lifestyle post-business sale

Although the analysis revealed that the couple could accomplish their goals at a lower sale price than they had believed, by implementing the recommended strategies and due diligence, they were able to sell the business for significantly more than they had anticipated. The goals-driven analysis also brought to light the couple’s commitment to philanthropy and presented an opportunity: The Wealth Planning team recommended that they contribute $10 million to a charitable lead trust in the year of sale, allowing them to take a tax deduction that would garner approximately $3.5 million in tax savings that year, as well as an additional $5 million in savings at the end of the term.

While the trust terms were flexible enough to allow the daughters to direct distributions, the team modeled multiple scenarios for the daughters so they could make their own decisions on what they needed to pursue their goals while allowing the trust to grow over time. To address knowledge gaps and prepare them to successfully manage wealth, the team also helped the daughters build a customized financial education plan within Northern Trust’s Essentials Curriculum, a series of courses covering personal finance, investing and estate planning. 

Outcome

A successful and confident transition

Working with our experts allowed the couple to take ownership of their financial situation and make decisions with confidence. They were able to accept the offer for their business with the comfort of knowing that the proceeds would be more than sufficient to fund their lifestyle and objectives.

Arjun and Neha continue to work hand-in-hand with their Northern Trust team to update their plan and adjust for changing needs in this new chapter of their lives.